Last week we co-hosted (along with Hunting Dynasty) an event to celebrate the second anniversary of the London Behavioural Economics Network. To mark the special occasion, we invited two illustrious speakers to discuss life on both sides of the behavioural fence: commercial and academic. Representing the academic side, we had George Loewenstein from Carnegie Mellon University and for the commercial side, there was only one option – Rory Sutherland.
Thanks to Brian Tarran from the Market Research Society, we can share with you a transcript of the event (link to our video at the end of this post). Brian also wrote an excellent review of the event which you can read on Research Live.
George Loewenstein: Why is it that British electrical outlets have a switch on them? If you don’t have anything plugged in, why bother to turn it off, and if you do have something plugged in, why bother to turn it off?Rory Sutherland: I’ve always seen it as a failing of other countries that you don’t have a switch. But there may have been also, bizarrely… if you go back to the early days of electricity, there was a considerable fear that if you left the switch on with nothing plugged in the electricity would leak into the room. So it might have been a device by the electricity boards to prevent people from being paranoid.GL: I’ve read in various places that you studied classics at Cambridge and taught classics. Now, I don’t want to rake the coals on any deep regrets that you feel about leaving teaching, but I’m wondering if you’ve gained any insights from your career in advertising that would apply to education?RS: A classical education is one of those things that works obliquely. It’s also worth asking: is a large component of education signalling, rather than value? Your level of educational attainment correlates very well with your career outcome if you get a paid job. It doesn’t correlate at all with people who are self-employed. This raises the question: is there a large amount of education that is effectively a spiralling, competitive credentialism? We don’t have any evidence that people with OxBridge firsts are better employees than people with firsts from Leeds. There’s no real empirical evidence that your degree class predicts your level of value to your company. There’s an aspect, which I know is a very cynical one, who argue that this is in a sense a peacock’s tail thing; basically it’s a three-year long IQ test combined with proof of commitment.GL: Take something like drop-outs, or students not studying as hard as you’d like them to. Are there any lessons from behavioural economics or the marketing world that would discourage and encourage those people?RS: There are some interesting questions about education. Does it disproportionately privilege certain personality types, those that are particularly well-suited to the system they find themselves in. One of the interesting things about an ad agency is that, as a place to work, it is a complimentary mix of skills. You need the beard-stroking Oxbridge intellectuals dotted around the place, but what you find in the most successful ad agencies is that the people who make up the management of that organisation tend to come from an extraordinary mix of educational and social background. That’s not just a politically correct, nice thing to have, it is a source of competitive advantage.GL: That’s a nice segue into a question I was going to ask, about the new master’s programmes that are beginning in the UK, focusing on behavioural economics. Is this the kind of training that you would value at Ogilvy, or are you looking for the pot-smoking… what was it?[laughter]RS: They are not mutually exclusive, of course. You can have an MSc in behavioural science and a severe pot habit.[laughter]RS: One of the strange things is, you would think that advertising agencies and clients are full of behavioural scientists and psychologists, devising the next evil way in which to mislead people into buying stuff. I must admit, I was rather hoping to find that kind of thing when I went into the business myself. I always assumed I’d be able to turn some strange corner and find a room full of people attaching electrodes to rats. That room does not exist. But the reason private enterprise looks like it’s good at behavioural science is that it stumbles on things by accident. It happens to produce things that work. Capitalism is sort of semi-Darwinist: if you stumble on something that is disproportionately successful, it makes money, so you tend to expand that particular area. Now, some time after the early Mad Men era, the links between academic psychology and advertising and marketing were actually quite strong. This was in the late-50s, early-60s, when there were various people dotted around ad agencies with possibly fake, possibly genuine Viennese accents, who claimed to have met Sigmund Freud. These people came up with ideas, like how ‘plink, plink, fizz’ would create a social norm around using two Alka-Seltzer rather than one. They came up with lines like, ‘How else can a month’s salary last a lifetime’ for DeBeers, which was an extraordinarily good piece of framing in terms of anchoring what a man should spend on a commitment device for his future wife. They stumbled on these things by accident, but they made no effort whatsoever to codify it. What the business world is very good at is stumbling on successes by accident, but it’s terrible at making sense of them. We had all the information to create a science of behavioural economics back in the 50s and 60s, but we squandered it because nobody tried to make sense of it.GL: How do you use behavioural economics in your practice? Can you give an example of a campaign that wouldn’t have happened without behavioural economics.RS: The most important thing about behavioural economics is the widespread awareness among clients and agency people that these things are important. Before, in modelling and attempting to predict consumer behaviour, we tended to rely on the two pairs of broken binoculars: neo-classical economic assumptions, which are quite seriously wrong in some areas, and market research. Enormous business and government decisions are based on these two flawed lenses. Neo-classical economics tends to assume that psychology isn’t matter – which, as a result, creates an imaginary fantasy world of perfect information, perfect trust and perfect efficiency where marketing and advertising needn’t exist. But there are loads of things for which there is no rational reason. Stripy toothpaste, say – let’s get really trivial. There is no rational reason for stripy toothpaste because once you put it into your mouth it all gets mixed up. Nobody in market research would ever say that toothpaste should be stripy. No neo-classical economist would argue that there was any benefit to it. But someone stumbled on this idea that it’s much easier for people to believe a toothpaste does three things if there are three different visible components. That kind of thing, just understanding something that would never have emerged from research or neo-classical economics – those kind of things can make the difference between triumph and disaster. If all I do is get people to understand that, and get people to accept that it is worth testing things that don’t appear to make any sense to test, that’s all you have to do.GL: The stereotype of advertisers and marketers is that they are playing on motives like power, sex, fear and so on. Is that true, and to what extent is behavioural economics capturing the motives that really drive people to purchase products?RS: I’m very uncomfortable with the use of the word irrational, because an awful lot of behaviour that is currently seen as irrational is meta-rational or evolutionary rational. It’s the product of evolved psychological instincts that may or may not be useful in the modern world. For example, people’s willingness to pay a premium for a famous brand is rational if you understand a bit of reputational game theory, which is that someone with a valuable reputation has more to lose from selling a bad product than someone you’ve never heard of. There are lots of mechanisms that we employ instinctively, actually make very good sense. I also think loss aversion, in evolutionary terms, needs to be better understood. Rationality is always about maximising something, but I would argue that any sensible evolved system is not going to care about whether something is good or really good, but it would desperately care about the chances of something being fatally terrible. If you look at it from the absence of bad, rather than presence of good, an awful lot of human decision making makes an awful lot of sense. The idea that rationality means getting the best of something… I mean, you can go to a Michelin-starred restaurant and spend the afternoon on the bog, but say what you like about Maccy D’s but you don’t get ill there. Satisficing is what most people do all the time to the extent where, when people don’t satisfice there’s probably something going wrong. When people maximise, it tends to be in competitive situations where people are thinking as game theorists.GL: But sometimes what appears to be maximising, isn’t maximising at all. I had a colleague who always tried to maximise the gain from any kind of negotiation and it was a disastrous strategy…RS:… Because no-one would negotiate with him?GL: That’s right. Another case is, if you always want to get the parking spot closest to the theatre, you’re going to waste a lot of time looking for a parking place. I’m actually a big believer in satisficing, but really a believer that satisficing can be a form of maximising. On the idea of loss aversion being connected with having evolved, it would have to be a very crude kind of evolution that produced that effect, because we’re loss averse over very small amounts: like gain $10/lose $10, or gain $15/lose $10 – most people are going to turn that down. But $10 has no prospect of killing you, so you would have to say it’s something we learned through evolution and then generalised inappropriately.RS: Do you accept the claim that some psychologists make that the term behavioural economics steals for economics credit that is owed to psychology?GL: There are a lot of psychologists who are annoyed at economics, and are annoyed at behavioural economics specifically. A lot of the work on changing health behaviours, for instance, was first done by psychologists, didn’t get a huge amount of attention, and then behavioural economists started doing it, and have gotten a tremendous amount of attention since then. Psychologists are, rightfully in my opinion, bothered about that. In fact, a lot of psychologists have started rebranding themselves as behavioural economists and getting more attention. I think they are right to have a grudge, but I guess you could tell us that it’s all a matter or marketing, and behavioural economists are much better at the marketing game.RS: I got into this weird Twitter row, and Nicholas Christakis, I think, had the last word on the question when he said, “Look, there is a branding problem with psychology, which is very simple: the president of the United States cannot have a council of psychological advisors – but he can have a council of economic advisors”. On the other hand, for reasons I don’t fully understand, economics has completely disproportionate influence in business, and especially in policy making, out of all the other social sciences. Part of my theory is that economics is the one academic discipline where it is ok to be greedy. My brother is an astrophysicist, and if he went off to work in a high-frequency trading firm for two years and make a fortune and then try to get back into astrophysics, his career would be dead because he’d sold out. Economics, because it preaches self interest as a virtue, getting two-year gig at Citibank for £300,000 a year is positively career enhancing. Is that a valid theory?GL: I think there is a good reason why economists are so tied into policy, because a lot of economics is oriented towards policy. But I actually want to pick up on a little piece of what you talked about, which is greed. When economists talk about greed they misuse the term. For an economist, greed is self interest. But when lay people use the term, they are using it in a very different sense. For a lay person, greed is self interest taken too far; to the point where it is destructive. So, it’s fine in my opinion to be self interested, but the danger is where you take it too far.RS: We do have a social epistemology, and our idea of the good life is probably massively informed by what we think other people’s idea of the good life is. So, I think the extent to which we decide individually is a really interesting question. Although we’re consciously determined to see ourselves as individuals, I think our vision of what’s good is massively driven by our assumptions of what other people think.GL: Exactly, and I recently co-authored a paper on mattering maps. When you’re in a particular situation, let’s say a social group, there’s typically something that matters more than anything else. Among academics it might be publications. If you are a musician it might be how well you play a piece. But one of the interesting features of mattering maps is they can change so abruptly as a result of whatever social milieu you’re in. So, I couldn’t agree more with you, that whatever we’re seeking at any given time is completely socially determined. The think we have some kind of free will about is how we’re going to seek it out. But we don’t really have a lot of control over what we’re seeking.RS: We won’t get into free will and determinism here, because that’s probably a bit heavy. But a final thing: there is this attack on behavioural economics that it is just a collection of findings, or anomalies – that it is stamp collecting for psychologists. Critics say, ‘Where is the unifying theory?’ But if you’re dealing with psychology, human behaviour, human health – any of these complex emergent phenomena – is there ever going to be a unifying theory?GL: Let me just say that something I’ve noticed about Brits is that you find pretension toxic. And what you don’t realise is that Rory is actually making fun of me with this question…[Laughter]RS: No, I’m not!GL: …because I was having breakfast with him and I told him that I was working with Nick Chater on a theory of everything. I actually meant it a little bit tongue in cheek, but not totally. So Rory’s making fun of me. But, ok, the first thing is that it’s kind of surprising as a behavioural economist to be questioned about the desire for a unified theory, because we’re always being attacked by traditional economists who say, ‘We have a unified theory and you’re just a bunch of disparate findings’. My view is that traditional economics is not nearly as unified as it claims to be because whatever phenomenon the economist is looking at, the utility function metamorphoses to deal with the phenomena that’s important to them. But I do think that a unifying theory, even a unifying mathematical theory, can be a beautiful thing. And, that’s what social science is all about: trying to take disparate social phenomena and come up with a unified account. That’s when I get a chill up my spine, when disparate things come together. So my aspiration is for behavioural economics to be grounded on a unified theory, or maybe a few unified theories.
For a video of the event, click here.
To sign up to the next London Behavioural Economics Event: meetup.com/London-behavioural-comms-monthly-informal-drinks/
Join the LBEN Facebook group: https://www.facebook.com/groups/londonBEnetwork/