Rory Sutherland

Supported by Greenhaven Road Capital, finding value off the beaten path.

Rory Sutherland (@RorySutherland) joined Shane Parrish on The Knowledge Project podcast. It was nearly two hours of stories and foibles. Here are some abbreviated notes.

1/ Framing. Most of the conversation works its way back to this; perception matters. We don’t always think of perception as a way to solve problems. Sutherland said, “no one would have gone to an advertising agency to solve this problem ten or fifteen years ago…It’s always more acceptable to spend money on infrastructure than to spend money on psychology.” Do we feel like it’s cheating?

Maybe we feel like it’s cheating? Yet we know this matter in other areas. Sutherland explained, “the taste of the food will be affected by the decor of the restaurant.”

“Wine will taste better if you pour it from a heavier bottle, wine will taste better if you tell people it is expensive…cheating or not it is inescapable.”

He also told the story of a creative pilot who, because his gate was backlogged, had to deposit the passengers on the tarmac. Passengers thought we’re being dumped on the tarmac and herded to a bus but the pilot reframed it as you’re being let off earlier than normal and we’re transporting you straight to customs. Same situation, different story.

It’s because of examples like this that Sutherland calls this, “a kind of alchemy.”

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2/ CAS. Sutherland said, “An automatic door is not the same as a doorman.”

Complex Adaptive Systems are not like Humpty Dumpty – you can’t put them back together again. In the podcast I explained this in terms of multiplication. My daughter is learning her multiplication facts and knows up to five. Six, seven, and eight are much harder. Once I explained that 88 is the same as 84*2 she understood.

Multiplication is a simple, linear system. Cause, effect. Numbers don’t have feelings being ripped apart to teach a nine-year-old. Not many systems are like this.

“Complex adaptive systems effectively obscure cause and effect.” Michael Mauboussin.

“In complex systems, malfunctions may not be detected for long periods, if ever.” John Gall, Systematics.

Problems bubble when you think you are solving a simple problem but it’s a complex one. Complex problems do not require complex approaches.

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3/ SITG. Sutherland said:

“Effectively I can still put my two teenage daughters into a black cab in London, driven by a total stranger and without bother to memorize the badge number, I can say, ‘can you take them there?’ Without giving any thought to their safety. Part of the reason is because if you’re prepared to spend four years becoming a cab driver and four years of your life – that you’ll never get back – is spent reaching that qualification, you’re committed to the job and secondly, you have a lot of skin in the game.”

From Yvon Chouinard (carabiners) to Seth Klarman (cash), it helps to have skin in the game. One scout said about scouting players for Bill Belichick, “your balls are on the line if you say a player isn’t going to be a problem off the field. If he is, then it’s your fault.”

People like this idea, but implementing it is hard. Anson Dorrance suggested to a group of administrators that anyone who voted for a coach should lose their position if the coach was fired. No one took him on it.

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4/ The experiment on the road to Damascus. Sutherland says he doesn’t have the time he’d like to read but that early in his career, books forced a change in his thinking:

“In 1989 I had a kind of road to Damascus moment, where I said, ‘however elegant economic theory may be it patently doesn’t describe individual real world behavior very well.”

Sutherland had a that’s interesting moment.

“My luck was, when I went into the advertising industry I first started working at a place called Ogilvy One – the direct marketing wing of the agency – and there you effectively do social science experiments very well funded at a grand scale.”

He started experimenting, reading, and experimenting some more. He asked academics about their research. Not the popular stuff, but the “rubbish”.

“In business if only 30% of people do a weird thing 20% of the time there’s still a business opportunity in that…the problem with economics isn’t only that it’s wrong but that it’s incredibly creatively limiting.”

What Sutherland discovered during this period was that it was worthwhile to experiment on just about anything. Even – or especially – on things that academic economists thought was sound.

Richard Thaler‘s book, Misbehaving covers this period of time where Sutherland was adapting his approach, with the same sort of that’s interesting attitude.

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5/ Rapid fire. Just go and listen already.

• Why is it that Americans (and Canadians) have so little vacation time? Wouldn’t working less when younger be worth working slightly more when older? (51:20)
• “In business, you have to act like there’s science behind your decision.” Did you predict it ex-ante? What can you learn from it ex-post? (55:00)
• “We call this the Heathrow effect.” (59:00)
• “There has to be a borderline pain threshold for that placebo to really work.” (1:14:00)
• “Effort can destigmatize price.” Pick your own strawberries and rinse them in your IKEA kitchen.
• “Anything that costs now and only pays off in the long term is a reliable signal of a business or individual who is playing the repeat game and not the one-off game.”(1:27:30)
• “If you test counterintuitive things it’s much more valuable when they pay off. Test counterintuitive things because your competitors won’t.” (1:53:00) The cost to test is low but the upside is huge. Chris Cole talked about this for everyday things.

 

Thanks for reading,
Mike