Whatever you think about McDonald’s—it’s really, really good at not being bad. If you understand satisficing—which would be another concept hugely important to the understanding of human behavior—we think we maximize and we describe our behavior as if we’re maximizing but most of the time we go “I want something that’s pretty good and definitely isn’t awful.” Why do we go to McDonald’s? Is it the best food in town? Probably not. The search cost of finding the best place to eat in town, given that we’ve only got one shot at having a meal in a strange town, would be pretty high. But also when you go into McDonald’s you know you’re not going to be ripped off, you’re almost certainly not going to be ill.
.. One of the single moments where I realized this stuff is really useful is when I first tore up a pair of air tickets. My wife and I had some nonrefundable air tickets to go to Paris for the weekend and the day before we were due to travel, both of us went down with flu and were feeling appalling. We were there packing, thinking, we’ve bought these tickets, they’re nonrefundable, we have to go to Paris. And I suddenly said, “Hold on, we’re now going to spend another 300 or 400 pounds on hotels, art galleries, and everything else in order to feel crap in a hotel room rather than feeling mildly ill at home.” The moment when I tore up those travel tickets that was almost a little Damascus Road experience where I realized some of this thinking is practically useful in everyday life.
.. It is true of quite a lot of progress in human life that businesses, in their blundering way, sometimes discover things before academics do. This is true of the steam engine. People developed steam engines before anybody knew how they worked. It’s true of the jet engine, true of aspirin, and so forth. People discover through trial and error—what Nassim Taleb calls “stochastic tinkering.” People make progress on their own without really understanding how it works. At that point, academics come along, explain how what works works and to some extent take the credit for it. ”
.. I was seduced by economic thinking and the elegance of it, but at the same time having worked in advertising for 15 years, I was also fairly conscious of the fact that this isn’t really how people behave. We’d always known, in those fields of marketing, like direct marketing, where you actually got results—you sent out letters to 50,000 people and saw how many people replied—there was something going on that we didn’t understand. In other words, occasionally you might do incredibly elaborate, complex, and expensive work and have more or less no effect on the uptake of some product. Then someone would redesign the application form and slightly change the order of the questions on the application form, and the number of people replying would double. We knew there was this mysterious kind of dark force at work in human behavior.
The extraordinary thing about the marketing industry is that, by accident, it was pretty good at stumbling on some of these biases which behavioral economics later codified. There’s a wonderful/evil advertisement I mentioned in a recent piece, “How else could a month’s salary last a lifetime?”, which is a De Beers advertisement in about 1953 for engagement rings. Now, that’s a brilliant case of framing or price anchoring. How much should you spend on an engagement ring? We’ll suggest that whatever your month’s salary is, that’s what you should spend.
“No one ever got fired for buying IBM” is a wonderful example of understanding loss aversion or “defensive decision making”. The advertising and marketing industry kind of acted as if it knew this stuff—but where we were disgracefully bad is that no one really attempted to sit down and codify it. When I discovered Nudge by Richard Thaler and Cass Sunstein, and the whole other corpus on Behavioral Economics…. when I started discovering there was a whole field of literature about “this thing for which we have no name” …. these powerful forces which no one properly understood—that was incredibly exciting.
.. The idea that capitalism doesn’t work because it’s efficient—that’s a complete myth. Anybody who’s worked in any kind of capitalist enterprise for any length of time will know that it’s not even remotely efficient. There are spectacular inefficiencies all over the place.
Markets work because they’re adaptive. Bad things get killed, good new things sometimes get promoted. But most of the time what you’ll find in business is no one has the faintest idea of why the things that work actually work. What’s very useful here is that finally a group of academics with money, time, and immensely high intelligence were finally sitting down to codify and make sense of things, which we’d been aware of for years but which, to our shame, we’d never attempted to try and systematize.
.. I know that academics go practically deranged at the mention of Malcolm Gladwell. They’ll say some of the things that he says are unrepresentative, or slightly inaccurate, or he misrepresents science, or takes credit for this or that. My view is much more benign, which is, look, if 100,000 business people read his books and wake up the next day being slightly more open-minded or slightly happier to work with the counterintuitive than they were the day before, then that book’s a net victory and I’m not that bothered.
.. But that’s because business and academia are fundamentally different. In academia you have to be right, in business you’ve just got to be less stupid, less wrong than your competitors. And so the approach we have to progress is fundamentally different. We just look for ways to be less wrong. And of course we don’t need to know why something works, just that it does.
.. One of them is the assumptions of neoclassical economics, which basically creates an imaginary species in order to be able to mathematically model it.
.. Homo economicus, not only has it never existed, my contention is that if homo economicus evolved for some peculiar reason, it would die out very, very quickly or we would club it to death with sticks. It’s not in our evolutionary interest to be rational optimizers, by the way. Any species that’s rational also becomes highly predictable, and anybody who’s highly predictable is rapidly dead because you can anticipate his behavior and game it. Sometimes being unpredictable is the best approach.
.. In the commercial world it’s not in the interests of consumers to be rational. If you imagine a world of rational consumers where they all bought cars based on some formula, which was fuel economy multiplied by acceleration divided by depreciation or whatever it may be, what they would end up with would be really, really terrible cars. Car manufacturers would immediately game their predictable and easily understanding preferences and produce cars, which met all the metrics laid down for a desirable car, but the cars would be ugly, uncomfortable, and generally ghastly, and no pleasure to own. It is our interest, in a sense, as consumers to have a degree of unpredictability to our behavior and to be difficult to model. But homo economicus is really a contrivance in order to pretend that humans can be treated as though they were atoms or planets or something like that, which is a fundamental category error.
.. “Well, one way to get men to get tested for cancer more regularly is to make it easier and to use lots of nudges where you book appointments, you confirm appointments by text messaging and all that stuff.” Absolutely true. And I commend that work, by the way.
There’s another thing you can do which is interesting, and no one has tried this, which is to say, “If you have this test, we will give you the results in 24 hours.” Because nobody’s thought that’s relevant. Nobody thought the delay between having the test and getting the result is relevant to the human propensity to have that test. Credit card companies discovered this by accident.
It is everywhere illegal yet slavery persists in many corners of the global economy. How do its beneficiaries justify it?
But Nixon and Trump share a common personality characteristic: a hatred of losing.
.. This dominant emotion—fear and loathing of losing—has been studied
.. people facing losses act irrationally because all humans hate to lose much more than they like to win—by a factor of almost three times. It is a deep, ingrained aversion.
.. the stronger the feeling about the loss, the more irrational the behavior. Think of Bill Clinton in his affair with Monica Lewinski
.. He chose to argue in a deposition about the meaning of the verb “is,” much like Trump’s press secretary argues about the meaning of “wiretapping.”
.. Howard Hunt, wanted to plead guilty to avoid a trial (his wife had died mysteriously in a plane crash in December)
.. Nixon was looking for a way to close down any congressional investigation so he could get on with his aggressive plan to reorganize the executive branch.
.. Judge Sirica was threatening to send the defendants back before the grand jury, give them immunity and insist on their testimony. But even here, Haldeman assured Nixon, the men would take contempt rather than testify
.. “you don’t really have to have hard evidence, Bob; you’re not going to take this to court. All you have to do is put it out and the press will write the goddamn story.”
.. Nixon then speculated as to why Johnson would have bugged his plane. One reason, he submitted, was Vietnam—Nixon knew that Johnson suspected him of interfering with the peace negotiations in Paris in October 1968 through back channels (a new book by John Farrell, Richard Nixon, The Life, provides corroborating proof from recently unearthed Haldeman notes that Nixon did in fact direct his campaign to “monkey wrench” the talks). This was a very dark charge that Nixon knew could destroy his presidency.
.. that gives us a little way to get back to Johnson on that basis that, you know, we’ve got to get this [Watergate investigation] turned off, because it is going to bounce back to the other story [the plane bugging], and we can’t hold them.”
.. Was Trump’s March 4 tweetstorm simply the impetuous act of man who reacted to the latest news he read, fake or not, or was Trump acting like Nixon in a deliberate way to distract attention from the growing concern about ties between his campaign and the election-tampering Russians?
Prospect Theory systematically describes these changing attitudes towards risk: people are either risk seeking or risk averse depending on whether the stakes are conceived as gains or as losses. This in turn depends on whether the potential consequences of choices are states of affair that are better or worse than some reference point—what is considered ‘normal.’
.. The political discourses of the Trump and Brexit advocates have framed the stakes in terms of losses rather than gains. The slogans “Make America great again” and “Take back control” clearly refer to the lost grandeur of the past. This sets the reference point as a lost state that was much better than the current one. Also, fear mongering is by definition talking about the frightening (negative) state in which we find ourselves. All this motivates citizens to favor risky options: the gains, even if they are unlikely, are so strongly desired that they induce discounting the very likely losses.
.. With Trump and Brexit voters, we face people who, perceiving that they have lost something, are willing to take high risks. Economic frustrations cause risk seeking preferences, which contribute to motivating votes for Trump and Brexit.