Below are three excerpts from a great interview with Rory Sutherland on decision making psychology.
Understanding Human Behavior
That attempt to model economic behaviour as though it were Newtonian physics was responsible for many past mistakes. This is closer to weather forecasting than to conventional physics as a science. But it is still a science and can still make progress like a science. And the great news is that we are starting from such a low base. If our ability to understand and predict human behaviour only improves by a few percent a decade, the benefits will be immense. And even a tiny reduction in misdirected effort (by abandoning daft, ineffectual sunk-cost-plagued endeavours such as the war on drugs or, at a more modest level, badly conceived choice-architectures in a new range of cars) all can be economically transformative.
The Physical Fallacy
The problem we all face is “The physical fallacy”. All of us, even those the social sciences, have an innate bias where we are happier fixing problems with stuff, rather than with psychological solutions – building faster trains rather than putting wifi on existing trains, to use my oft cited example. But as Benjamin Franklin (no mean decision scientist himself) remarked “There are two ways of being happy: We must either diminish our wants or augment our means – either may do. The result is the same and it is for each man to decide for himself and to do that which happens to be easier.”
There is no reason to prefer one solution over another simply because it involves solid matter rather than grey matter. This is an interesting area where the advertising industry and the environmental movement (rarely seen as natural bedfellows) sometimes find common ground. Intangible value is the best kind of value – since the materials needed to create it are not in short supply.
Marketing and Advertising
If you need to understand why marketing and advertising (and reputation and brands) are important to the functioning of markets, Akerlof’s paper “The Market for Lemons” is essential reading. So too is his excellent and underread book “Identity Economics” written with Rachel Kranton. The problem is not with economics as practiced by great economists – it is the unquestioning adherence to the dumber assumptions of Basic Economics 101 as unthinkingly absorbed by the product of a thousand business schools.
You are particularly made aware of the pernicious influence of bad economics if you work in advertising. Even when advertising demonstrably works and is highly cost effective, people in finance and in the boards of companies don’t seem to like it very much. Since they have a mental model of the world in which everyone has perfect information, they have of course constructed in their heads a vision of the world in which marketing shouldn’t exist.