Rory’s Rules of Alchemy
Solving problems using rationality is like playing golf with only one club.
Prologue: Challenging Coca-Cola
The Case for Magic
The economy is not a machine – it is a highly complex system. Machines don’t allow for magic, but complex systems do.
In our addiction to naïve logic, we have created a magic-free world of neat economic models, business case studies and narrow technological ideas, which together give us a wonderfully reassuring sense of mastery over a complex world. Often these models are useful, but sometimes they are inaccurate or misleading. And occasionally they are highly dangerous.
It’s true that logic is usually the best way to succeed in an argument, but if you want to succeed in life, it is not necessarily all that useful; entrepreneurs are disproportionately valuable precisely because they are not confined to doing only those things that make sense to a committee.
When you demand logic, you pay a hidden price: you destroy magic.
Introduction
Introduction: Cracking the (Human) Code
The human mind does not run-on logic any more than a horse runs on petrol.
There are often two reasons behind people’s behavior: the ostensibly logical reason, and the real reason.
Modern consumerism is the best-funded social science experiment in the world, the Galapagos Islands of human weirdness.
to reach intelligent answers, you often need to ask really dumb questions.
Learning how to disentangle the literal from the lateral meaning is essential to solving cryptic crosswords, and it is also essential to understanding human behavior.
If you want to look like a scientist, it pays to cultivate an air of certainty, but the problem with attachment to certainty is that it causes people completely to misrepresent the nature of the problem being examined, as if it were a simple physics problem rather than a psychological one.
Introducing Psycho-Logic
Robert Zion, the social psychologist, once described cognitive psychology as ‘social psychology with all the interesting variables set to zero’.
In the real world, social context is absolutely critical.
The trick to being an alchemist lies not in understanding universal laws, but in spotting the many instances where those laws do not apply.
Some Things Are Dishwasher-Proof, Others Are Reason-Proof
It’s important to remember that big data all comes from the same place – the past.
In theory, you can’t be too logical, but in practice, you can. Yet we never seem to believe that it is possible for logical solutions to fail. After all, if it makes sense, how can it possibly be wrong?
Irrational people are much more powerful than rational people, because their threats are so much more convincing.
A rational leader suggests changing course to avoid a storm. An irrational one can change the weather.
If you are wholly predictable, people learn to hack you.
Crime, Fiction and Post-Rationalism: Or Why Reality Isn’t Nearly as Logical as We Think
In a designed system, such as a machine, one thing does serve one narrow purpose, but in an evolved or complex system, or in human behavior, things can have multiple uses depending on the context within which they are viewed.
On Nonsense and Non-Sense
Behavioral economics is an odd term. As Warren Buffett’s business partner Charlie Munger once said, ‘If economics isn’t behavioral, I don’t know what the hell is.’ It’s true: in a more sensible world, economics would be a subdiscipline of psychology. Adam Smith was as much a behavioral economist as an economist – The Wealth of Nations (1776) doesn’t contain a single equation.
The lesson we should learn from the appendix is that something can be valuable without necessarily being valuable all the time.
Business, creativity and the arts are full of successful non-sense. In fact, the single greatest strength of free markets is their ability to generate innovative things whose popularity makes no sense.
Once you accept that there may be a value or purpose to things that are hard to justify, you will naturally come to another conclusion: that it is perfectly possible to be both rational and wrong.
The drive to be rational has led people to seek political and economic laws that are akin to the laws of physics – universally true and applicable.
And in reality ‘context’ is often the most important thing in determining how people think, behave and act: this simple fact dooms many universal models from the start. Because in order to form universal laws, naïve rationalists have to pretend that context doesn’t matter.
The Opposite of a Good Idea Can Be a Good Idea
The two categories of retailer who have weathered the global economic instability best in recent years are those at the top end of the price spectrum and those at the bottom.
Context Is Everything
People are highly contradictory. The situation or place in which we find ourselves may completely change our perception and judgement.
You can never be fired for being logical. If your reasoning is sound and unimaginative, even if you fail, it is unlikely you will attract much blame. It is much easier to be fired for being illogical than it is for being unimaginative.
The Four S-es
There are five main reasons why we have evolved to behave in seemingly illogical ways, and they conveniently all begin with the letter S. They are: Signaling, Subconscious hacking, Satisficing and Psychophysics.
Why We Should Ignore Our GPS
A fascinating theory, first proposed by the evolutionary biologist Robert Trivers and later supported by the evolutionary psychologist Robert Kurzban, explains that we do not have full access to the reasons behind our decision-making because, in evolutionary terms, we are better off not knowing; we have evolved to deceive ourselves, in order that we are better at deceiving others.
The late David Ogilvy, one of the greats of the American advertising industry and the founder of the company I work for, apparently once said, ‘The trouble with market research is that people don’t think what they feel, they don’t say what they think, and they don’t do what they say.’
If it helps us to perceive the world in a distorted fashion, then evolution will limit our objectivity.
For a business to be truly customer-focused, it needs to ignore what people say. Instead, it needs to concentrate on what people feel.
On the Uses and Abuses of Reason
Once we are honest about the existence of unconscious motivations, we can broaden our possible solutions. It will free us to open up previously untried spaces for experimentation in resolving practical problems if we are able to discover what people really, really want, rather than a) what they say they want or b) what we think they should want.
The Broken Binoculars
For the last fifty years or so, most issues involving human behavior or decision-making have been solved by looking through what I call ‘regulation-issue binoculars’. These have two lenses – market research and economic theory – that together are supposed to provide a complete view of human motivation. There’s only one problem: the binoculars are broken.
Any new binocular lenses provided by sciences such as behavioral economics and evolutionary psychology will not be flawless, but they can at least provide us with a wider field of view.
I Know It Works in Practice, but Does It Work in Theory? On John Harrison, Semmelweis and the Electronic Cigarette
If a problem is solved using a discipline other than that practiced by those who believe themselves the rightful guardians of the solution, you’ll face an uphill struggle no matter how much evidence you can amass.
All too often, what matters is not whether an idea is true or effective, but whether it fits with the preconceptions of a dominant cabal.
As the novelist Upton Sinclair once remarked, ‘It is difficult to get a man to understand something, when his salary depends on his not understanding it.’
In Search of the ‘Real Why?’ Uncovering Our Unconscious Motivations
As I have already said, if you want to annoy your more rational colleagues, begin a meeting by asking a childish question to which the answer seems self-evident – the fact that sensible people never ask questions of this kind is exactly why you need to ask them.
You will never uncover unconscious motivations unless you create an atmosphere in which people can ask apparently fatuous questions without fear of shame.
Whether we use logic or psycho-logic depends on whether we want to solve the problem or to simply to be seen to be trying to solve the problem.
The Right Thing for the Wrong Reason
What’s interesting is that we adopted the behavior many thousands of years before we knew the reasons for it. There is a good reason why evolution worked this way. Instincts are heritable, whereas reasons have to be taught; what is important is how you behave, not knowing why you do.
As far as evolution is concerned, if a behavior is beneficial, we can attach any reason to it that we like.
In the Middle Ages, Europeans moved cemeteries from inside their fortifications to outside because of a fear that the souls of the bodies of the dead might return to haunt the living. The incidental result of this fear of ‘revenants’ was improved hygiene and protection from disease.
In trying to encourage rational behavior, don’t confine yourself to rational arguments.
If you confine yourself to using rational arguments to encourage rational behavior, you will be using only a tiny proportion of the tools in your armory.
What people do with their own money (their ‘revealed preferences’) is generally a better guide to what they really want than their own reported wants and needs.
How You Ask the Question Affects the Answer
Nassim Nicholas Taleb remarks, ‘the way a question is phrased is itself information’.
Strangely, as we have gained access to more information, data, processing power and better communications, we may also be losing the ability to see things in more than one way; the more data we have, the less room there is for things that can’t easily be used in computation. Far from reducing our problems, technology may have equipped us with a rational straitjacket that limits our freedom to solve them.
‘A Change in Perspective Is Worth 80 IQ Points’
An attendant problem is that people who are not skilled at mathematics tend to view the output of second-rate mathematicians with a high level of credulity, and attach almost mystical significance to their findings. Bad maths is the palmistry of the twenty-first century.
To put it crudely, when you multiply bullshit with bullshit, you don’t get a bit more bullshit – you get bullshit squared.
A bet costing £ 5 which has a 50 per cent chance of paying out £ 12 (including the return of your stake) is a good bet.
Unfortunately, this principle applies only under certain conditions, and real life is not one of them. It assumes that each gamble is independent of your past performance, but in real life, your ability to bet is contingent on the success of bets you have made in the past.
If a thousand people all took this bet once, starting with £ 100 each (meaning a total of £ 100,000), typically 500 people would end up with £ 150 and 500 people would end up with £ 60. That’s £ 75,000 + £ 30,000 or £ 105,000, a net 5 per cent return.
The parallel average tells you nothing about the series expectation. An ensemble perspective is not the same as a time-series perspective.
A million people all taking the bet repeatedly will collectively end up richer, but only because the richest 0.1 per cent will be multi-billionaires: the great majority of the players will lose.
This distinction had never occurred to me, but it also seems to have escaped the attention of most of the economics profession, too. And it’s a finding that has great implications for the behavioral sciences, because it suggests that many supposed biases which economists wish to correct may not be biases at all – they may simply arise from the fact that a decision which seems irrational when viewed through an ensemble perspective is rational when viewed through the correct time-series perspective, which is how real life is actually lived; what happens on average when a thousand people do something once is not a clue to what will happen when one person does something a thousand times.
Be Careful with Maths: Or Why the Need to Look Rational Can Make You Act Dumb
Remember that every time you average, add or multiply something, you are losing information. Remember also that a single rogue outlier can lead to an extraordinary distortion of reality.
In maths, 10 x 1 is always the same as 1 x 10, but in real life, it rarely is. You can trick ten people once, but it’s much harder to trick one person ten times.
Amazon can be a very big business selling one thing to 47 people, but if it can’t sell 47 things to one person, there’s a ceiling to how large it can be.
Recruitment and Bad Maths
We are much more likely to take risks when hiring ten people than when hiring one. If you hire ten people, you might expect one or two of them not to work out: you won’t risk your reputation if a couple of them leave after two years, or if one starts stealing staplers and photocopying his bottom at the Christmas party.
The problem is that when ‘the rules are the same for everyone’ the same boring bastards win every time. The idea that you should therefore try making your recruitment system less fair outrages people when I suggest it, but it is worth remembering that there is an inevitable trade-off between fairness and variety. By applying identical criteria to everyone in the name of fairness, you end up recruiting identical people.
Complementary talent is far more valuable than conformist talent.
Metrics, and especially averages, encourage you to focus on the middle of a market, but innovation happens at the extremes. You are more likely to come up with a good idea focusing on one outlier than on ten average users.
What Gets Mismeasured Gets Mismanaged
One great problem with metrics is that they destroy diversity because they force everybody to pursue the same narrow goal, often in the same narrow way, or to make choices using the exact same criteria.
We Don’t Make Choices as Rationally as We Think
The context and order of choosing affects things in ways we would not consciously expect – not just in corporate decision-making and recruitment, but also in personal decisions. The psychologist and behavioral economist Dan Ariely was one of the first people to highlight the famous decoy effect in the decision process – the phenomenon whereby consumers tend to have a specific change in preference between two options when also presented with a third option that is more desirable than one, but less desirable than the other.
Success Is Rarely Scientific – Even in Science
We often misuse our powers of reason, setting too low a bar in how we evaluate solutions, but too high a bar in our conditions for how we reach solutions. Reason is a wonderful evaluative tool, but we are treating it as though it were the only problem-solving tool – it isn’t.
A good guess which stands up to observation is still science. So is a lucky accident.
It is, after all, a distinguishing feature of entrepreneurs that, since they don’t have to defend their reasoning every time they make a decision, they are free to experiment with solutions that are off-limits to others within a corporate or institutional setting.
Most valuable discoveries don’t make sense at first; if they did, somebody would have discovered them already.
We should test counterintuitive things – because no one else will.
The View Back Down the Mountain: The Reasons We Supply for Our Experimental Successes
I am not suggesting that we try to solve problems completely at random, with no plan as to where we want to go, and nor do I mean that data and rational judgement play no part in our deliberations. But in coming up with anything genuinely new, unconscious instinct, luck and simple random experimentation play a far greater part in the problem-solving process than we ever admit.
One astonishing possible explanation for the function of reason only emerged about ten years ago: the argumentative hypothesis suggests reason arose in the human brain not to inform our actions and beliefs, but to explain and defend them to others. In other words, it is an adaptation necessitated by our being a highly social species.
Collective, self-serving argument can work well when people are in possession of all the pertinent facts, which is why it works well in the physical sciences, when all the pertinent variables are known, and can be numerically expressed. However, in the social sciences this simply does not apply – it is impossible to quantify many of the important psychological factors which people care about, and there are no SI units for what really matters.
In the physical sciences, cause and effect map neatly; in behavioral sciences it is far more complex. Cause, context, meaning, emotion, effect.
The Overuse of Reason
One explanation for why apparently logical arguments may be ineffectual at changing people’s minds, and why they should be treated with suspicion, is that it is simply too easy to generate them in the real world.
An Automatic Door Does Not Replace a Doorman: Why Efficiency Doesn’t Always Pay
When every function of a business is looked at from the same narrow economic standpoint, the same game is applied endlessly. Define something narrowly, automate or streamline it – or remove it entirely – then regard the savings as profit.
Today, the principal activity of any publicly held company is rarely the creation of products to satisfy a market need. Management attention is instead largely directed towards the invention of plausible-sounding efficiency narratives to satisfy financial analysts, many of whom know nothing about the businesses they claim to analyse, beyond what they can read on a spreadsheet.
The theory is that free markets are principally about maximizing efficiency, but in truth, free markets are not efficient at all. Admiring capitalism for its efficiency is like admiring Bob Dylan for his singing voice: it is to hold a healthy opinion for an entirely ridiculous reason. The market mechanism is loosely efficient, but the idea that efficiency is its main virtue is surely wrong, because competition is highly inefficient.
An Alchemist’s Tale (Or Why Magic Really Still Exists)
The Great Upside of Abandoning Logic – You Get Magic
In psychology these laws do not apply: one plus one can equal three.
We don’t value things; we value their meaning. What they are is determined by the laws of physics, but what they mean is determined by the laws of psychology.
If you propose any solution where the gain in perceived value outweighs the attendant expenditure in money, time, effort or resources, people either don’t believe you, or worse, they think you are somehow cheating them.
Turning Lead into Gold: Value Is in the Mind and Heart of the Valuer
The reason the alchemists gave up in the Middle Ages was because they were looking at the problem the wrong way – they had set themselves the impossible task of trying to turn lead into gold, but had got it into their heads that the value of something lies solely in what it is. This was a false assumption, because you don’t need to tinker with atomic structure to make lead as valuable as gold – all you need to do is to tinker with human psychology so that it feels as valuable as gold. At which point, who cares that it isn’t actually gold? If you think that’s impossible, look at the paper money in your wallet or purse; the value is exclusively psychological. Value resides not in the thing itself, but in the minds of those who value it. You can therefore create (or destroy) value it in two ways – either by changing the thing or by changing minds about what it is.
Preoccupied as they were with the hopeless idea of ‘transmutation’ – the transformation of one element into another – the alchemists failed to experiment with the rebranding of lead.
Turning Iron and Potatoes into Gold: Lessons from Prussia
To fund the war effort against France, Princess Marianne appealed in 1813 to all wealthy and aristocratic women there to swap their gold ornaments for base metal, to fund the war effort. In return they were given iron replicas of the gold items of jewelry they had donated, stamped with the words ‘Gold gab ich für Eisen’, ‘I gave gold for iron’.
Yes, precious metals have a value, but so does meaning, the addition of which is generally less expensive and less environmentally damaging.
One eighteenth-century monarch, Frederick the Great, used the same magic in the promotion of the potato as a domestic crop, transforming something worthless and unwanted into something valuable through the elixir of psychology.
He established a royal potato patch in the grounds of his palace, and declared that it was to be a royal vegetable, that could only be consumed by members of the royal household or with royal permission. If you declare something highly exclusive and out of reach, it makes us all want it much more – call it ‘the elixir of scarcity’. Frederick knew this and so posted guards around his potato patch to protect his crop, but gave them secret instructions not to guard the patch too closely. Curious Prussians found they could sneak into the royal potato patch and could steal, eat and even cultivate this fabulously exclusive vegetable for themselves.
Benign Bullshit – and Hacking the Unconscious
The invention of the ‘designated driver’ was an even cleverer use of semantics and naming to create a social good. The phrase, meaning the person who is nominated to stay sober in order to drive his friends home safely,
The Alchemy of Design
Eventually most physical objects, by a form of natural selection, acquire a shape and function matched to our evolved preferences and instincts. After a few decades, this principle came to extend to software interface design. Finger gestures such as pointing, clicking, pinch-to-zoom and so forth have become the default modes of interaction with technological devices, simply because they closely resemble the instinctive movements we have been making for a few hundred thousand years or more.
But while it is accepted that physical objects are designed around the evolved human frame, it is not universally accepted that the world is shaped to work with the evolved human brain.
Psycho-Logical Design: Why Less Is Sometimes More
‘The term affordance refers to the perceived and actual properties of the thing, primarily those fundamental properties that determine just how the thing could possibly be used. Affordances provide strong clues to the operations of things.
If you want to offer ease of use – and ease of purchase – it is often a good idea not to offer people a Swiss Army knife, something that claims to do lots of things. With the notable exception of the mobile phone, we generally find it easier to buy things that serve a single purpose.
‘No one ever got fired for buying IBM’ was never the company’s official slogan – but when it gained currency among corporate buyers of IT systems, it became what several commentators have called ‘the most valuable marketing mantra in existence’. The strongest marketing approach in a business-to-business context comes not from explaining that your product is good, but from sowing fear, uncertainty and doubt (now commonly abbreviated as FUD) around the available alternatives.
Signaling
Prince Albert and Black Cabs
I mentioned earlier in this book that there are five main reasons why human behavior often departs from what we think of as conventional rationality. The first of these is signaling, the need to send reliable indications of commitment and intent, which can inspire confidence and trust.
Medieval guilds existed for this reason. Trust is always more difficult to gain in cities because of the anonymity they afford, and guilds help to offset this problem.
Reciprocation, reputation and pre-commitment signaling are the three big mechanisms that underpin trust.
A Few Notes on Game Theory
Many things which do not make sense in a logical context suddenly make perfect sense if you consider what they mean rather than what they are.
You might expect a book of this kind to have a chapter about the Ultimatum Game and other experimental, game-theoretic investigations into the nature of trust and reciprocation. This book contains no such chapter. The reason for that is that the Ultimatum Game is stupid, and so is the Prisoner’s Dilemma: these games exist in a context-free, theoretical universe with no real-life parallels.
Continuity Probability Signaling: Another Name for Trust
I mentioned that before the prospect of repeat custom is something that keeps businesses honest, but there is another conclusion we can draw – that you can signal that you are an honest business by showing that your business model relies on repeat custom.
Unlike short-term expediency, long-term self-interest, as the evolutionary biologist Robert Trivers has shown, often leads to behaviors that are indistinguishable from mutually beneficial cooperation.
In game theory, this prospect of repetition is known as ‘continuation probability’, and the American political scientist Robert Axelrod has poetically referred to it as ‘The Shadow of the Future’.
Yet there are, when you think about it, two contrasting approaches to business. There is the ‘tourist restaurant’ approach, where you try to make as much money from people in a single visit. And then there is the ‘local pub’ approach, where you may make less money from people on each visit, but where you will profit more over time by encouraging them to come back. The second type of business is much more likely to generate trust than the first.
Why Signaling Has to Be Costly
‘Costly signaling theory’, the fact that the meaning and significance attached to a something is in direct proportion to the expense with which it is communicated.
Efficiency, Logic and Meaning: Pick Any Two
It is hardly surprising that we have evolved to invest more significance in unusual, surprising or unexpected stimuli and signals than to routine, everyday ‘noise’.
Water ‘tastes of nothing’, so we notice the smallest thing which deviates from this.
We notice and attach significance and meaning to those things that deviate from narrow, economic common sense, precisely because they deviate from it. The result of this is that the pursuit of narrow economic rationalism will produce a world rich in goods, but deficient in meaning.
Creativity as Costly Signaling
Bravery and wit can be a form of costly signaling.
Effective communication will always require some degree of irrationality in its creation because if it’s perfectly rational it becomes, like water, entirely lacking in flavor. This explains why working with an advertising agency can be frustrating: it is difficult to produce good advertising, but good advertising is only good because it is difficult to produce.
One of the most important ideas in this book is that it is only by deviating from a narrow, short-term self-interest that we can generate anything more than cheap talk. It is therefore impossible to generate trust, affection, respect, reputation, status, loyalty, generosity or sexual opportunity by simply pursuing the dictates of rational economic theory.
Advertising Does Not Always Look Like Advertising: The Chairs on the Pavement
Our brains did not evolve to make perfect decisions using mathematical precision – there wasn’t much call for this kind of thing on the African savannah. Instead, we have developed the ability to arrive at pretty good, non-catastrophic decisions based on limited, non-numerical information, some of which may be deceptive.
Bees Do It
The advertisements which bees find useful are flowers – and if you think about it, a flower is simply a weed with an advertising budget.
To borrow the language of the Michelin Guide, a flower can be ‘vaut l’étape’, ‘vaut le détour’ or ‘vaut le voyage’; ‘worth stopping at’, ‘worth going out of your way for’ or ‘a destination in itself’.
To quote a Caribbean proverb, ‘Trust grows at the speed of a coconut tree and falls at the speed of a coconut.’
Costly Signaling and Sexual Selection
Costly signaling theory, which was first proposed by the evolutionary biologist Amotz Zahavi, is, I believe, one of the most important theories in the social sciences.
The evolution of aposematism, literally a ‘stay away sign’ or ‘warning off’, surprised nineteenth-century naturalists because the conspicuous signal suggested a higher chance of predation. However, you might also argue that aposematic colouration might be explained as a form of costly signaling: ‘I’m not trying to hide, therefore there might be a good reason not to eat me.’
Necessary Waste
I may be alone in saying this, but I don’t think evolution by natural selection was Darwin’s most interesting idea.
However, the theory of sexual selection was a truly extraordinary, outside-the-box idea, and it still is; once you understand it, a whole host of behaviors that were previously baffling or seemingly irrational suddenly make perfect sense.
The tension between sexual and natural selection – and the interplay between them – may be the really big story here. Many innovations would not have got off the ground without the human instinct for status-signaling, so might it be the same in nature? In other words, as Geoffrey Miller says, might sexual selection provide the ‘early-stage funding’ for nature’s best experiments?
On the Importance of Identity
Remember that without distinctiveness, mutualism of the kind found in bees and flowers cannot work, because an improvement in a flower’s product quality would not result in a corresponding increase in the bees’ loyalty. Without identity and the resulting differentiation, a breed of flower would give away extra nectar for no gain, as the next time, the bees would simply visit the less-generous-but-identical-looking flower next to it. Over time, flowers would end up in a ‘race to the bottom’, producing as little costly nectar as possible and relying on their similar appearance to other, more generous flowers to preserve the bees supply of nectar and to maintain the incentive for them to continue travelling from plant to plant. We need to consider whether the same process occurs in business, as well as in nature. Are brands essential to making capitalism work?
Hoverboards and Chocolate: Why Distinctiveness Matters
We don’t so much choose brands as use them to aid choice. And when a choice baffles us, we take the safe default option – which is to do nothing at all.
In many ways, expensive advertising and brands arise as a solution to a problem identified by George Akerlof in his 1970 paper ‘The Market for Lemons’ in the Quarterly Journal of Economics. The problem is known as ‘information asymmetry’, whereby the seller knows more about what he is selling than the buyer knows about what he is buying.
Branding isn’t just something to add to great products – it’s essential to their existence.
Subconscious Hacking: Signaling to Ourselves
How We Can ‘Hack’ What We Can’t Control
As with an automatic camera, so with your body’s autonomic systems – you can’t directly control either of them, but you can ‘hack’ them obliquely, by deliberately contriving the conditions that will generate the automatic response you want.
Essentially, we like to imagine we have more free will than we really do, which means we favor direct interventions that preserve our inner delusion of personal autonomy, over oblique interventions that seem less logical.
‘The Conscious Mind Thinks It’s the Oval Office, When in Reality It’s the Press Office’
In the words of Jonathan Haidt, ‘The conscious mind thinks it’s the Oval Office, when in reality it’s the press office.’
I owe my explanation of the placebo theory to its author, Nicholas Humphrey. To me, his theory seems to be among the most significant theories in the field of psychology.
An article in New Scientist in 2012 examining the nature of the placebo effect described new evidence from a model that offered a possible evolutionary explanation. It suggested that the immune system has ‘an on-off switch controlled by the mind’, an idea first proposed by psychologist Nicholas Humphrey a decade or so earlier.
Pete Trimmer, a biologist at the University of Bristol, observed that the ability of Siberian hamsters to fight infections varied according to the lighting above their cages – longer hours of light (mimicking summer days) triggered a stronger immune response. Trimmer’s model demonstrated that in challenging environments, animals fared better by weathering infections and conserving resources.
Humphrey argues that people subconsciously respond to a sham treatment because it assures us that it will weaken the infection without overburdening the body’s resources.
How Placebos Help Us Recalibrate for More Benign Conditions
It’s interesting that Humphrey suggests that our body’s immune system is calibrated to suit a much tougher environment than the one in which we find ourselves.
Bravery is, for most people, not a consciously determined state – it’s automatic, not manual.
As with getting to sleep, the trick in generating bravery lies in consciously creating the conditions conducive to the emotional state.
The strangest aspect of it is that we all spend a considerable amount of time and money essentially signaling to ourselves: many of the things we do are not be intended to advertise anything about ourselves to others – we are, in effect, advertising to ourselves. The evolutionary psychologist Jonathan Haidt refers to such activities as ‘self-placebbing.’ Once we understand the concept, a great deal of bizarre consumerism will make more sense.
The Hidden Purposes Behind Our Behavior: Why We Buy Clothes, Flowers or Yachts
The intriguing thing about Uber as an innovation was that no one really asked for it before it existed. Its success lay in a couple of astute psychological hacks: the fact that no money changes hands during a trip is one of the most powerful – it makes using it feel like a service rather than a transaction.
On Self-Placebbing
One way to understand military paraphernalia of uniforms, trumpets, drums and regalia is to consider its value as a ‘bravery placebo’.
Once you understand the placebo, I think you’ll agree that a large part of the two trillion dollars spent on female self-beautification is not spent in order to appeal to the opposite sex; to put it bluntly, as a woman, it simply isn’t that difficult to dress in a way that appeals to men – you just have to wear very little. There are also some trends in female fashion, high-waisted trousers, for instance, which men find fairly repellent. It seems likely that a significant part of what you’re doing when you spend two hours on self-grooming is self-administering a confidence placebo to produce emotions that you can’t generate through a conscious act of will.
Men have equivalent placebo vices, of course: of these, a love of cars and gadgetry, funds and accelerates the development of useful products. However, a fetish for expensive wines seems to me entirely about self-placebbing or status seeking, and little to do with enjoyment – after all, is a great wine really all that much nicer than a good one?
What Makes an Effective Placebo?
One of Nicholas Humphrey’s rules about what makes an effective placebo is that there must be some effort, scarcity or expense involved.
Red Bull is among the most successful commercial placebos ever produced. So potent are the drink’s associations that the very presence of the logo seems to change behavior.
In its early days, Red Bull also benefited from repeated rumors that its active ingredient, taurine, was about to be banned. In addition to the price and the taste, the small can is particularly potent.
Why Hacking Often Involves Things That Don’t Quite Make Sense
So, signaling to ourselves or others – whether to obtain a health benefit (boosting the immune system), applying make-up (boosting confidence) or buying luxury goods (boosting status) – always seems to come accompanied by behaviors that don’t make sense when viewed from a logical perspective. However, rather than being a coincidence or a regrettable by-product, it may be a necessity.
The qualities we notice, and the things which often affect us most, are the things that make no sense – at some level, perhaps it is necessary to deviate from standard rationality and do something apparently illogical to attract the attention of the subconscious and create meaning. Cathedrals are an overelaborate way of keeping rain off your head. Opera is an inefficient way of telling a story. Even politeness is effectively a mode of interaction that involves an amount of unnecessary effort. And advertising is a hugely expensive way of conveying that you are trustworthy.
Satisficing
Why It’s Better to Be Vaguely Right than Precisely Wrong
The modern education system spends most of its time teaching us how to make decisions under conditions of perfect certainty .
It’s interesting that we find solving complex problems like this so easy – it suggests that our brains have evolved to answer ‘wide context’ problems because most problems we faced as we developed were of this type. Blurry ‘pretty good’ decision-making has simply proven more useful than precise logic.
The problems occur when people try to solve ‘wide’ problems using ‘narrow’ thinking.
Never call a behavior irrational until you really know what the person is trying to do.
(I Can’t Get No) Satisficing
In the 1950s, the economist and political scientist Herbert Simon coined the term ‘satisficing’, combining as it does the words ‘satisfy’ and ‘suffice’. It is often used in contrast with the word ‘maximizing’, which is an approach to problem-solving where you obtain, or pretend to obtain, a single optimally right answer to a particular question.
‘Simon used satisficing to explain the behavior of decision makers under circumstances in which an optimal solution cannot be determined. He maintained that many natural problems are characterized by computational intractability or a lack of information, both of which preclude the use of mathematical optimization procedures. Consequently, as he observed in his speech on winning the 1978 Nobel Prize, “decision makers can satisfice either by finding optimum solutions for a simplified world, or by finding satisfactory solutions for a more realistic world. Neither approach, in general, dominates the other, and both have continued to co-exist in the world of management science.”’
A company pursuing only profit but not considering the impact of its profit-seeking upon customer satisfaction, trust or long-term resilience, could do very well in the short term, but its long-term future may be rather perilous.
In any complex system, an overemphasis on the importance of some metrics will lead to weaknesses developing in other overlooked ones.
We Buy Brands to Satisfice
Joel Raphaelson and his wife Marikay worked as copywriters for David Ogilvy in the 1960s.
Joel’s 50-year-old theory concerning brand preference. The idea, most simply expressed, is this: ‘People do not choose Brand A over Brand B because they think Brand A is better, but because they are more certain that it is good.’ We do not do it consciously.
We will pay a disproportionately high premium for the elimination of a small degree of uncertainty – why this matters so much is that it finally explains the brand premium that consumers pay.
Once the possibility moves beyond a certain threshold, we seem unable to take the risk at any price.
This example illustrates that, when we make decisions, we look not only for the expected average outcome – we also seek to minimize the possible variance, which makes sense in an uncertain world.
In a world of perfect information and infinite calculating power, it might be slightly suboptimal to use these heuristics, or rules of thumb, to make decisions, but in the real world, where we have limited trustworthy data, time and calculating power, the heuristic approach is better than any other alternative.
He’s Not Stupid, He’s Satisficing
It isn’t always clear which heuristic rules are learned and which are innate, but everyday life would be impossible without them.
Heuristics look second-best to people who think all decisions should be optimal. In a world where satisficing is necessary, they are often not only the easiest option but the best.
Satisficing: Lessons from Sport
A 1 per cent chance of a nightmarish experience dwarfs a 99 per cent chance of a 5 per cent gain.
JFK vs EWR: Why the Best Is Not Always the Least Worst
The great thing about making the ‘default’ choice is that it feels like not making a decision at all, which is what businesspeople and public sector employees tend to really like doing – because every time you don’t visibly make a decision, you’ve ducked a bullet.
Blame, unlike credit, always finds a home.
By going with the default, you are making a worse decision overall, but also insuring yourself against a catastrophically bad personal outcome. In his book Risk Savvy (2014), the German psychologist Gerd Gigerenzer refers to this mental process as ‘Defensive Decision-Making’ – making a decision which is unconsciously designed not to maximize welfare overall but to minimize the damage to the decision maker in the event of a negative outcome.
In institutional settings, we need to be alert to the wide divergence between what is good for the company and what is good for the individual. Ironically, the kind of incentives we put in place to encourage people to perform may lead to them to be unwilling to take any risks that have a potential personal downside – even when this would be the best approach for the company overall. For example, preferring a definite 5 per cent gain in sales to a 50 per cent chance of a 20 per cent gain. Why else do you think Management Consultancies are so rich?
Psychophysics
Is Objectivity Overrated?
You may have never heard the term ‘psychophysics’, which is essentially the study of how the neurobiology of perception varies among different species, and how what we see, hear, taste and feel differs from ‘objective’ reality.
Nothing about perception is completely objective, even though we act as though it is.
How to Buy a Television for Your Pet Monkey
You probably aren’t aware of this, but your television is cheating you. Not everything on an LCD screen involves deceit: when the screen shows pure blue, green or red, it is more or less telling the truth. Color mixing is a biological, not a physical phenomenon.
The reason for all this is that humans – and indeed all apes – have trichromatic vision. We have three sets of cones (or color sensors) in our retinas, each of which is sensitive to a different part of the color spectrum; the brain then constructs the rest of the spectrum by extrapolating from the relative strength of these three.
The lesson to take from this is that it is possible for something to be objectively wrong but subjectively right. TVs are designed around how we see, not what they show.
What really is and what we perceive can be very different. This is where physical laws diverge from psychological ones. And it is this very divergence which makes Alchemy possible.
Lost and Gained in Translation: Reality and Perception as Two Different Languages
There is a whole academic discipline devoted to the idea that human behavior can be modelled as if it were a physical phenomenon: it’s called economics.
If a tree falls in the forest and no one hears it, does it make a sound? Yes, because mechanical sensors could still record that sound. But if a car lingers too long at a green traffic light and there is no one waiting behind to get angry, is it an annoyance? No, because annoyance is a perceptual concept that is confined to living things.
The job of a designer is hence that of a translator. To play with the source material of objective reality in order to create the right perceptual and emotional outcome.
Mokusatsu: The A-Bomb, the H-Bomb and the C-Bomb
What determines the behavior of physical objects is the thing itself, but what determines the behavior of living creatures is their perception of the thing itself.
To use the analogy of the needle in the haystack, more data does increase the number of needles, but it also increases the volume of hay, as well as the frequency of false needles – things we will believe are significant when really, they aren’t. The risk of spurious correlations, ephemeral correlation, confounding variables or confirmation bias can lead to more dumb decisions than insightful ones, with the data giving us a confidence in these decisions that is simply not warranted.
Big data makes the assumption that reality maps neatly on to behavior, but it doesn’t. Context changes everything. Perception may map neatly on to behavior, but reality does not map neatly onto perception. We should also remember that all big data comes from the same place: the past. Yet a single change in context can change human behavior significantly.
When It Pays to Be Objective – and When It Doesn’t
If you are a scientist, your job is to reach beyond the quirks of human perception and create universally applicable laws that describe objective reality.
In the human sciences, just as in TV design, what people perceive is sometimes more important than what is objectively true.
In physics and engineering, objective models usually make problems easier to solve, while in economics and politics objectivity might make things harder.
Every day, companies or governments wrongly make highly simplistic assumptions about what people care about.
Economic logic is an attempt to create a psychology-free model of human behavior based on presumptions of rationality, but it can be a very costly mistake. Not only can a rational approach to pricing be very destructive of perceived savings, but it also assumes that everyone reacts to savings the same way. They don’t, and context and framing matter.
How Words Change the Taste of Biscuits
Remember that words do not only affect the price of a dish – they can also change its taste.
Map Is Not the Territory, but the Packaging Is the Product
The Polish-American academic Alfred Korzybski (1879 – 1950) is perhaps most famous for his dictum that ‘The map is not the territory.’ He created a field called general semantics, and argued that because human knowledge of the world is limited by human biology, the nervous system and the languages humans have developed, no one can perceive reality, given that everything we know arrived filtered by the brain’s own interpretation of it. Top man!
The Focusing Illusion
Attention affects our thoughts and actions far more than we realize.
‘Nothing is as important as we think it is while we are thinking about it. Marketers exploit the focusing illusion. When people are induced to believe that they “must have” a good, they greatly exaggerate the difference that this good might make to the quality of their life. The focusing illusion is greater for some goods than for others, depending on the extent to which the goods attract continued attention over time.
The old advertising belief in having a Unique Selling Proposition (a ‘USP’) also exploits the focusing illusion: products are easier to sell if they offer one quality that the others do not.
Bias, Illusion and Survival
The focusing illusion is indeed an illusion, but so is almost all our perception, because an objective animal would not survive for long. As neuroscientist Michael Graziano explains, ‘If the wind rustles the grass and you misinterpret it as a lion, no harm done. But if you fail to detect an actual lion, you’re taken out of the gene pool.’
We have to be careful before we start to casually label biases and illusions as inherent mental failings, rather than the product of evolutionary selection.
No living creature can evolve and survive in the real world by processing information in an objective, measured and proportionate manner. Some degree of bias and illusion is unavoidable.
The Ikea Effect: Why It Doesn’t Pay to Make Things Too Easy
When working with IKEA I was once advised: ‘Do not, under any circumstances, suggest ways of making the IKEA experience more convenient. If you do, we shall fire you on the spot.’
When working with pharmaceutical companies, I discovered that every developer tried to make their drug as easy to ingest as possible – however, the behavioral economist Dan Ariely and I disagree with this apparently logical assumption. We both feel that the placebo effect might be strengthened if the drug requires some preparation, whether prior dilution or mixing. In addition, by creating a routine around the preparation of a drug before you take it you also create a ritual, which makes it much harder to forget.
Getting People to Do the Right Thing Sometimes Means Giving Them the Wrong Reason
The human brain to some extent automatically assumes that there are trade-offs in any decision.
If people adopt behaviors that benefit the environment, we shouldn’t really care what their motives are. Demanding people do the right thing and for the right reason is setting the bar rather too high.
Behavior comes first; attitude changes to keep up.
It is only the behavior that matters, not the reasons for adopting it. Give people a reason and they may not supply the behavior; but give people a behavior and they’ll have no problem supplying the reasons themselves.
How to Be an Alchemist
Alchemy Lesson One: Given Enough Material to Work On, People Often Try to Be Optimistic
One characteristic of humans is that we naturally direct our attention to the upside of any situation if an alternative narrative is available, minimizing the downside.
Robert Cialdini has observed that, as you are closing a sale, the admission of a downside oddly adds persuasive power: ‘Yes, it is expensive, but you’ll soon find it’s worth it,’ seems to be a strangely persuasive construction – explicitly mentioning a product’s weakness enables people to downplay its importance and accept the trade-off, rather than endlessly worrying about the potential downside. If you are introducing a new product, it might pay to bear this in mind.
Make something too cheap without sufficient explanation and it simply might not be believable – after all, things which seem too good to be true usually are.
Alchemy Lesson Two: What Works at a Small-Scale Works at a Large Scale
I was recently part of a group that met to discuss what the government could do to make paying into a pension more appealing, particularly to younger people, without requiring such a high level of financial subsidy. We were all impressed by the work that Richard Thaler and Shlomo Benartzi had already performed in this field: together, they conceived a new mechanism for pension-saving that acknowledges one of the central principles of behavioral psychology – loss-aversion.
A typical pension works like this: if you buy a pension plan for £ 250 a month, every month thereafter you are £ 250 poorer, until your retirement, when you can redeem the annual salary which that pension provides. By contrast, Thaler and Benartzi’s ‘Save More Tomorrow’ pension worked differently: you signed up for a pension at a certain rate (let’s say 20 per cent) but instead of starting immediately, your contributions would only represent a proportion of any future wage rises. So, if you were given a £ 500-a-month pay rise, 20 per cent of it (if that is what you had chosen) would go towards your pension. The same would apply to further pay rises: if, in your fifties, you were earning £ 50,000 more annually than when you took out the pension, you would by then be paying £ 10,000 each year into a retirement fund. The result was that people taking out a ‘Save More Tomorrow’ pension would never be poorer because of it – they would just be ‘less richer’. To an economist these two states are identical, but to the evolved human brain they are very different.
We are a herd species in many ways: we feel comfortable in company and like to buy things in packs.
Alchemy Lesson Three: Find Different Expressions for the Same Thing
The job of the alchemist is to find out which framing works best.
Alchemy Lesson Four: Create Gratuitous Choices
People seem to like choice for its own sake. It is harder to like something when you haven’t chosen it.
Alchemy Lesson Seven: In Defense of Trivia
The mentality of the physicist or the economist assumes that large effects are only obtained by large inputs. The mind of the alchemist understands that the smallest change in context or meaning can have immense effects on behavior.
Conclusion: On Being a Little Less Logical
The problem with logic is that it kills off magic. Or, as Niels Bohr apparently once told Einstein, ‘You are not thinking; you are merely being logical.’
Remember, if you never do anything differently, you’ll reduce your chances of enjoying lucky accidents.
Solving Problems Using Rationality Is Like Playing Golf with Only One Club
You will improve your thinking a great deal if you try to abandon artificial certainty and learn to think ambiguously about the peculiarities of human psychology.
Rebel against the Arithmocracy
My friend, the advertising expert Anthony Tasgal, coined the term ‘the arithmocracy’ to describe a new class of influential people who believe that their superior level of education qualifies them to make economic and political decisions.
I do not believe that these people form a conspiracy and I think most of what they do is intended for the common good. However, they’re dangerous because their worship of reason leaves them unable to imagine improvements to life, outside a narrow range of measures.
This is not irrationality – it is second-order social intelligence applied to an uncertain world. By using a simple economic model with a narrow view of human motivation, the neo-liberal project has become a threat to the human imagination.
