Alchemy by Rory Sutherland- Notes

  1. The opposite of a good idea can also be a good idea.
  2. Don’t design for average.
  3. It doesn’t pay to be logical if everyone else is being logical.
  4. The nature of our attention affects the nature of our experience.
  5. A flower is simply a weed with an advertising budget.
  6. The problem with logic is that it kills off magic.
  7. A good guess which stands up to observation is still science.
  8. So is a lucky accident.
  9. Test counterintuitive things only because no one else will.
  10. Solving problems using rationality is like playing golf with only one club.
  11. Dare to be trivial.
  12. If there were a logical answer, we would have found it.

THE CASE FOR MAGIC

  1. Machines don’t allow for magic, but complex systems do.
  2. Engineering doesn’t allow for magic. Psychology does.
  3. The human mind does not run on logic any more than a horse runs on petrol.
  4. But in real life, most things aren’t logical — they are psycho-logical.
  5. To reach intelligent answers, you often need to ask really dumb questions.
  1. Logic is what makes a successful engineer or mathematician, but psycho-logic is what has made us a successful breed of monkey, that has survived and flourished over time.
  2. Robert Zion, the social psychologist, once described cognitive psychology as ‘social psychology with all the interesting variables set to zero’.
  3. Research into human behaviour or choices in artificial experiments where there is no social context isn’t really all that useful. In the real world, social context is absolutely critical.
  4. The trick to being an alchemist lies not in understanding universal laws, but in spotting the many instances where those laws do not apply.
  5. Not everything that makes sense works, and not everything that works makes sense.
  1. Most political, business, foreign policy and, I strongly suspect, marital problems seem to be non-logical problems.
  2. This isn’t the Middle Ages, which had too many alchemists and not enough scientists.
  3. More data leads to better decisions. Except when it doesn’t. Anecdotal evidence is sometimes right, and data is proven wrong. Case in Point US presidential elections where Donald Trump won.
  4. The Nobel Prize-winning behavioural scientist Richard Thaler said, ‘As a general rule the US Government is run by lawyers who occasionally take advice from economists. Others interested in helping the lawyers out need not apply.’
  5. Irrational people are much more powerful than rational people, because their threats are so much more convincing.
  6. Being slightly bonkers can be a good negotiating strategy: being rational means you are predictable, and being predictable makes you weak.
  7. Hillary thinks like an economist, while Donald is a game theorist.
  8. If you are wholly predictable, people learn to hack you.
  9. Evolution, too, is a haphazard process that discovers what can survive in a world where some things are predictable but others aren’t. It works because each gene reaps the rewards and costs from its lucky or unlucky mistakes, but it doesn’t care a damn about reasons. It isn’t necessary for anything to make sense: if it works it survives and proliferates; if it doesn’t, it diminishes and dies. It doesn’t need to know why it works — it just needs to work.
  10. Advertisements with cute animals sell more than those which don’t have animals.
  11. Advertising exists to be noticed, and we have evolved, surely, to pay attention to living things.
  12. An evolutionary psychologist might also suggest that a penguin nightlight — a gift for one’s child — might be more emotionally rewarding than a cash reward, which is a gain for oneself.
  13. Evolution is like a brilliant uneducated craftsman: what it lacks in intellect it makes up for in experience.
  14. It is perfectly possible to be both rational and wrong.
  15. Logical ideas often fail because logic demands universally applicable laws but humans, unlike atoms, are not consistent enough in their behaviour for such laws to hold very broadly.
  16. It is impossible for human relations to work unless we accept that our obligations to some people will always exceed our obligations to others.
  17. Jeremy Bentham, father of utilitarianism once declined the chance to meet his young nieces, saying, ‘If I don’t like them, I will not enjoy the experience, and if I do like them then I will be sad to see them leave.’
  1. Scarcity and ubiquity can both matter, depending on the context.
  2. While in physics the opposite of a good idea is generally a bad idea, in psychology the opposite of a good idea can be a very good idea indeed: both opposites often work.
  3. Even the super-rich love a bargain. In fact supermarket own-brand products tend to be bought more by wealthier people than by poorer people.
  4. We derive pleasure from ‘expensive treats’ and also enjoy finding ‘bargains’.
  1. Pernod, of course, only tastes really good in France. And Guinness tastes better in Ireland. But that’s not because Guinness is better in Ireland, but because Ireland is a better backdrop for drinking Guinness. Apparently rosé wine tastes much better if you are by the sea.
  2. ‘At the federal level I am a Libertarian. At the state level, I am a Republican. At the town level, I am a Democrat. In my family I am a socialist. And with my dog I am a Marxist — from each according to his abilities, to each according to his needs.’
  3. You can never be fired for being logical.
  4. It is much easier to be fired for being illogical than it is for being unimaginative.
  5. Signalling, Subconscious hacking, Satisficing and Psychophysics.
  6. The reason we don’t always behave in a way which corresponds with conventional ideas of rationality is not because we are silly: it is because we know more than we know we know.
  7. We have evolved to deceive ourselves, in order that we are better at deceiving others.
  8. The theory is that if all our unconscious motivations were to impinge on our consciousness, subtle cues in our behaviour might reveal our true motivation, which would limit our social and reproductive prospects.
  9. Humans may be descended from ancestors who were better at the concealment of their true motives (Robert Trivers)
  10. ‘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.’
  11. We patently need a level of self-delusion to function as a social species.
  12. Evolution does not care about objectivity — it only cares about fitness.
  13. For a business to be truly customer-focused, it needs to ignore what people say. Instead it needs to concentrate on what people feel.
  14. Restaurants are only peripherally about food: their real value lies in social connection, and status.
  15. ‘A choice, not a compromise’ was at one time Ogilvy’s slogan for the Ford Fiesta.
  16. If you attend a meeting with the UK Government, no biscuits are provided. It saves something like £50m a year.
  17. 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.’

Psychological Moonshots

  1. ‘psychological moonshots’ are comparatively easy. Making a train journey 20 per cent faster might cost hundreds of millions, but making it 20 per cent more enjoyable may cost almost nothing.
  2. The biggest progress in the next 50 years may come not from improvements in technology but in psychology and design thinking. Put simply, it’s easy to achieve massive improvements in perception at a fraction of the cost of equivalent improvements in reality. Logic tends to rule out magical improvements of this kind, but psycho-logic doesn’t.
  3. We have a culture that prizes measuring things over understanding people.
  4. We are much bothered by the uncertainty of waiting than by the duration of a wait.
  5. if an unconscious motivation happens to coincide with a rational explanation, we assume that it is the rational motive which drives the action.

The Right Thing for the Wrong Reason

  1. ‘There is no such thing as a rational or irrational belief — there is only rational or irrational behaviour.’ — Taleb
  2. You don’t need reasons to be rational.
  3. ‘the way a question is phrased is itself information’.
  4. ‘A Change in Perspective Is Worth 80 IQ Points’.
  5. An inability to change perspective is equivalent to a loss of intelligence.
  6. When you multiply bullshit with bullshit, you don’t get a bit more bullshit — you get bullshit squared.
  1. You can trick ten people once, but it’s much harder to trick one person ten times.
  2. Online shopping is a very good way for ten people to buy one thing, but it is not a good way for one person to buy ten things.
  3. 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.
  4. metrics do not distinguish between ten people who have to stand 10 per cent of the time and one person who has to stand all the time, but these two things aren’t the same at all.
  5. The quandary is that you can either create a fairer, more equitable society, with opportunities for all but where luck plays a significant role, or you can create a society which maintains the illusion of complete and non-random fairness, yet where opportunities are open to only a few — the problem is that when ‘the rules are the same for everyone’ the same boring bastards win every time.
  6. In recruitment, there is an inevitable trade-off between fairness and variety.
  7. By applying identical criteria to everyone in the name of fairness, you end up recruiting identical people.
  8. Complementary talent is far more valuable than conformist talent.
  9. Don’t design for averages
  10. Metrics, and especially averages, encourage you to focus on the middle of a market, but innovation happens at the extremes.
  11. You are more likely to come up with a good idea focusing on one outlier than on ten average users.
  12. Weird consumers drive more innovation than normal ones.
  1. ‘what gets mismeasured gets mismanaged’.
  2. the attractiveness of what we choose is affected by comparisons with what we reject.
  3. ‘Everyone likes to go to a nightclub in the company of a friend who’s slightly less attractive than them.’
  4. Ideas which people hate may be more powerful than those that people like
  1. ‘drama is just real life with the boring bits edited out’. — Alfred Hitchcock
  2. We constantly rewrite the past to form a narrative which cuts out the non-critical points — and which replaces luck and random experimentation with conscious intent.
  3. evolution does not do long-term planning.
  4. Reason arose in the human brain not to inform our actions and beliefs, but to explain and defend them to others. It’s an adaptation necessitated by our being a highly social species.
  5. We may use reason to detect lying in others, to resolve disputes, to attempt to influence other people or to explain our actions in retrospect, but it seems not to play the decisive role in individual decision-making.
  6. Reason is not as Descartes thought, the brain’s science and research and development function — it is the brain’s legal and PR department.
  7. In the physical sciences, cause and effect map neatly; in behavioural sciences it is far more complex.
  8. competition is highly inefficient.
  9. People’s motivations are not always well-aligned with the interests of a business.

Part 2: An Alchemist’s Tale (Or Why Magic Really Still Exists)

  1. In psychology, one plus one can equal three.
  2. In maths it is a rule that 2 + 2 = 4. In psychology, 2 + 2 can equal more or less than 4. It’s up to you.
  3. Wine tastes better when poured from a heavier bottle. Painkillers are more effective when people believe they are expensive. Almost everything becomes more desirable when people believe it is in scarce supply, and possessions become more enjoyable when they have a famous brand name attached.
  4. The best way to improve air travel probably lies with faster airports, not faster aircraft.

The Modern-Day Alchemy of Semantics

  1. the nature of our attention affects the nature of our experience.
  2. Advertising word comes from the Latin ‘ anima advertere ’, or ‘to direct attention’.

The Alchemy of Design

  1. Starbucks owes a large part of its revenues to hiring out horizontal surfaces (tables) to laptop users under the guise of selling coffee.
  1. Economic logic suggests that more is better. Psycho-logic often believes that less is more.

Part 3: Signalling

  1. Reciprocation, reputation and pre-commitment signalling are the three big mechanisms that underpin trust.
  2. Long-term self-interest, often leads to behaviours that are indistinguishable from mutually beneficial cooperation
  3. Bits deliver information, but costliness carries meaning.
  4. 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.
  5. In architecture this has produced modernism, a style with a marked absence of decoration or ‘spurious’ detail, and a corresponding loss of ‘meaning’.
  1. it is difficult to produce good advertising, but good advertising is only good because it is difficult to produce.
  2. The potency and meaningfulness of communication is in direct proportion to the costliness of its creation
  3. all powerful messages must contain an element of absurdity, illogicality, costliness, disproportion, inefficiency, scarcity, difficulty or extravagance — because rational behaviour and talk, for all their strengths, convey no meaning.
  4. If rationality were valuable in evolutionary terms, accountants would be sexy.
  5. Male strippers dress as firemen, not accountants; bravery is sexy, but rationality isn’t.
  6. Information is free, but sincerity is not, and it isn’t only humans who attach significance to messages in proportion to the costliness of their creation and transmission. — Cole Porter
  7. Trust grows at the speed of a coconut tree and falls at the speed of a coconut.
  1. when sexual selection succeeds, people casually attribute the success to natural selection.
  2. Geoffrey Miller says sexual selection provide the ‘early stage funding’ for nature’s best experiments.
  3. Without any established brand in a product category, choices baffle us, and we default to the safe choice, of no purchase at all.
  4. Without brand feedback mechanism, where bad product makers are abandoned and good product makers get repeat business, the products lose innovation and quality control, and degrade over time, as it happened to bread during communist rule. People had no idea how to differentiate between different packagings of bread.
  1. we often cannot alter subconscious processes through a direct logical act of will — we instead have to tinker with those things we can control to influence those things we can’t or manipulate our environment to create conditions conducive to an emotional state which we cannot will into being.
  2. feelings can be inherited, whereas reasons have to be taught, which means that evolution can select for emotions much more reliably than for reasons.
  1. Humphrey suggests that our body’s immune system is calibrated to suit a much tougher environment than the one in which we find ourselves.
  2. ‘enemies of reason’ series in which Nicholas Humphrey argues his case against Richard Dawkins, the high priest of reductionist rationality.
  3. The mammalian brain has a deep-set preference for control and certainty.
  1. One of Nicholas Humphrey’s rules about what makes an effective placebo is that there must be some effort, scarcity or expense involved.
  2. Five giant industries that exist by selling mood-altering substances — alcohol, coffee, tea, tobacco and entertainment
  3. The Mating Mind (2000) or Spent (2009) by Geoffrey Miller, or The Darwin Economy (2001) or Luxury Fever (2000) by Robert H. Frank (both authors are brilliant eminent evolutionary psychologists) you will see that both come to more or less the same conclusions. Gad Saad is another very good commentator on this phenomenon, especially in The Consuming Instinct .
  1. So signalling 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 behaviours that don’t make sense when viewed from a logical perspective.
  2. Meaning is disproportionately conveyed by things that are unexpected or illogical, while narrowly logical things convey no information at all.

PART 5: SATISFICING

  1. Our brains have evolved to answer ‘wide context’ problems because most problems we faced as we developed were of this type.
  2. Blurry ‘pretty good’ decision-making has simply proven more useful than precise logic.
  3. The problems occur when people try to solve ‘wide’ problems using ‘narrow’ thinking.
  4. ‘It is better to be vaguely right than precisely wrong’ — Keynes
  5. The risk with the growing use of cheap computational power is that it encourages us to take a simple, mathematically expressible part of a complicated question, solve it to a high degree of mathematical precision, and assume we have solved the whole problem.
  6. GPS answers a narrow question like ‘How long will it take to drive to Gatwick?’ brilliantly, but the wider questions like ‘How should I get there and when should I set off?’ still remain. The GPS device has provided a brilliant answer to the wrong question.
  7. We fetishise precise numerical answers because they make us look scientific — and we crave the illusion of certainty.
  8. Our brain has evolved not so much to find a right answer as to avoid a disastrously wrong one.
  9. The question we were unconsciously asking was not, ‘What car should I buy, and where?’, but ‘Who could I find trustworthy enough to sell me a really cheap car?’ We weren’t trying to buy the best car in the world — we were trying to avoid the risk of buying a terrible car.
  10. The question we were asking, ‘Who can I find who won’t rip me off?’
  11. Decision makers can satisfice either by finding optimum solutions for a simplified world, or by finding satisfactory solutions for a more realistic world. —Herbert Simon
  12. Big data carries with it the promise of certainty, but in truth it usually provides a huge amount of information about a narrow field of knowledge.
  13. It is precisely because they do not concentrate exclusively on short-term efficiency that bees have survived so many million years.
  14. It’s better to find satisfactory solutions for a realistic world, than perfect solutions for an unrealistic one.
  15. Just because it’s irrational, it doesn’t mean it isn’t right.
  1. We will pay a disproportionately high premium for the elimination of a small degree of uncertainty
  2. While a brand name is rarely a reliable guarantee that a product is the best you can buy, it is generally a reliable indicator that the product is not terrible.
  3. As a guarantee of non-crapness, a brand works.
  4. It is no good judging things on their average expectation without considering the possible level of variance.
  5. 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.
  1. Smell almost certainly plays a much greater role in attraction than we are aware of. One experiment suggests we are attracted to the smell of people who have an immune system complementary to our own.
  1. Many real-life decisions have a scoring rubric that is more like darts than archery.
  2. In deciding whom to marry, aiming for the best may be less important than avoiding the worst.
  3. Rather than trying to maximise an outcome, you may seek a pretty good all-round solution with a low chance of disaster.
  4. An approach seeking to minimise variance or minimise downsides often involves behaviour that seems nonsensical to those who don’t understand what the actor is trying to do.
  5. Habit, which can often appear irrational, is perfectly sensible if your purpose is to avoid unpleasant surprises.
  6. Social copying — buying products or adopting behaviours and fashions that are popular with others — is another safe behavioural approach.
  7. You would not ask ‘What car should I buy?’, but ‘Whom can I trust to sell me a car?’ Not ‘What’s the best television?’, but ‘Who has most to lose from selling a bad television?’ Or not ‘What should I wear to look great?’, but ‘What’s everyone else going to be wearing?’
  8. A 1 per cent chance of a nightmarish experience dwarfs a 99 per cent chance of a 5 per cent gain.
  1. Blame, unlike credit, always finds a home
  2. The German psychologist Gerd Gigerenzer refers to this mental process as ‘Defensive Decision-Making’ — making a decision which is unconsciously designed not to maximise welfare overall but to minimise the damage to the decision maker in the event of a negative outcome. (From book called Risk Savvy 2014)

PART 6: PSYCHOPHYSICS

  1. Nothing about perception is completely objective, even though we act as though it is.
  1. It is possible for something to be objectively wrong but subjectively right.
  2. TVs are designed around how we see , not what they show
  3. psycho-logic and psychophysics need to be applied not just to the design of televisions, but also to welfare programmes, tax, transportation, healthcare, market research, the pricing of products and the design of democracy.
  4. What really is and what we perceive can be very different.
  5. This is where physical laws diverges from psychological ones. And it is this very divergence which makes Alchemy possible.
  1. Economics: The idea that human behaviour can be modelled as if it were a physical phenomenon.
  2. Annoyance is a perceptual concept that is confined to living things.
  3. 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.
  1. 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 correlations, 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.
  2. The data might say that people won’t pay £49 for a jar of coffee and that’s true, mostly. However people will pay 29p for a single Nespresso capsule which amounts to a similar cost.
  3. Big data makes the assumption that reality maps neatly on to behaviour, but it doesn’t. Context changes everything.
  4. Perception may map neatly on to behaviour, but reality does not map neatly onto perception.
  1. It does not matter whether a bridge looks strong — we need to know that it really is strong.
  2. In the human sciences, just as in TV design, what people perceive is sometimes more important than what is objectively true.
  3. People didn’t want low prices — they wanted concrete savings. One possible explanation for this is that we are psychologically rivalrous, and like to feel we are getting a better deal than other people. If everyone can pay a low price, the thrill of having won out over other people disappears; a quantifiable saving makes one feel smart, while paying the same low prices as everyone else just makes us feel like cheapskates.
  4. perception of price and value came from the father of ‘Nudge Theory’, Richard Thaler.
  1. 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.
  1. Attention affects our thoughts and actions far more than we realise.
  2. Daniel Kahneman, along with Amos Tversky, is one of the fathers of behavioural economics; ‘the focusing illusion’, as he calls it, causes us to vastly overestimate the significance of anything to which our attention is drawn.
  3. Status probably ranks higher on your list of priorities when you buy a car than it does later on in the car’s life, when reliability, running costs and comfort are more significant.
  1. The focusing illusion is indeed an illusion, but so is almost all our perception, because an objective animal would not survive for long.
  2. 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.
  1. It is only the behaviour that matters, not the reasons for adopting it. Give people a reason and they may not supply the behaviour; but give people a behaviour and they’ll have no problem supplying the reasons themselves.

Part 7: How to Be an Alchemist

  1. As Shakespeare wrote, ‘there is nothing either good or bad, but thinking makes it so’.
  1. Consumers have a similar instinct — we would rather make a suboptimal decision in company than a perfect decision alone.
  2. A problem is much less worrying when shared.
  1. Most of a company’s management should have a love of the obvious, whereas the marketer needs to have a fear of the obvious.
  2. It is easier to get fired for being illogical than for being unimaginative.
  1. the problem with logic is that it kills off magic.
  2. as Niels Bohr * apparently once told Einstein, ‘You are not thinking; you are merely being logical.’
  3. if you never do anything differently, you’ll reduce your chances of enjoying lucky accidents.
  4. What often matters most to those making a decision in business or government is not a successful outcome, but their ability to defend their decision, whatever the outcome may be.
  1. John Maynard Keynes once wrote, ‘Wordly wisdom teaches that it is often better for the reputation to fail conventionally than to succeed unconventionally.’
  1. Our brains present us with a view that is the best-calibrated to improve our evolutionary fitness rather than the most accurate.
  2. Being ignorant about your own motivations may pay off in evolutionary terms:
  3. Evolution cares about fitness rather than objectivity, and if the ability to present oneself in a good light has certain reproductive advantages, then it will be prioritised.

The real ‘why’ differs from the official ‘why’, and that our evolved rationality is very different from the economic idea of rationality.

Investor, Ex-PayTM, DCE Alumnus