Library / Personal Development | Human Psychology

Date of review: January 2020
Book author: Rory Sutherland
Вook published: 2019

Alchemy: The Surprising Power of Ideas That Don't Make Sense by Rory Sutherland (2019)

As with many books that I have been reading recently, decision to read Alchemy came to me after I listened to a fascinating podcast in which Rory Sutherland discussed his key ideas and mentioned the book.

Human psychology has a disproportionate role in our life, in product development and even broader corporate strategies.

Rory Sutherland is vice chairman of Ogilvy UK a leading brand development company. The key message of the book is that psychology has a disproportionate role in our life, but also in product development and even broader corporate strategies. Human psychology is very different from rational decision making process that is the model used by economists and often investors in their thinking / analysis.

While this idea is not new and has been discussed particularly well by Daniel Kahneman in his book 'Thinking Fast, and Slow', the book, nevertheless, has a great collection of various cases when humans make unexpected choices contrary to expectations made under rational assumptions.

A few ideas I picked up from the book are the following ones:

  • Irrational decisions work. For example, instead of spending billions on expanding the tunnel to gain extra 10 min in a train journey between London and Paris, the operator could better spend a few dozens millions on more advanced entertainment systems on board the train to make the journey more pleasant so that passengers would not want to cut their travel time but rather spend enjoy spending it on the train.

  • A useful tip for negotiation - stay irrational and you won't be predictable / hacked. Often not knowing your true motivation helps like a hare running in zig zag making random turns cannot be captured by a wolf. An even more interesting idea is that for driverless cars to become more efficient, they should learn to become less predictable which would train people to be extra careful especially when crossing the roads.

  • Don't try to look for things that make sense and look logical when looking for the best solution. Bicycle is a good example, before it had been invented, the idea that you could ride on two wheels balancing would have sounded ridiculous and definitely not logical.

  • Innovation often comes from odd people (e.g. sandwich - a person wanted to eat without leaving his table while gambling). 
  • 4S - four reasons which make people act illogically: Signalling, Subconscience hacking, Satisficing and Psychophysics.

  • Products should be either great luxury goods or great bargains, anything in between is the dead zone as people want to get excitement from making a purchase (either great saving or great experience).

Context is very important to how decisions are made.

  • People hate uncertainty, solutions that reduce uncertainty can create a lot of value (e.g. 'The flight is delayed by 18 minutes' is materially better than just 'The flight is delayed'). People enjoy feeling that situation remains under their control (e.g. a map showing Uber driver on his way to pick you up offers an additional value). Interestingly, the actual results would not differ in both examples whether you know exact timing or not, but the quality of the service would be quite different.

  • In investing, this means that companies with predictable dividends, regular disclosure tend to be valued higher (which means that the same business with less disclosure could be purchased cheaper and deliver the same earnings / dividend growth and overall better results for investor).
  • For a business to be truly customer focused, it needs to ignore what people say and instead to concentrate on what they feel.

  • What can work for a group of people as a whole, may not work for a typical individual (e.g. stock market or coin tossing).

  • Sutherland also makes the point that the next 20 years would see less technological improvements, but progress in psychology and design thinking - making things more enjoyable.

  • When buying it is better to avoid having the same tastes as everyone else, then you can get a better deal (e.g. house). Similar in investing - looking for less popular sectors, countries.

  • Value of a product often depends not on its physical qualities but on the mind of a person using it (a person may feel something is valuable to him even if it is not a great product). Purely rationally looking solutions / products may not be the best, while those ideas that don't look logical can be a great success (e.g. Red Bull - selling more expensive product with worse taste in a highly competitive market sounds like a completely irrational decision).

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