Maps and Miracles

Patrick: [00:00:00] So Rory, I really toyed with where to start in this conversation, and I figured a neat place would be this idea that a spreadsheet leaves no room for miracles, and that the problem with logic is that it kills off magic. I'd love you to expand on those two great ideas because in my world of finance, we use a lot of spreadsheets.

Rory: [00:02:29] I think that actually goes wider in a way, which is that most people want maps of the world. In fact, we need them because patently, simple human perception and decision making in evolutionary terms, in practical terms, requires that we develop these kinds of schemas because patently, we have to go from data to decision. And the amount of information we have, very large parts of which may be entirely irrelevant by the way, mean that we have to produce this kind of reduced map by which we operate. And I think the problem is that the maps we like to use are always kind of deterministic and they're kind of Newtonian, if you like, whereas reality is neither, it's both probabilistic and it's highly complex.

So in any deterministic model, whether it be a spreadsheet or a map of the London underground or whatever map we're using to understand the territory, I think there's a tendency to assume a proportionality. Once you have a deterministic universe, there's no room for magic, but there are things in complex systems, butterfly effects, where you can achieve spectacular results with tiny interventions. That's one thing. And it's also true to say, that's the complexity element of it. Patently, human perceptions, complex human behaviors, complex mass human behavior, is even more complex still. So, the deterministic map and the Newtonian map effectively are a quest for laws, which tend to be universal and proportionate.

And of course, magic is produced, if you want to just slightly stretch the conventional meaning of magic in the dictionary, either by a tiny little tweak that leads to an enormous effect, domino effect or whatever it may be, butterfly effect, but the possibility of magic exists anywhere where you either have butterfly effects, I think, or where you have highly non-objective perception. And so, just an example of this, of magic, you can double the conversion rate of a call center if you're asking people to choose between three options of subscription, and you simply add the sentence, "Most people choose B."

The number of people who will go on to buy when given what to an economist is entirely irrelevant information, because economics assumes perfect information and perfect trust, and as a byproduct of that, perfectly objective perception, that should have no effect on what anybody chooses, but of course it does. Because anybody who's undecided can go with the flow of social norms there. And in evolutionary terms, it makes obvious sense that we actually base many of our decisions on what other people normally do, because it's free information. Copy other people is a fairly reliable rule for avoiding catastrophic decisions. It may not be perfect, but that's, again, an economic failing where they assume we're trying to optimize something. Well, maybe we are, but I think what we're trying to optimize isn’t what economists think we should be trying to optimize

Regular Moonshots vs. Psychological Moonshots

Patrick: [00:05:42] The thing that I think unites so much of your thinking and your writing is this difference between what a product or service is literally, it's raw, underlying utility, and the method with which it's delivered and how it makes you feel. I thought an interesting place to jump into that part of the conversation is for you to describe the difference between what you call a regular moonshot and a psychological moonshot, and why probably we should, if we want to build great businesses, focus more on the latter.

Rory: [00:06:10] Well, it's funny that. Tim Harford, the economist said, "I never understand why you marketing people have such difficulty in gaining traction with business audiences." And I said, "Why?" I said, "It's incredibly difficult getting business people to understand that a large part of the value of their product is created in the head and not in the factory." And Tim Harford said, "But Apple, it's a trillion-dollar company?" And the extraordinary thing, I think, that distinguished them from... Strangely, I'm not a massive Apple user, but the thing I think that distinguished Apple from other tech companies was other tech companies were asking what their technology could do and Apple was the first to wonder about what it felt like while you were doing it. Which is a second-order consideration, which is actually much closer to being customer-centric than asking what functions you can perform for people.

An awful lot of functional products, they're customer-centered, but they're not focused on the customer. They’re focused on the customer's prefrontal cortex, which is the customer's own post-rationalized notion about what they want the product to do. So when I talked about that business of the whole question of psychological value, first of all, we don't even know. If I held a market research group about dishwashers, all the conversation would be about removing unpleasant bits of baked-on grime from baking trays or whatever. And always jokingly said, "Well, actually, the principle value of a dishwasher isn't that it washes your plates and knives and forks, it's that it gives you a place to put dirty crockery where it's out of sight and where you can't smell it."

And actually, if your dishwasher breaks down, that's the bit that will really annoy you really, rather than having to wash things. The fact that essentially you have to put up with a pile of hideous looking plates of your draining board is the worst part of not having a dishwasher in many respects.

Patrick: [00:08:03] One example that I really liked of the difference between a psychological and standard moonshot is this idea of how to improve like a train ride; maybe don't speed it up, but make the existing ride more enjoyable.

Rory: [00:08:15] I've always had a theory that you could transform Gatwick Airport, it's rather like Newark. If you had a train from Newark Airport into Manhattan, which was spectacularly luxurious and opulent, to be honest, actually, it's closer to New York than JFK. I've never really understood why people use JFK by default. Can you get your head around? Does that make any sense to you?

Patrick: [00:08:36] No, I can't explain it.

Rory: [00:08:37] I've never fully understood it, to be absolutely honest. Why people go to use JFK. And I’ve asked some New Yorkers, and they just said, "Well, Newark's in New Jersey," which didn't seem to be very relevant, to be absolutely honest, it [Newark] is much closer. And actually, the people seem rather friendlier to me, if anything. But what's happening there is that it's quite difficult to produce what Google calls a moonshot, a 10X effect in the physical world, because increasingly, we're running up against the limits of physics in terms of how fast a train can travel, how fast a plane can go. All those things, we're running up against the limit to either of the physics of air resistance, or indeed passenger safety, because it's worth remembering that if you have a crash on a 500-mile-an-hour train, that's 250 people dead.

So you're running up against these fundamental limits. It's much, much easier I would argue, and indeed, it's something you should try first, to achieve a 10X in psychology. And I'd argue that Uber, for instance, is an example of a 10X in psychology because it doesn't reduce the weight by a factor of 10, it reduces the degree of uncertainty by a factor of about 25. What I'm meaning is that a car that is running a bit late but where you can see where it is in the map, the order of frustration you experience, where you can see where your car is in a wait may be inordinately reduced. It could even be turned into pleasure, which is, "Oh, no, I'm not in a particular hurry."

If I don't have a map, I stay there on tenterhooks going, "Oh my God, my cab could be here any moment. I will go and stand on the pavement, sidewalk, in case I will miss it." It's possible that when you have the Uber map, it turns the wait time into an actively enjoyable experience where you go, "Oh, bugger, he's trapped at that set of traffic lights. I'll have another pint." What you're doing there is since you have to agree with Aristotle, the ultimate aim of anything is to increase human happiness. If you can achieve that with psychological moonshots much more inexpensively and much more easily, and, I would argue, in a way that's much more environmentally friendly. If you can achieve that through psychology, through a psychological moonshot, rather than through trying to produce a supersonic taxi, it makes obvious sense to do so.

Now, probably an interesting question” is Silicon Valley too engineer heavy? In that it's created a culture which would rather solve a problem through engineering than through psychology because your status derives from that. No person working in a software company wants to believe that the success of their app was due to its superior marketing. They don't derive any status from that. They regard marketing, if you're in that mentality, they regard marketing as essentially cheating. But marketing can be cheating, there are forms of marketing which are undoubtedly a cheat, there are forms of behavioral science where behavioral economics is put to a very bad use, I don't dispute that. Nonetheless, a large part of the value of anything, and I would argue in a kind of discretionary, wealthy, developed economy, the majority of expenditure is there to achieve a psychological end, not an end around survival or movement or something of that kind.

No person working in a software company wants to believe that the success of their app was due to its superior marketing. They don't derive any status from that. They regard marketing, if you're in that mentality, they regard marketing as essentially cheating.

The proportion of our expenditure, which is… that was always the great argument of an American ad man when people criticized advertising as creating unnecessary human wants, making people want things they didn't need. His argument was always, "Look, on an average day, we need something like 1500 calories, three pints of water and a warm, dry place. Everything else is a want." And since a large part of the economy is there principally to satisfy emotional needs, then it doesn't seem to be entirely deranged if you're at a business, or for that matter if you're in government, to factor that into account when you design a program. But instead, the problem is handed to economists who define the problem in economic terms.

"Look, on an average day, we need something like 1500 calories, three pints of water and a warm, dry place. Everything else is a want."

And once you've defined the problem in economic terms, the only people who are now free to solve that problem are economists. The great thing about psychology, even when it doesn't work, and let's be candid, quite often it doesn't. I'm not claiming for a second that we should aspire to be a kind of science with immense predictive value, I think that's overly ambitious. But what we can do once you admit psychological variables into the equation, you can massively expand the possible solution set. And including within that solution set, solutions which might be extraordinarily cheap, simple, and have no impact on the environment at all.

Companies Built Upon Glorious Irrationalities

Patrick: [00:13:22] One of the very rational ways to think about business is that you're always trying to do things better, faster or cheaper. I have in mind your Coke versus Red Bull example as to why this might not always be a good or true idea. Could you expand upon that?

Rory: [00:13:36] At Red Bull, there's no evidence whatsoever and there's no logic to suggest that there's a massive gap in the market for a drink that tastes worse than Coke, costs more than Coke, and comes in a smaller can. And indeed, if you'd have done market research, everybody would have told you to get lost. And indeed, when they tested the taste, people did tell them to get lost. That is one of those things which is an extraordinarily well rewarded case of capitalism rewarding you disproportionately the more counter intuitive your idea is. To be honest, if your idea makes sense, someone will already have tried it. It's what I say, if there were a logical solution to this problem, someone would already have found it. So the place to look, if you want to have disproportionate upside in investments is invest in something which has an element of absurdity to it.

If your idea makes sense, someone will already have tried it. It's what I say, if there were a logical solution to this problem, someone would already have found it. So, the place to look, if you want to have disproportionate upside in investments is invest in something which has an element of absurdity to it.

And Zoom, for example, okay, let's look at the negatives. If Eric had come to me 12 years ago, to be honest, I would have suggested giving it a go. I would have said, as a serious business consultant, "Look, you're up against Google, Facebook, Amazon, and indeed Microsoft Teams and Skype, all of which are owned by giants in the industry and which are given away for free. What makes you think this is a sensible business sector in which to explore?" What he spotted that, there is a technological strength of Zoom, not lot claiming it's all psychology. It was the first, I think, to be built for the cloud, so it did work at a better level. I think it worked at a level which just took it through the threshold of non-crappiness first.

But, it also had brilliant... The fact that there was a URL link to the meeting meant that anybody, however Luddite, could join a meeting. And if you are capable of using the web, you are capable of joining a Zoom call. That wasn't true of Skype, it wasn't true of anything else. Now, bear in mind, for meetings, the quality of a meeting is determined by the most technologically incompetent participant. So all it took was one useless person where half the meeting was spent, "Dave you're on mute," to explicitly ruin the experience for all eight people. In the case of Starbucks, if you'd asked Americans, "Would you pay $3.25 for a cup of coffee?" And you got around in 1990 asking that question, 80% of the people would have said “No,” and the other 20% of people would have said, “No,” but in even ruder terms.

Now, I think you can explain the successes in part, if not in full, of most of these apparent “glorious irrationalities.” And I think it's only through psychology that you can explain their success. Dyson, I still don't fully understand, although I have theories. Because no one would have said there was a market for $800 vacuum cleaner. Let's look at the vacuum cleaner market. It’s distressed purchase, you only buy one grudgingly when your existing one breaks, or when you move out of rental accommodation or something. Anybody who could spend $700 on a vacuum cleaner probably employs a cleaner anyway, so they don't even do their own vacuuming half the time. I could have killed that idea so easily.

And in fact, if you want to get a rational bastard going around and basically killing beautiful ideas, it's the easiest job in the world. Amazon Prime, everybody except Bezos within Amazon hated the idea. I think with Starbucks, and this might be replicable for anybody who's looking invest, I think if you only sell one thing and you're all about one thing, you can charge more for that one thing than you can if you sell coffee as a side item. If you're a cafe which also sells coffee, people will pay $2 for a coffee. If you make your brand all about coffee, and of course there's an element of signaling that people walk into work carrying a branded cup. Here's an interesting one, which I mentioned to someone, not your dad actually, but mentioned to someone else yesterday, Five Guys, that's another one because the price you pay for your burger is insane.

I think if you only sell one thing and you're all about one thing, you can charge more for that one thing than you can if you sell coffee as a side item.

Rory: [00:15:30]: Now, where they've been very clever, I think in Five Guys is you spend a huge amount of money on the thing where you believe that money makes a big difference, the quality of the burger, but then they do evolve fast because the extras, the things you add to the burger, are all free. You can have double jalapenos, a brown sauce, that may only be in the UK. You pay for a bit of extra for cheese and bacon, but on top of that, all the other toppings are free. The peanuts are free, the drink refills are unlimited, and the fries are insanely generous because they actually give you a free scoop of fries on top of the amount that's dominated by the size of the cup. Now, there's something really clever going on there because what that is getting you to pay willingly for something you care about while being fairly generous with the ancillary stuff.

Now, one of my great points about pattern recognition in behavioral science is, this isn't about laws, that's Newtonian physics, this is about spotting recurring patterns. Complex systems are like that, there aren't laws, there are patterns. And I often make the argument that you can spot a pattern in something utterly trivial, like burger sales, and you can redeploy that insight in something absolutely massive like taxation. What would happen for example, in the UK, if you adopted the Five Guys' approach to tax and all your income tax was hypothecated towards things people really cared about it, it was schools and education and health? And then the tax, you didn't notice paying like sales tax, that went towards things like defense and so on and so forth?

Now, I think what Five Guys has done is they've invented hypothecated pricing, which is really clever because you're probably subsidizing your fries or your peanuts with the cost of the burger, but you're paying more for the thing you really want to pay for, and yet you feel you're getting a pretty damn good deal on the fries. I think the great thing about psychological anomalies is they manifest themselves in a fractal way where something you can discover at a very small scale can just as easily be deployed towards something big.

Specialists vs. Generalists

Patrick: [00:19:54] There's another aspect there, which I'll call the Swiss Army Knife phenomenon that I'd love you to expand upon. So each of those examples, Starbucks, Five Guys, etc, they're very focused on a single product versus the cafe that sells 30 different things. Why is that Swiss Army Knife concept one to be avoided for products in your opinion?

Rory: [00:20:14] There seems to be a kind of heuristic, which is probably based on a reasonable assumption sometimes called the Jack of all trades heuristic, that if you claim to do lots of different things, people are less likely to believe you than if you claim to be focused on one thing. There was an ad campaign for Gordon's gin. Gordon's only makes gin. And the ad campaign featured famous people doing something other than that which they were famous for and doing it very badly. We had a very famous shot putter in the Olympics called Geoff Capes. And he was an enormous guy, he was absolutely brilliant shot putter. The ad showed Geoff Capes' butterfly collection, and of course all the things were bent over and half the butterflies have their wings falling off and the whole thing was a total mess. The end line was, “You can only be good at one thing.”

I always loved that campaign because I thought it chimed with the basic human [truth] ... If you go to a restaurant that says, "We do Thai-Italian fusion." Generally, your assumption is, "I'm going to get a bad Thai meal or a bad Italian meal here." Someone who claims to be a restaurant and funeral director, we're not going to go into that business. Well, I think it's an Adam Smith thing about the division of labor that we accept the fact that focus brings with it quality, and it also probably brings with it range as well. If you only sell sunglasses, you'll stock a wider range of sunglasses than if you're a general drug store. And also, if you think about it, what Adam Smith didn't notice about the division of labor, there's also the division of reputation.

Now, someone who is only known for selling seafood, I'm much happier eating oysters at a seafood restaurant or an oyster bar that I am eating oysters at a general restaurant. The point I'm making is that if you stake your entire reputation... Where I occasionally go on holiday on the Kent coast, there's a bar called Bloody Mary's, and when I go there, I always order a Bloody Mary. And the reason is, if you call yourself Bloody Mary's, you've got to make a pretty good Bloody Mary. If I went to a restaurant called “Espresso martini,” I'd order an espresso martini, because you've put your name, you staked your reputation on one thing. Now, a general restaurant isn't going to be as fussed about the quality of their oyster as an oyster bar is.

I think Adam Smith failed to notice the second quality about the gains of specialization, which is that it creates much more reputational vulnerability and that we can trust people who focus much better than we can trust generalists.

Patrick: [00:22:49] This is an extension of the same idea, but you've got this principle that you say don't design for average. And that implicit in this is, logically, maybe the smartest thing to do would be design for average, which has a bigger addressable market or something. But I think the implicit advice here is, focus on tails and niches. Do you agree with that?

Rory: [00:23:08] I think you shouldn't aim to remain in a niche, but the best place to get started, often the best place to innovate, is in a surprising niche. Now, one example, which isn't in my book is designing for the disabled is a particularly good use of a designer's time. One of the reasons is that it focuses you on a very particular need state, which is unrepresentative. But by focusing on that need state, you're probably creating value for a whole lot of people who aren't technically disabled, but are incommoded, a large part of them. So legislation on door opening would mandate now in a federal building, I'd guess, you have to have a door handle not a door knob because if you suffer from arthritis or if you don't have any hands, you can operate a door handle with your elbow or indeed with your foot, whereas the door knob requires a hand.

To British this example, anybody carrying two mugs of tea effectively has lost the use of their hands temporarily. It was probably a good idea to make the shampoo open at the top and the conditioner open at the bottom, and that might've been done originally for people who are blind. Everybody in a shower, particularly people who normally wear spectacles or contact lenses, but even me with 20/20 vision, I'm half blind in a shower. I can't read things as there’s steam all over the place. So I find that business where I can tell by feel whether it's shampoo or conditioner is a benefit.

Advice for Improving Your Business Through Marketing

Patrick: [00:24:33] I love that idea that good distribution and marketing could make an average product successful, but not the reverse. How would you recommend people that are trying to improve their business primarily through marketing begin to approach that problem? Another way of asking, how do you start the conversation with a new client?

Rory: [00:24:54] The first thing I think is, don't fall into the trap of thinking that marketing... First of all, don't think that marketing is marcoms. Because in very many businesses, the two are conflated to a point where marketing is sometimes dismissed as the “coloring-in department.” Marketing should basically be the repository for any insights, any psychological insights, particularly those which counter-intuitive, or which run against normal economic assumptions in the space of human perception and behavior. That would also apply, by the way, to internal relations, shareholder relations, and obviously, customer relations. So marketing in a sense needs to step back up to the plate and not allow itself to be trapped in the marcoms communication ghetto.

The second thing is by being trapped in that ghetto, where it tends to get framed as a cost, as a necessary evil, not as a source of value creation. Once you're in that marcoms ghetto, you're essentially a cost center. As a result, what you get judged by is the efficiency with which you perform the necessary. So this turns the whole thing into this marcoms insanity, where everybody is trying to target 2% more efficiently every month. And I would argue that a large part of marketing needs to be both experimental and probabilistic. We shouldn't turn it into this optimization game, efficiency optimization game.

I would argue that a large part of marketing needs to be both experimental and probabilistic. We shouldn't turn it into this optimization game, efficiency optimization game.

Part of it is probabilistic. Maybe actually you should do very inefficient mass advertising simply because it increases your odds of getting lucky. You can't predict how in advance and you can't attribute the success in retrospect, but nonetheless, fame is valuable on balance. More lucky things happen to famous people simply because more people have heard of them. There's a guy in Somerset in Britain who owns a billion dollar or did own well, at least a half billion dollar business because he happened to park his lorry with his phone number on it in the right place at the right time, and someone looking for Japanese distribution rang him first.

So quite a lot of advertising I suspect is fat tailed, that it works when, you reach a million people, and in 10 cases it produces something, a spectacular result. Because we can't plan for that, because we can't measure it, we therefore pretend that it doesn't exist, and therefore we don't do that kind of advertising anymore, but we should. So that's the first thing, don't turn into an efficiency optimization game, accept that it's probabilistic and accept that actually there needs to be a trade off between exploit and explore.

So quite a lot of advertising I suspect is fat tailed, that it works when you reach a million people and in 10 cases it produces something, a spectacular result. Because we can't plan for that, because we can't measure it, we therefore pretend that it doesn't exist, and therefore we don't do that kind of advertising anymore, but we should.

Patrick: [00:27:22] I'd love you to say a little bit about the very antiquated way of doing this, which is direct mail. It seems like in today's world, I love the example of, you don't send a wedding invite over email, you send a flowery, expensive, clearly scarce and costly message to invite people. I'd love you to talk a bit about the world of atoms, given that the world of bits seems to have taken over.

Rory: [00:27:51] There's a game theoretic reason to be irrational, which is most of your competitors find it very, very easy to copy the rational things you do. They find it very, very hard for often for cultural reasons to copy the irrational things you do. So that's one example, but also the other reason to do direct mail of course, is that we forget that your dad and I, not so much you, but we grew up in an area of insane volumes of direct mail because it was the only individually addressable form of communication apart from the telephone, before the internet came along. It was hugely expensive, but it nonetheless worked.

There's a game theoretic reason to be irrational, which is most of your competitors find it very, very easy to copy the rational things you do. They find it very, very hard for often for cultural reasons to copy the irrational things you do.

It worked partly because of the targeting, but a large part of it worked because of the physicality. A catalog sits in your lavatory for five weeks, so is much more likely to actually be on the hand and mental/ physical availability here, and available at a time when you feel like buying an ice making machine than an ad that's broadcast on TV, for example. The other thing is that to my kids who didn't grow up in that age, where we were bombarded with direct mail, a piece of direct mail is really, goddamn special. Because it means someone's written to them. They're 18, if they get a letter, they read every goddamn single word, they treat it with unbelievable seriousness because it patently means something. That someone's spent, it's kind of costly signaling, someone's spent 70 pence or so on paper and postage in order to reach them.

Patrick: [00:29:21] What other key lessons have we not covered about advertising specifically? And the effective ways that you've seen businesses transform purely, not through product innovation, but through marketing?

Rory: [00:29:35] A lovely example is Cunard, which I'm delighted to say its brand still survives, in reacting to the invention of jet travel. Because if you think about it, in the 1920s and '30s, it was all about the Blue Riband, how quickly can you cross the Atlantic and the Normandy and the United States and the Queen Mary and so forth, would all compete for the fastest West to East crossing, thereby, to hold the blue riband, great status thing in the age of liners pre-war. And then air travel comes along and suddenly, you've got a massive bummer because no one cares whether you can do it in four and a half days or four and a quarter when a plane gets you to New York in under a day, even if you had to stop and refuel.

And in a sense, what Cunard did is they said, "We have to make the journey." In other words, time has to go from being a negative to a positive. This is a great alchemy of marketing that by reframing something, by changing the consumer's frame of reference or comparison set, you can turn a weakness into strength. What Cunard ultimately ended up doing was bringing on shipboard entertainment, bringing up the whole romantic age of sea travel. But, in the process, they pretty much created the worldwide cruise industry, most of the innovations like your own private balcony, for example in a cabin were introduced first on Cunard ships.

This is a great alchemy of marketing that by reframing something, by changing the consumer's frame of reference or comparison set, you can turn a weakness into strength.

So that's a wonderful case where in necessity, you can pivot, and what marketing allows you to do is to do a psychological pivot. In other words, “we're number two, so we try harder.” Is a psychological thing where the fact that you're number two, particularly at the time the ad run, where America in the 1960s wasn't really into boutique anything, it wasn't into artisan brewing or anything like that, everything was big and therefore, it's good. So being number two in rental cars was a downside until you add the four words “so we try harder” and you make it not about the physical or logistical capabilities of Avis versus Hertz, you make it about the customer attitude of Avis versus Hertz.

And at that point, what you've done, “good things come to those who wait for Guinness” “Reassuringly expensive” for Stella Artois. “With a name like Smucker's, we’ve got to make good jam.” If you think about all those lines.

Patrick: [00:31:47] It's all embracing weakness in a way.

Rory: [00:31:49] It's all in a sense, flipping a weakness into an advantage. And actually, one of the thing I've always wondered about is why the investment community doesn't actively look for this. In other words, is there a business which is currently valued at X billion pounds, but if you actually did a clever reversal, a clever psychological bit of trickery in terms of how you presented it, or indeed a clever and innovative approach to pricing, one thing that actually baffles me is that nobody, and this is where businesses are really flaming useless.

Businesses are really clever because the whole system of free market, capitalism and competitive markets is a brilliantly clever system for ultimately weeding out what people really want, even the things they don't know they want. But why has virtually nobody else tried to do an Amazon Prime? Why hasn't the hotel chain done it? If you think about it, your hotel chain, very few hotel chains have 100% occupancy, certainly not across a city, by the way. The likelihood there's a hotel chain, you had 100% occupancy across London?! Why is there not a hotel club where I pay you a few hundred pounds a year? Bear in mind, I live 30 minutes from London by train. If I miss the train or it's 11 o'clock at night, I can't quite face going back that late. In returns, my £200 a year, if there's an empty room, I can have it for half price. Now, there's virtually no cannibalization involved there I suspect, there might be a little bit, but I think there are ways in which you can experiment with pricing.

The Holiday Inn hotel chain, by the way, fascinatingly no longer does this. It got started by offering the second room at half price to kids, because the point was that when you have kids, A] this is a slightly Darwinian explanation, but I think it's none the less true, that people quite like having sex in hotel rooms, for whatever reason, which is obviously difficult to do if you're sharing a room with your kids, unless you live in some weird commune thing, but people can't help grudging once they have kids that they're paying five-star prices to stay at a three-star hotel, because you've got to take two rooms. Now, something like that is a complete game changer, I would argue. If you wanted to start a new hotel chain and you said, "I was suggesting this," I'd say, "That's how Holiday Inn got started in the first place."

So the opportunity, I think, for investors to look for psychological moonshots and deliberately go for stocks or businesses which are entirely underappreciated and undervalued because of some aspect of how they're presented.

Marketing and the Seven Deadly Sins

Patrick: [00:34:29] I wonder how you think about the seven deadly sins and how useful they may be as guideposts versus the more rational speed/cost/efficiency?

Rory: [00:34:40] This is something where Nassim Taleb has been a big influence, which is there generally is some value in ancestral wisdom, which is, it's not that its wisdom is the rational wisdom of a narrow deterministic science, but it's pattern recognition, essentially. It's heuristic wisdom, which is, if you do this, you're less likely to suffer disaster. Quite a lot of the way in which we design rules for human beings needs to be optimized not around say, science, but around psychology. Epidemiology. The way in which they recommend people should drink is they look at how much people drink in terms of number of units a week, and they look at the point at which it appears to have a deleterious effect on health, and they recommend people to drink less than that.

But the problem with that is when you give people a quantitative measure, it's not very easy to follow, because apart from everything else, let's say I told you, you should only drink, I don't know, 17 units of alcohol a week, maximum, nine times out of 10, when you hit unit number 17, you're going to be already slightly pissed. So your judgment is going to be weakened because it's highly unlikely that after you've had six drinks, you'll stand there going, "Well, I'm afraid I've had my 17th unit for the day, so now it's time for me to stop and switch to orange juice." It's not going to happen!

Let's just look at it through the point of view of life as it's experienced by human beings, which is over time and individually and in a social context and social setting as opposed to life as experienced by the economist idea of a human being, which is one big solving average, it's one big simultaneous average. If you look at it like that, the second thing is that the rule we suggested, which has now been adopted as one of the rules by the UK is, “don't drink for three days consecutively every week.” That isn’t a perfect rule in the sense that you could theoretically drink in immense amount four days of the week and then be dry for three.

…look at it through the point of view of life as it's experienced by human beings, which is over time and individually and in a social context and social setting as opposed to life as experienced by the economist idea of a human being, which is one big solving average, it's one big simultaneous average.

On the other hand, as a behavioral rule, it's much better. Why? One, it gives your liver time to recover, by the way. Two, if you could not drink for three days of the week, you probably are much less likely to acquire an alcohol dependency problem, because you practice abstinence once a week. Three, you could also agree with all your friends to follow the same rule. You're never going to synchronize your units, but if you say to all your mates, "Okay, Tuesday, Wednesday, Thursday, we don't drink alcohol." And then you go and meet them on a Wednesday and you have a coffee. That means the rule can now spread socially across your network in a way that a units-based rule never can.

Generally, humans find it easier to obey binary rules than they do rules of degree. We break the speed limit much more often than we drive through a red traffic light, and there are other reasons for that. But what I'm saying is that we feel bad about breaking a yes-no rule to a greater extent we feel bad about breaking a rule of degree, if you like.

Patrick: [00:37:38] Which of the seven deadly sins from a marketing perspective, do you think is the most powerful; lust, gluttony, greed, sloth, wrath, envy, and pride?

Rory: [00:37:48] All of them are something taken to excess, which is interesting. Sloth is what marketers would call convenience. You could add the word. Generally, consumers will do things which are convenience. There's an acronym of the behavioral insights team, easy EAST, it's called easy, attractive, social and timely. Pride by the way is ego, and we do things that make us feel good about ourselves. One of the things I think we should never, ever underestimate is the extent to which social embarrassment can be a crippling force in human behavior. So there are literally cases of planes crashing because the copilot doesn't want to appear rude to his senior, who is flying the plane, particularly in cultures where you have social distance, but there are a whole other things.

Baileys, which is a delicious drink, I don't know if you had that Irish chocolate and cream-based alcoholic drink? One of the mysteries that Diageo shared with me is that people don't drink Baileys nearly as much as they should given how much they like it. And there I think in most social settings, it's an awkward thing to ask for. One of the reasons I think video conferencing will continue to be popular is that asking to attend a meeting remotely six months ago made you look weird and made you look part of the awkward squad, whereas now it's normal. It's gone from: going to someone's house, you can't ask for Dr. Pepper, but you could ask for Coke.

Dumb Questions and the Opposite of Good Ideas

Patrick: [00:39:13] One of the great ideas you have is that to reach intelligent answers, you have to ask really dumb question. What does a dumb question look like?

Rory: [00:39:22] Dumb questions are particularly valuable because everybody feels stupid asking them. And so there we get back to pride, in business, in a board meeting, someone would feel inordinately happier asking a question about the tax implications of funding something in two different ways than they would asking a question about why don't people like standing up on trains? If you have a brief, which is about train overcrowding, what tends to happen is, “yeah, we must reduce trade overcrowding. Trade overcrowding is very bad. It's a source of customer dissatisfaction, blah, blah, blah."

They immediately set about saying, "Okay, so we must reduce the number of people who have to stand on a train, which means we cram the seats close together. We don't have nice tables anymore. We make the trains longer or faster or more frequent. But all those things are either expensive or unpleasant. And nobody's gone back and said, "Why?” Why are we trying to reduce train overcrowding? And then there's a subsequent… then you might answer because people don't like it, and it's a reason not to travel by train. And then you go back one more and say, "Why don't people don't like it?"

And then things start to get interesting because actually, the extent to which people don't like it is not even. If 10 people will have to stand 100% of the time on a commuter journey, are a much more angry than 100 people who have to stand up 10% of the time. That's the first point. So it's not even. Secondly, it may be that we dislike it, not because we don't have a seat, but because we've paid for a seat and we don't get one. And when you don't get a seat, you get nothing. So if you redesign trains so that they have a bum rest areas with nice little ledges where you had a USB charger and a cup holder, a hook for your bag and a view out of the window and the people who have seats have to sit in the middle of a train, looking at your bum with only a cup holder and no table or no ledge.

And part of the train was designed that way, the people in that part of the train would always basically practice adaptive preference formation and go, "I'm glad I'm standing up because sitting down is just for the old people. I've got a nice bum rest, I've got the use of my hands," which you normally don't have if you stand. So it means you can't read, you can't use your mobile phone, you can't use a tablet because you're holding onto something to stop yourself falling over. Now, if you've produced a bum rest and a small table at elbow height or a ledge, and you had a charging function so that you could stand up, look right next to the window, look out the window and get on with a bit of work, I think a lot of people would choose to stand for shorter journeys.

There's a third thing, which is even bigger problem, which we have to face, which is the availability bias. Which is actually, 90% of trains aren't very crowded. The reason people think that they're crowded is because far more people travel on crowded trains than travel on empty ones. So your perception is not an accurate reflection of the level of overcrowdedness on trains. So one of the things you might want to look at is to say is actually everybody thinks trains are overcrowded and it's not helped by the fact that very infrequent train users mostly travel at peak times like Christmas or Easter.

That's when everybody's suddenly piles onto a train for the only time of the year and their engineering works and the trains are packed, so they go “God this this train thing, it's shit, isn't it? I've got to go back to the car.” But actually, they've had a completely distorted view of reality in that 80% of trains, 90% of the year are basically ferrying air across the countryside. So if you did an exercise, which actually said “How to take a less crowded train” and websites actually said, "This is the least crowded train of the day." Along with price comparison, all I've done here is by asking “Stupid Why’s”, about three times.

What I've done is the initial solution space to reducing train overcrowding was all about engineering, which is really, really expensive. Suddenly, once you introduce those dumb “why’s” to the mix, you get into the deepest second order, third order, psychological questions, and the solution space suddenly opens up like a flower.

Patrick: [00:43:25] There's one final idea I'd love you to give an example of before I go to my traditional final closing question which is, why sometimes the opposite of a good idea can also be a good idea.

Rory: [00:43:35] This is why I think it's terrible that we try and make business scientific by modeling it on physics or high school math or something like that, because in those cases, there's a single right answer and you have all the information you require to arrive at it. In most real world situations, there isn't a single right answer, there are multiple right answers. You don't have all the information you'd need to derive any of those answers without some degree of probabilistic, experimentation, or creativity. Weirder still the opposite of a good idea can be a good idea, because I think in some categories, depending on how you frame something, the best thing is an extreme.

If you frame something as a second honeymoon, what you want from a hotel is totally different to if you frame it from a night stay. Actually, the average may be a crap hotel because it's no good for a romantic evening and it's no good for low cost utilitarian accommodation. So in many ways, what the markets want may increasingly be at the extremes, not in the middle. And the way I phrase this is you don't get an endorphin rush from mid-market retail, we get a thrill from an extravagance and we get a bit of a hit from getting a bargain, but we don't get a thrill from something that's neither.

That's probably why Dyson is popular because you go, "Shit, I've got to spend a few hundred quid on replacing the vacuum cleaner. I need a new vacuum cleaner. Well, okay, this one is 700 quid, but at least I'm going to get a kick out of it." And actually probably both parties in a relationship are quite keen on it. So the amount you're authorized to spend… now, equally, you could buy a Henry. I don't know if the Henry exists in the US, it's a thing called Henry Hoover. It's an anthropomorphized vacuum cleaner where the tube is its nose, and it's got the eyes. And that's the total utilitarian vacuum cleaner, which costs about 70 quid. But that's a great thing as well. Whereas the mid-range vacuum cleaner is kinda meh.

Now, actually one area where you Americans could do with a bit of mid-range retailers is grocery shopping, I have to say. To me, the American grocery... When I get back to the UK, I love the United States, I obviously love going there, but one thing I'm glad to get back to in the UK is the shops, grocery shops, because you seem to have this completely bipolar retail universe. Where it's either all about price, effectively and things are being bought as commodities, and your cheese comes in an aerosol and costs 90 cents, or it's Whole Foods. Frequently, Tesco went in with fresh and easy, I think. So the British retail, Tesco couldn't make British retailing, grocery retailing work in the US.

But I think what it was is that something about it, it is the frame of American grocery shopping is people are either skinflints or there are lots of reasons you might go to Whole Foods, you're very, very rich and you just want food that's proportionally expensive. By the way, that absolutely is a reason why many companies exist. Bang & Olufsen, I'm not going to dis them because they're kind of probably a bit better than Samsung in build quality or in sound quality or something else. But the real reason Bang & Olufsen exist is if you're a hedge fund manager and you go into a TV shop and there's a Samsung, that is fantastic, it's 55 inch, flat screen, blah, blah, blah, and it's $920. A bit of you goes, "Well, a grade school teacher could afford that telly, what the hell is the point of being a fucking hedge fund manager if I have the same TV as a teacher?"

Patrick: [00:47:04] Well, I'll certainly remember so many interesting devices for thinking about the same side of that second coin of innovation, which is marketing, especially that the opposite of good can also be good because of its tendency to push us to extremes which people like.

Rory: [00:47:16] Yeah. I think that's probably true, it's a very interesting area, isn't it? I think that actually looking if there's a missed opposite, in other words, no one thought of premiumizing the vacuum cleaner until Dyson.

Patrick: [00:47:29] My traditional closing question for everybody is to ask for the kindest thing that anyone's ever done for you.

Rory: [00:47:37] Rory [45:25]:Oh, someone for our honeymoon, someone lent us, my wife and me, a Morgan sports car to drive around. It was Eileen Murphy. She gets a name check here because she lent us a sports car for my wife and me to drive around France for a week on our honeymoon. That was spectacular generosity, particularly as I was only about 23 at the time. Other things by the way, which create a huge amount of happiness are often surprisingly small. And I think that's one of the things we mustn't forget about kindness that it's, again, it's nonlinear, there are butterfly effects. Tiny little gestures like sending a card, in some ways, this is an interesting thing, which is: the very fact that the gesture is kind of unnecessary or that it's done in a way that's just slightly more laborious than is necessary, those little things I think give us a surprising amount of happiness in life.

Other things by the way, which create a huge amount of happiness are often surprisingly small. And I think that's one of the things we mustn't forget about kindness that it's, again, it's nonlinear, there are butterfly effects. Tiny little gestures like sending a card, in some ways, this is an interesting thing, which is: the very fact that the gesture is kind of unnecessary or that it's done in a way that's just slightly more laborious than is necessary, those little things I think give us a surprising amount of happiness in life.

Patrick: [00:48:33] t's a fantastic place to close, a great set of answers and degrees of kindness, I’ve learned so much from you over the years, Rory, and all your writing. Great to finally connect on the phone. Thank you so much for your time.

Rory: [00:48:40] Anytime. It's huge pleasure. Thank you very much, indeed.

Created by @pbrychcy1 and Erik Berg