Tuesday, May 13, 2014

Edge Conversation with Rory Sutherland: This Thing For Which We Have No Name

Link to video and conversation text: This Thing For Which We Have No Name
"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. And the effect of these changes can be an order of magnitude. This is the important thing. Really small interventions can have huge effects. ... 
...Markets actually 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 actually try and systematize.

There are some great books mentioned in the interview, such as Thinking, Fast and Slow (only $2.99 on Kindle) and Timothy Wilson's book, Strangers to Ourselves, which Nassim Taleb reviewed on Amazon in 2003, in which he wrote:
The book that carried the most influence on my thinking this year (I went back to it half a dozen times). 
This is a clearly written presentation of our inability to forecast our own behavior and to predict our emotional reactions to positive and negative events. One would think that the repetition of experiences with consistent forecasting biases would lead to some correction but this is not the case. 
We are more resilient than we think ("immune neglect"). The book also discusses the reversion to baseline happiness after what we thought would bring a permanent improvement in our moods (yet we never learn from it). 
The most important part covers the "hindsight bias" how we see past misfortunes as deterministic --and how we can confront negative emotions by making them even more so (by creating a narrative that make the events appear unavoidable).