EconTalk — Rory Sutherland

On: Alchemy.

Episode: N/A

Date: November 2019

Background: Advertising executive and author of “Alchemy”.

Key Subjects:

  • Markets are inventive, not necessarily efficient.
    • Markets allow for trial and error, testing ideas, discovery.
    • Leads to finding more than one solution for one problem.
      • Solving the same problem for different people in different ways.
  • Variance reduction.
    • Human drive: reduce uncertainty.
      • “What is the worst that could happen?”
      • Assessing the importance of the worst case scenario.
      • Assessing the risk of multiple bad outcomes in a row or at the same time.
    • Brands.
      • Have reputational skin in the game.
      • Consumer willing to pay for the reliable certainty of a limited downside.
  • Choice architecture.
    • In hiring:
      • If you want more diversity, hire more people at the same time (you are more conservative if you only make one hire at a time).
    • In consumption:
      • If you buy something more frequently (clothes, cars, houses), you’re more likely to buy differentiated items (as a producer: don’t be the average option).
    • Minority rule:
      • Offer variety to avoid being caught out by minority preferences (don’t be a seafood restaurant: one person may not like it…).
  • Advertising.
    • Upfront cost.
    • Only makes sense assuming repeat business.
    • Therefore, can be a reliable indicator of the seller’s confidence.
      • (That he can deliver “the goods” repeatedly).
  • Danger of focusing on efficiency.
    • Drive for economies of scale and commoditization removes incentives for innovation.
    • Ignores the value of trust and developing longer term relationships (intermediaries).
    • Replacement of intermediaries by top-down algorithms.
      • Uniform questions, filters or categories.
      • May not fully allow for bottom-up signals and discovery process.
      • Quantification bias.
  • Economics is an art, not a science.
    • Human behavior is highly context dependent.
    • Depending on the context, a given stimulus can lead to opposite behaviors.
    • Therefore, attempts at fixing and mapping stimulus and behavior are difficult.
    • What drives human behavior is not reality per se, but the perception of it.
    • Understand how reality is perceived and develop stories and meaning accordingly (advertising).
    • In other words, persuasion.

Key Takeaways:

  • Markets are inventive, not necessarily efficient.
    • Solving the same problem for different people in different ways.
  • Brands provide certainty of limited downside.

Worth Listening:


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