Alchemy: The Dark Art and Curious Science of Creating Magic in Brands, Business, and Life

by Rory Sutherland

There are two lessons to be learned here. Firstly, it doesn’t always pay to be logical if everyone else is also being logical. Logic may be a good way to defend and explain a decision, but it is not always a good way to reach one. This is because conventional logic is a straightforward mental process that is equally available to all and will therefore get you to the same place as everyone else. This isn’t always bad – when you are buying mass-produced goods, such as toasters, it generally pays to cultivate mainstream tastes. But when choosing things in scarce supply* it pays to be eccentric. The second interesting thing is that we have no real unitary measure of what is important and what is not – the same quality (such as not having a lift) can be seen as a curse or a blessing, depending on how you think of it. What you pay attention to, and how you frame it, inevitably affects your decision-making.

Reason is a wonderful evaluative tool, but we are treating it as though it were the only problem-solving tool – it isn’t. If you look at the history of great inventions and discoveries, sequential deductive reasoning has contributed to relatively few of them.

“from cradle to coffin”,

Here is the brilliant American physicist Richard Feynman, in a Lecture in 1964, describing his method: ‘In general, we look for a new law by the following process. First, we guess it . . . Then we compute the consequences of the guess, to see what, if this law we guess is right, to see what it would imply and then we compare the computation results to . . . experience, compare it directly with observations to see if it works . . . In that simple statement is the key to science. It doesn’t make any difference how beautiful your guess is, it doesn’t matter how smart you are, who made the guess or what his name is . . . If it disagrees with the experiment, it’s wrong. That’s all there is to it.’

A good guess which stands up to observation is still science. So is a lucky accident.

A result of this is that business and politics have become far more boring and sensible than they need to be. Steve Jobs’s valedictory injunction to students to ‘stay hungry, stay foolish’ probably contained more valuable advice than may be apparent at first glance. It is, after all, a distinguishing feature of entrepreneurs that, since they don’t have to defend their reasoning every time they make a decision, they are free to experiment with solutions that are off-limits to others within a corporate or institutional setting.* We approve reasonable things too quickly, while counterintuitive ideas are frequently treated with suspicion.

We should test counterintuitive things – because no one else will.

As Alfred Hitchcock once said, ‘drama is just real life with the boring bits edited out’. We constantly rewrite the past to form a narrative which cuts out the non-critical points – and which replaces luck and random experimentation with conscious intent.

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.

I rang a company’s call centre the other day, and the experience was exemplary: helpful, knowledgeable and charming. The firm was a client of ours, so I asked them what they did to make their telephone operators so good. The response was unexpected: ‘To be perfectly honest, we probably overpay them.’

It is a never-mentioned, slightly embarrassing but nevertheless essential facet of free market capitalism that it does not care about reasons – in fact it will often reward lucky idiots. You can be a certifiable lunatic with an IQ of 80, but if you stumble blindly on an underserved market niche at the right moment, you will be handsomely rewarded. Equally you can have all the MBAs money can buy and, if you launch your genius idea a year too late (or too early), you will fail. To people who see intelligence as the highest virtue, this all seems hopelessly unmeritocratic, but that’s what makes markets so brilliant: they are happy to reward and fund the necessary, regardless of the quality of reasoning. Perhaps people don’t ‘deserve’ to be rewarded for being lucky, but a system that did not ensure the survival of lucky accidents would lose most of its value. Evolutionary progress, after all, is the product of lucky accidents.

The theory is that free markets are principally about maximising efficiency, but in truth, free markets are not efficient at all. Admiring capitalism for its efficiency is like admiring Bob Dylan for his singing voice: it is to hold a healthy opinion for an entirely ridiculous reason. The market mechanism is loosely efficient, but the idea that efficiency is its main virtue is surely wrong, because competition is highly inefficient.

People’s motivations are not always well-aligned with the interests of a business: the best decision to make is to pursue rational self-justification, not profit. No one was ever fired for pretending economics was true.

In the late Middle Ages, science took a wrong turn and came to the wrongheaded conclusion that alchemy didn’t work. People had struggled for years to turn base metals into gold; when they found they couldn’t do this in the way they expected, they gave up. Later on, Newton really didn’t help the cause by filling our heads with thermodynamics and the conservation of energy – where science hopelessly misled us was that it imbued in all of us the idea that you can’t create something out of nothing. It taught us that you can’t create a valuable metal out of a cheap one, or that you can’t create energy in one place or form without destroying it somewhere else. While all this is perfectly true in the narrow sphere of physics, it is hopelessly wrong when it comes to the very different business of psychology. In psychology these laws do not apply: one plus one can equal three.

In maths it is a rule that 2 + 2 = 4. In psychology, 2 + 2 can equal more or less than 4. It’s up to you.

In nineteenth-century Prussia, a glorious feat of alchemy saved the public exchequer, when the kingdom’s royal family managed to make iron jewellery more desirable than gold jewellery. To fund the war effort against France, Princess Marianne appealed in 1813 to all wealthy and aristocratic women there to swap their gold ornaments for base metal, to fund the war effort. In return they were given iron replicas of the gold items of jewellery they had donated, stamped with the words ‘Gold gab ich für Eisen’, ‘I gave gold for iron’. At social events thereafter, wearing and displaying the iron replica jewellery and ornaments became a far better indication of status than wearing gold itself. Gold jewellery merely proved that your family was rich, while iron jewellery proved that your family was not only rich but also generous and patriotic. As one contemporary observed, ‘Iron jewellery became the fashion of all patriot women, thus showing their contribution in support of the wars of liberation.’

One eighteenth-century monarch, Frederick the Great, used the same magic in the promotion of the potato as a domestic crop, transforming something worthless and unwanted into something valuable through the elixir of psychology. The reason he wanted eighteenth-century Prussian peasants to cultivate and eat the potato was because he hoped that they would be less at risk of famine when bread was in short supply if they had an alternative source of carbohydrate; it would also make food prices less volatile. The problem was that the peasants weren’t keen on potatoes; even when Frederick tried coercion and the threat of fines, they simply showed no interest in eating them. Some people objected because the potato was not mentioned in the Bible, while others argued that, since dogs wouldn’t eat potatoes, why should humans? So, having given up on compulsion, Frederick tried subtle persuasion. He established a royal potato patch in the grounds of his palace, and declared that it was to be a royal vegetable, that could only be consumed by members of the royal household or with royal permission.* If you declare something highly exclusive and out of reach, it makes us all want it much more – call it ‘the elixir of scarcity’. Frederick knew this and so posted guards around his potato patch to protect his crop, but gave them secret instructions not to guard the patch too closely. Curious Prussians found they could sneak into the royal potato patch and could steal, eat and even cultivate ...

Never forget this: the nature of our attention affects the nature of our experience. Advertising* often also works in this way. A great deal of the effectiveness of advertising derives from its power to direct attention to favourable aspects of an experience, in order to change the experience for the better.

If there is a mystery at the heart of this book, it is why psychology has been so peculiarly uninfluential in business and in policy-making when, whether done well or badly, it makes a spectacular difference.

By reducing the possible applications of the device to a single use, it clarified what the device was for. The technical design term for this is an ‘affordance’, a word that deserves to be more widely known. As Don Norman observes: ‘The term affordance refers to the perceived and actual properties of the thing, primarily those fundamental properties that determine just how the thing could possibly be used. [. . .] Affordances provide strong clues to the operations of things. Plates are for pushing. Knobs are for turning. Slots are for inserting things into. Balls are for throwing or bouncing. When affordances are taken advantage of, the user knows what to do just by looking: no picture, label, or instruction needed.’

I mentioned earlier in this book that there are five main reasons why human behaviour often departs from what we think of as conventional rationality. The first of these is signalling, the need to send reliable indications of commitment and intent, which can inspire confidence and trust. Cooperation is impossible unless a mechanism is in place to prevent deception and cheating; some degree of efficiency often needs to be sacrificed in order to convey trustworthiness or to build a reputation.

Reciprocation, reputation and pre-commitment signalling are the three big mechanisms that underpin trust.

In game theory, this prospect of repetition is known as ‘continuation probability’, and the American political scientist Robert Axelrod has poetically referred to it as ‘The Shadow of the Future’. It is agreed by both game theorists and evolutionary biologists that the prospects for cooperation are far greater when there is a high expectation of repetition than in single-shot transactions. Clay Shirky has even described social capital as ‘the shadow of the future at a societal scale’. We acquire it as a means of signalling our commitment to long-term, mutually beneficial behaviours, yet some businesses barely consider this at all – procurement, by setting shorter and shorter contract periods, may be unwittingly working to reduce cooperation. Yet there are, when you think about it, two contrasting approaches to business. There is the ‘tourist restaurant’ approach, where you try to make as much money from people in a single visit. And then there is the ‘local pub’ approach, where you may make less money from people on each visit, but where you will profit more over time by encouraging them to come back. The second type of business is much more likely to generate trust than the first.

‘Look’, he said, ‘I’d like you to produce a stand-out piece of creative work here. But if you can’t, what I’d like you to do is write them a really nice one-page letter – and we’ll send it out by FedEx.’ Steve was effectively describing what biologists call ‘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.

Bits deliver information, but costliness carries meaning. We do not invite people to our weddings by sending out an email. We put the information (all of which would fit on an email – or even a text message) on a gilt embossed card, which costs a fortune. Imagine you receive two wedding invitations on the same day, one of which comes in an expensive envelope with gilt edges and embossing, and the other (which contains exactly the same information) in an email. Be honest – you’re probably going to go to the first wedding, aren’t you?

One of the most important ideas in this book is that it is only by deviating from a narrow, short-term self-interest that we can generate anything more than cheap talk. It is therefore impossible to generate trust, affection, respect, reputation, status, loyalty, generosity or sexual opportunity by simply pursuing the dictates of rational economic theory.

Our brains did not evolve to make perfect decisions using mathematical precision – there wasn’t much call for this kind of thing on the African savannah. Instead we have developed the ability to arrive at pretty good, non-catastrophic decisions based on limited, non-numerical information, some of which may be deceptive.

The advertisements which bees find useful are flowers – and if you think about it, a flower is simply a weed with an advertising budget.

To quote a Caribbean proverb, ‘Trust grows at the speed of a coconut tree and falls at the speed of a coconut.’

Costly signalling theory, which was first proposed by the evolutionary biologist Amotz Zahavi, is, I believe, one of the most important theories in the social sciences.

Modern environmentalists also suggest that status-signalling competition between humans is destroying the planet. They propose that the Earth has enough resources to comfortably support the present population if we are all prepared to live modestly, but that natural rivalry can lead to ever-rising expectations – and with it increasing consumption. In many ways, this competition is not healthy – and nor does it necessarily contribute much to human happiness. In some ways it places people under an obligation to spend more money than they would otherwise choose to, just to maintain their status relative to other people. There is an interesting debate to be had here between business and environmentalists. My contention is that, once you understand unconscious motivation, the widespread conviction that humans could be content to live without competing for status in an egalitarian state is nice in theory, but psychologically implausible. Yet the status markers for which we compete don’t have to be environmentally damaging; people can derive status from philanthropy as well as through selfish consumption. For instance, as Geoffrey Miller notes, a tribe where males advertised their hunting prowess by conspicuously sharing meat from their kills would prosper, as a result of economically irrational behaviour. On the other hand, an otherwise identical tribe whose males signalled their strength by violently fighting each other would suffer as a consequence: even the eventual winners o...

In the early stages of any significant innovation, there may be an awkward stage where the new product is no better than what it is seeking to replace. For instance, early cars were in most respect worse than horses. Early aircraft were insanely dangerous. Early washing machines were unreliable. The appeal of these products was based on their status as much as their utility.

Without the feedback loop made possible by distinctive and distinguishable petals or brands, nothing can improve. The loop exists because insects or people learn to differentiate between the more and less rewarding plants or brands, and then direct their behaviour accordingly. Without this mechanism there is no incentive to improve your product, because the benefits will accrue to everybody equally; in addition, there is an ever-present incentive to let product quality slip, because you will reap the immediate gains, while the reputational consequences will hurt everyone else equally. This explains why it is necessary for markets to endure the apparent inefficiency of supporting different and competing products with expensively differentiated identities, in order to reward quality control and innovation.

We often forget that, without this assurance of quality, there simply isn’t enough trust for markets to function at all, which means that perfectly good ideas can fail. Branding isn’t just something to add to great products – it’s essential to their existence.

The psychologist Nicholas Humphrey argues that placebos work by prompting the body to invest more resources in its recovery.* He believes that evolution has calibrated our immune system to suit a harsher environment than the current one, so we need to convince our unconscious that the conditions for recovery are especially favourable in order for our immune system to work at full tilt. The assistance of doctors (whether witch or NHS), exotic potions (whether homeopathic or antibiotic) or the caring presence of relatives and friends can all create this illusion, yet policymakers hate the idea of any solution that involves such unconscious processes – too little is spent on researching the placebo effect in proportion to its importance.

Our unconscious, specifically our ‘adaptive unconscious’ as psychologist Timothy Wilson calls it in Strangers to Ourselves (2002), does not notice or process information in the same way we do consciously, and does not speak the same language that our consciousness does, but it holds the reins when it comes to much of our behaviour. This means that we often cannot alter subconscious processes through a direct logical act of will – we instead have to tinker with those things we can control to influence those things we can’t or manipulate our environment to create conditions conducive to an emotional state which we cannot will into being.

In the words of Jonathan Haidt,* ‘The conscious mind thinks it’s the Oval Office, when in reality it’s the press office.’ By this he means that we believe we are issuing executive orders, while most of the time we are actually engaged in hastily constructing plausible post-rationalisations to explain decisions taken somewhere else, for reasons we do not understand. But the fact that we can deploy reason to explain our actions post-hoc does not mean that it was reason that decided on that action in the first place, or indeed that the use of reason can help obtain it.

I owe my explanation of the placebo theory to its author, Nicholas Humphrey. To me, his theory seems to be among the most significant theories in the field of psychology. Indeed, given its potential value to human health, it is inexplicable to me that more use has not been made of it, or at the very least that it has not been more widely investigated. It could potentially change the whole practice of medicine, but I suspect that the reason people seem less than eager to pursue the implications of Humphrey’s ideas is because it contains a whiff of alchemy.

Pete Trimmer, a biologist at the University of Bristol, observed that the ability of Siberian hamsters to fight infections varied according to the lighting above their cages – longer hours of light (mimicking summer days) triggered a stronger immune response. Trimmer’s explanation was that the immune system is costly to run, and so as long as an infection is not lethal, it will wait for a signal that fighting it will not endanger the animal in other ways. It seems that the Siberian hamster subconsciously fights infection more energetically in summer because that is when food supplies are sufficiently plentiful to sustain an immune response. Trimmer’s model demonstrated that in challenging environments, animals fared better by weathering infections and conserving resources. Humphrey argues that people subconsciously respond to a sham treatment because it assures us that it will weaken the infection without overburdening the body’s resources. In populations where food is plentiful we can, in theory, mount a full immune response at any time, but Humphrey believes that the subconscious switch has not yet adapted to this – thus it takes a placebo to convince the mind that it is the right time for an immune response.

In countries including Korea and China, accidents at intersections have been reduced by simply displaying the number of seconds remaining before the lights turn green.* This is because the mammalian brain has a deep-set preference for control and certainty.

doolally.’

Our body is calibrated not to notice the taste of pure water, because it is valuable in evolutionary terms that we notice any deviation from its normal taste. The qualities we notice, and the things which often affect us most, are the things that make no sense – at some level, perhaps it is necessary to deviate from standard rationality and do something apparently illogical to attract the attention of the subconscious and create meaning. Cathedrals are an over-elaborate way of keeping rain off your head. Opera is an inefficient way of telling a story. Even politeness is effectively a mode of interaction that involves an amount of unnecessary effort. And advertising is a hugely expensive way of conveying that you are trustworthy.

Here’s a typical school maths question: Two buses leave the same bus station at noon. One travels west at a constant 30mph, while the other travels north at a constant 40mph. At what time will the buses be 100 miles apart?* Here’s a typical real-life problem: I need to catch a plane leaving Gatwick at 8am. Should I get there by train, taxi or car? And at what time should I leave the house? The odd thing about the human mind is that many people would find the first question difficult, and the second easy, yet the second question is computationally far more complex. This says more about the evolution of our brains than the difficulty of the problem. The reason is that the first question is tailor-made for computation, being what you might call a ‘narrow context’ problem. It assumes an artificially simplified, regularised world (where buses miraculously travel at a constant speed), it involves very few variables (all of which are numerically expressible, and allow for no ambiguity) and it has one single, incontrovertibly correct answer. The question of how to get to Gatwick is what you might call a ‘wide context’ problem. It allows for vagueness and multiple right answers, and it doesn’t demand absolute adherence to any precise rules. There is no formula for the solution, it allows scope for all kinds of possible ‘right-ish’ answers and all kinds of information can be taken into account when coming up with an answer.

It’s interesting that we find solving complex problems like this so easy – it suggests that our brains have evolved to answer ‘wide context’ problems because most problems we faced as we developed were of this type. Blurry ‘pretty good’ decision-making has simply proven more useful than precise logic. Now, I accept that the need to solve ‘narrow context’ problems is much greater today than it was a million years ago, and there’s no denying the contribution that rational approaches have made to our lives – in fields such as engineering, physics and chemistry. But I would also contend that our environment has not changed all that much: most big human problems, and the majority of business decisions, are still ‘wide context’ problems. The problems occur when people try to solve ‘wide’ problems using ‘narrow’ thinking. Keynes once said, ‘It is better to be vaguely right than precisely wrong’, and evolution seems to be on his side. 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. So my GPS answers a narrow question like ‘How long will it take to drive to Gatwick?’ brilliantly, but the wider questions like ‘How should I get there and when should I set off?’ still remain. The GPS device has provided a brilliant answer to the wrong question. In the same way, companies can, f...

In the 1950s, the economist and political scientist Herbert Simon coined the term ‘satisficing’, combining as it does the words ‘satisfy’ and ‘suffice’. It is often used in contrast with the word ‘maximising’, which is an approach to problem-solving where you obtain, or pretend to obtain, a single optimally right answer to a particular question. As Wikipedia* helpfully explains, ‘Simon used satisficing to explain the behaviour of decision makers under circumstances in which an optimal solution cannot be determined. He maintained that many natural problems are characterised by computational intractability or a lack of information, both of which preclude the use of mathematical optimisation procedures. Consequently, as he observed in his speech on winning the 1978 Nobel Prize, “decision makers can satisfice either by finding optimum solutions for a simplified world, or by finding satisfactory solutions for a more realistic world. Neither approach, in general, dominates the other, and both have continued to co-exist in the world of management science.”’ Since then, I aver, the balance has shifted. The former approach – creating a simplified model of the world and applying a logical approach – is in danger of overpowering the other, more nuanced approach, sometimes with potentially dangerous consequences: the 2008 financial crisis arose after people placed unquestioning faith in mathematically neat models of an artificially simple reality.

There is a parallel in the behaviour of bees, which do not make the most of the system they have evolved to collect nectar and pollen. Although they have an efficient way of communicating about the direction of reliable food sources, the waggle dance, a significant proportion of the hive seems to ignore it altogether and journeys off at random. In the short term, the hive would be better off if all bees slavishly followed the waggle dance, and for a time this random behaviour baffled scientists, who wondered why 20 million years of bee evolution had not enforced a greater level of behavioural compliance. However, what they discovered was fascinating: without these rogue bees, the hive would get stuck in what complexity theorists call ‘a local maximum’; they would be so efficient at collecting food from known sources that, once these existing sources of food dried up, they wouldn’t know where to go next and the hive would starve to death. So the rogue bees are, in a sense, the hive’s research and development function, and their inefficiency pays off handsomely when they discover a fresh source of food. It is precisely because they do not concentrate exclusively on short-term efficiency that bees have survived so many million years. If you optimise something in one direction, you may be creating a weakness somewhere else.

In any complex system, an overemphasis on the importance of some metrics will lead to weaknesses developing in other overlooked ones. I prefer Simon’s second type of satisficing; it’s surely better to find satisfactory solutions for a realistic world, than perfect solutions for an unrealistic one. It is all too easy, however, to portray satisficing as ‘irrational’. But just because it’s irrational, it doesn’t mean it isn’t right.

Joel Raphaelson and his wife Marikay worked as copywriters for David Ogilvy in the 1960s. We recently ate dinner at Gibson’s Steakhouse at the Doubletree Hotel near O’Hare Airport in Chicago,* and talked about Joel’s 50-year-old theory concerning brand preference. The idea, most simply expressed, is this: ‘People do not choose Brand A over Brand B because they think Brand A is better, but because they are more certain that it is good.’* This insight is vitally important, but equally important is the realisation that we do not do it consciously. When making a decision, we assume that we must be weighting and scoring various attributes, but we think that only because this is the kind of calculation that the conscious brain understands. Although it suits the argumentative hypothesis to believe something is ‘the best’, our real behaviour shows relatively few signs of our operating in this way.

The primary reason why we have evolved to satisfice in our particularly human way is because we are making decisions in a world of uncertainty, and the rules for making decisions in such times are completely different from those when you have complete and perfect information. If you need to calculate the hypotenuse of a triangle and you know one interior angle and the length of the other two sides, you can be perfectly correct, and many problems in mathematics, engineering, physics and chemistry can achieve this level of certainty. However, this is not appropriate to most of the decisions we have to make. Such questions as whom to marry, where to live, where to work, whether to buy a Toyota or a Jaguar or what to wear to a conference don’t submit to any mathematical solution. There are too many future unknowns and too many variables, many of which are either not mathematically expressible or measurable. Another good example of a decision that has to be taken subjectively is whether we choose to buy an economical or a high-performance car. In general there is a trade-off between these two attributes. Do you sacrifice economy for performance or performance for economy?

Remember, making decisions under uncertainty is like travelling to Gatwick Airport: you have to consider two things – not only the expected average outcome, but also the worst-case scenario. It is no good judging things on their average expectation without considering the possible level of variance.