Book Notes: Alchemy by Rory Sutherland
Spreadsheets Kill Magic. A Flower is Just a Weed With an Advertising Budget.
One of my favorite recent (and all-time, really) books is Alchemy: The Dark Art and Curious Science of Creating Magic in Brands, Business, and Life, a timely book written by Rory Sutherland, the Vice Chairman of Ogilvy, an advertising legend, and just an all-around funny dude. The premise of the book is simple and provocative: "We could never have evolved to be rational - it makes you weak."
In the book, he shares dozens of stories and anecdotes of his time in advertising, detailing how and why completely irrational ideas worked, from why placebos get results to how Red Bull is actually one of the most successful commercial placebos ever produced. It may not seem like an advertising guru’s insights would have applications to investing, but there are countless examples throughout the book. My favorite ones are below and I also highly recommend his Invest Like The Best podcast with Patrick O’Shaughnessy.
"The need to rely on data can also blind you to important facts that lie outside your model."
Logical people's minds are "often most resistant to change - perhaps because their status is deeply intertwines with their capacity for reason…it is part of their identity."
Politics and Organizations
"Irrational people are much more powerful than rational people, because their threats are so much more convincing…Being rational means you are predictable, and being predicable makes you weak."
"If you are wholly predictable, people learn to hack you."
"Logical ideas often fail because logic demands universally applicable laws but humans, unlike atoms, are not consistent enough in their behavior for such laws to hold very broadly."
"The problem that bedevils organizations once they reach a certain size is that narrow, conventional logic is the natural mode of thinking for the risk-averse bureaucrat or executive. There is a simple reason for this: you can never be fired for being logical."
Why is TJ Maxx and the other discounters/treasure hunt stores popular?
"We derive pleasure from 'expensive treats' and also enjoy finding 'bargains.' By contract, the mid-range retailer offers far less of an emotional hit."
"…the rational attempt to contrive universal, context-free laws for human behavior may be largely doomed."
Part 1: On the Uses and Abuses of Reason
"If you would like an easy life, never come up with a solution to a problem that is drawn from a field of expertise other than that from which it is assumed the solution will arise."
"Science seems to fall short of its ideals whenever the theoretical elegance of the solution or the intellectual credentials of the solver are valued above the practicality of an idea."
"All too often, what matters is not whether an idea is true or effective, but whether it fits with the preconceptions of a dominant cabal."
"It's easy to achieve massive improvements in perception at a fraction of the cost of equivalent improvements in reality." (see CVNA, UBER)
"We have a culture that prizes measuring things over understanding people."
"What people do with their own money (their 'revealed preferences') is generally a better guide to what they really want than their own reported wants and needs."
"A decision which seems irrational when viewed through an ensemble perspective is rational when viewed through the correct time-series perspective, which is how real life is actually lived."
"If you want low variance, it pays to hire conventionally and adhere to the status quo, while people hiring a group of employees are much more likely to take a risk on some less conventional candidates."
"Find one or two things your boss is rubbish at and be quite good at them. Complementary talent is far more valuable than conformist talent."
"In making decisions, we should at times be wary of paying too much attention to numerical metrics."
"A nervous and bureaucratic culture is closed-mindedly attaching more importance to the purity of the methodology than to the possible value of the solution, which leads us to ignore possible solutions not because they have been proven to be wrong, but because they have not been reached through an approved process of reasoning."
"The more data you have, the easier it is to find support for some spurious, self-serving narrative. The profusion of data in future will not settle arguments: it will make them worse."
"Today, the principal activity of any publicly held company is rarely the creation of products to satisfy a market need. Management attention is instead largely directed towards the invention of plausible-sounding efficiency narratives to satisfy financial analysts, many of whom know nothing about the businesses they claim to analyse, beyond what they can read on a spreadsheet."
"Truly free markets trade efficiency for market-tested innovation that is heavily reliant on luck."
Part 2: An Alchemist's Tale (Or Why Magic Really Still Exists)
"It is always possible to add functionalist to something, but while this makes the new thing versatile, it also reduces the clarity of its affordance, making it less pleasurable to use and quite possibly more difficult to justify buying."
"It is surprisingly common for significant innovations to emerge from the removal of features rather than the addition."
"The strongest marketing approach in a business-to-business context comes not from explaining that your product is good, but from sowing fear, uncertainty and doubt (now commonly abbreviated as FUD) around the available alternatives."
Part 3: Signalling
"If it is costly and time-consuming to join one, the only people who enter are those with a serious commitment to a craft."
"Costly signalling theory, the fact that the meaning and significance attached to a something is in direct proportion to the expense with which it is communicated."
"The potency and meaningfulness of communication is in direct proportion to the costliness of its creation - the amount of pain, effort, talent (or failing that, expensive celebrities or pricey TV airtime) consumed in its creation and distribution."
"If you think about it, a flower is simply a weed with an advertising budget."
"We don't so much choose brands as use them to aid choice."
Part 4: Subconscious Hacking: Signalling to Ourselves
On "close buttons" in elevators: "…on many (and perhaps most) elevators, it is actually a placebo button - it is connected to nothing at all. It is there simply to make impatient people feel better by giving them something to do and the illusion of control."
"One of Nicholas Humphrey's rules about what makes an effective placebo is that there must be some effort, scarcity or expense involved."
On Red Bull: "…it shares many of the features of a great placebo: it's expensive, it tastes weird and it comes in a 'restricted dose.'"
"Meaning is disproportionately conveyed by things that are unexpected or illogical, while narrowly logical things convey no information at all."
Part 5: Satisficing
"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."
"We fetishise precise numerical answers because they make us look scientific - and we crave the illusion of certainty. But the real genius of humanity lies in being vaguely right…"
"We will pay a disproportionately high premium for the elimination of a small degree of uncertainty - why this matters so much is that it finally explains the brand premium that consumers pay."
"It is no good judging things on their average expectation without considering the possible level of variance."
Part 6: Psychophysics
"Nothing about perception is completely objective, even through we act as though it is."
"Like many things that emerge from the technology sector, we become so drunk on the early possible benefit of a technology that we forget to calculate the second-order problems."
"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 they really 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 confidence in these decisions that is simply not warranted."
"We should also remember that all big data comes from the same place: the past. Yet a single change in context can change human behavior significantly."
"An admission of a downside makes a claim more plausible. Great advertising taglines often harness this effect - examples include 'reassuringly expensive' and 'we're number two so we try harder.'"
"Conventional wisdom about human decision-making has always held that our attitudes drive our behavior, but evidence strongly suggests that the process mostly works in reverse: the behaviors we adopt shape our attitudes."
"Give people a reason and they may not supply the behavior; but give people a behavior and they'll have no problem supplying the reasons themselves."
Part 7: How to Be an Alchemist
"…explicitly mentioning a product's weakness enables people to downplay its importance and accept the trade-off, rather than endlessly worrying about the potential downside."
"Most of business is run according to conventional logic…but there are other parts of a business that don't work this way, and marketing is one of them: in truth, it's a part of business where there's never best practice, because if you follow a standard orthodoxy your brand will become more like your competitors', thus eroding your advantage."
"Paying attention to trivial things is not necessarily a waste of time, because the most important clues may often seem irrelevant and a lot of life is best understood by observing trivial details."
"The mind of the alchemist understands that the smallest change in context or meaning can have immense effects on behavior."
"It seems safer to create an artificial model that allows one logical solution and to claim that the decision was driven by 'facts' rather than opinion: remember that 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."
"Are we bizarrely cherishing numbers or models over simple observations, because the former look more objective?"