The models that dominate all human decision-making today are duly heavy on simplistic logic, and light on magic – a spreadsheet leaves no room for miracles. But what if this approach is wrong? What if, in our quest to recreate the certainty of the laws of physics, we are now too eager to impose the same consistency and certainty in fields where it has no place?
The case for magic:
Potential investors can learn a great deal from Alchemy – The Surprising Power Of Ideas That Don’t Make Sense. Just consider how investors and analysts make spreadsheet analysis to arrive at price targets and intrinsic values: Investors use discounted cash flow models, CAPM and a multitude of other models just to arrive at valuations that turn out to be way off from reality. Perhaps the good old “back of the envelope” calculations are best? Or perhaps even simpler methods that at first sight don’t make sense?
I came across Sutherland via Nassim Nicholas Taleb: he mentions Rory Sutherland several times in his Incerto series, and the similarity in thinking is obvious. The modern world turns its back on magic and illogic, but it can at times be very powerful. No doubt Western logic and science have made a great leap for mankind, but along the way, Sutherland argues some of the insensible magic and alchemy were left behind. Science, math and physics contain undeniable truths, but in business and everyday life it might be different. Apple’s iPhone was not made because consumers wanted it, but because Steve Jobs thought they might want it. Likewise, Red Bull is a success despite a wide cross-section of the public said it “tasted kind of disgusting”. By being purely rational Sutherland argues we forego many business opportunities.
What is Sutherland’s alchemy? Engineering doesn’t allow for magic, but psychology does. The need to appear scientific prevents us from considering less logical but nevertheless solutions that can be cheap, fast and effective. When we demand logic, we pay a hidden price: we destroy the magic. As Sutherland puts it: The human mind doesn’t run on logic any more than a horse runs on petrol. If the world is allowed to run solely by logical people, we will only discover logical things. But in real life, most things aren’t logical – they are psycho-logical, according to Sutherland.
Sutherland’s background is from the advertising business, which probably explains his interest for the irrational and (often) counterintuitive things. Math, science and logic come short in explaining human behaviour, as Sutherland argues.
The book starts with a pretty interesting list of rules explaining Sutherland’s alchemy and magic:
- The opposite of a good idea can also be a good idea.
- Don’t design for average.
- It doesn’t pay to be logical if everyone else is being logical.
- The nature of our attention affects the nature of our experience.
- A flower is simply a weed with an advertising budget.
- The problem with logic is that it kills off magic.
- A good guess which stands up to observations is still science. So is a lucky accident.
- Test counterintuitive things only because no one else will.
- Solving problems using rationality is like playing golf with only one club.
- Dare to be trivial.
- If there were a logical answer, we would have found it.
What’s the relevance of this book for investors and traders? Apple is in my opinion a perfect example of a company that is using Sutherland’s magic. Same goes for traders: you have to think outside the box and test ideas via trial and error. This way you can “discover” new angles and opportunities.
I’m no fan of long summaries and I believe a sample of quotes give a much better explanation of what the book is all about:
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We discovered that problems almost always have a plethora of seemingly irrational solutions waiting to be discovered, but that nobody is looking for them; everyone is too preoccupied with logic to look anywhere else.
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….to reach intelligent answers, you often need to ask really dumb questions.
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Human behaviour is an enigma. Learn to crack the code……To avoid stupid mistakes, learn to be slightly silly.
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The need to rely on data can also blind you to important facts that lie outside your model.
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If this book provides you with nothing else, I hope it gives you permission to suggest slightly silly things from time to time. To fail a little more often. To think unlike an economist.
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Being slightly bonkers can be a good negotiating strategy: being rational means you are predictable…..If you are wholly predictable, people learn to hack you.
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Like a criminal investigation, what looks neat and logical when viewed with hindsight is usually much messier in real-time.
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….models of human behaviour devised and promoted by economists and other conventionally rational people are wholly inadequate at predicting human behaviour…….The Wealth of Nations (1776) doesn’t contain a single equation…..there is much more value to be found in understanding how people behave in reality than how they should behave in theory.
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Notice that ordinary people are never allowed to pronounce on complex problems. When do you ever hear an immigration officer interviewed about immigration? These people patently know far more about these issues than economists or sociologists, and yet we instead seek wisdom from people with models and theories rather than actual experience.
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The trouble with market research is that people don’t think what they feel, they don’t say what they think, and they don’t do what they say.
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For a business to be truly customer-focused, it needs to ignore what people say. Instead it needs to concentrate on what people feel.
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“Yes, I know it works in practice, but does it work in theory?”
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Making a train journey 20 per cent faster might cost hundreds of millions, but making it 20 per cent more enjoyable may cost almost nothing.
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If you want to change people’s behaviour, listening to their rational explanation for their behaviour may be misleading, because it isn’t “the real why”. This means that attempting to change behaviour through rational argument may be ineffective, and even counterproductive…..If you confine yourself to using rational arguments to encourage rational behaviour, you will be using only a tiny proportion of the tools in your armoury.
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A change in perspective is worth 80 IQ points (Alan Kay)…..an inability to change perspective is equivalent to a loss of intelligence.
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To put it crudely, when you multiply bullshit with bullshit, you don’t get a bit more bullshit – you get bullshit squared.
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Everyone worries about declining social mobility, rising inequality and the hideous homogeneity of politicians, yet it is possible these have arisen from well-meaning attempts to make the world fairer.
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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.
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Usually someone has often already found an answer to your problem – just in a different domain.
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Firstly, it doesn’t always pay to be logical if everyone else is also being logical. Logical may be a good way to defend and explain a decision, but it is not always a good way to reach one.
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However, most valuable discoveries don’t make sense at first; if they did, somebody would have discovered them already. And ideas which people hate may be more powerful than those that people like, the popular and obvious ideas having all been tried already. We should test counterintuitive things – because no one else will.
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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.
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…all i can rely on here for evidence is a recurrent pattern of events – it is surprisingly common for significant innovations to emerge from the removal of features rather than the addition.
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Trust grows at the speed of a coconut tree,and falls at the speed of a coconut.
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Heuristics look second-best to people who think all decisions should be optimal. In a world where satisficing is necessary, they are often not only the easiest option but the best.
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Habit, which can often appear irrational, is perfectly sensible if your purpose is to avoid unpleasant surprises.
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Blame, unlike credit, always finds a home.
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Defensive decision making – making a decision which is unconsciously designed not to maximise welfare overall but to minimise the damage to the decision maker in the event of a negative outcome.
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….in reality, all valuable information starts with very little data – the lookout on the Titanic only had one data point.
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Conventional wisdom about human decision-making has always held that our attitudes drive our behaviour, but evidence strongly suggests that the process mostly works in reverse: the behaviours we adopt shape our attitudes.
Conclusion:
Sutherland concludes the book like this:
Remember, if you never do anything differently, you’ll reduce your chances of enjoying lucky accidents.
Daniel Kahneman offers great advice in rules governing human behavior in Thinking, Fast And Slow. Rory Sutherland doesn’t, but that’s precisely his point! You can have too much randomness and irrationality in your life, but Sutherland argues the opposite can be true as well: you can have too much predictability, rationality and logic. Sutherland’s main point is that logic kills the magic. Niels Bohr presumably told Einstein: You are not thinking, you are merely being logical.
FAQ:
– How does Sutherland view the use of logic in decision-making, particularly in the context of business and investing?
Sutherland suggests that being overly rational can lead to missed opportunities, emphasizing the importance of incorporating a bit of magic and illogical thinking in decision-making processes.
– How does Sutherland connect his ideas to real-world examples, such as Apple’s iPhone and Red Bull’s success?
Sutherland highlights that innovative and successful products like the iPhone were not solely driven by consumer demand but by visionary thinking that defied conventional logic. He suggests that businesses, like Apple, embrace a touch of magic in their strategies.
– What relevance does Sutherland’s alchemy have for investors and traders?
Sutherland’s perspective encourages investors and traders to think outside the box, test ideas through trial and error, and embrace unconventional approaches to discover new opportunities and angles in the market.
