Freakonomics Radio - 198. The Maddest Men of All

Episode Date: February 26, 2015

Advertisers have always been adept at manipulating our emotions. Now they're using behavioral economics to get even better.

I'm Rory Sutherland. I'm the vice chairman of Ogilvy and Mather in the UK. Now, that is a pretty impressive title, but we should say you hardly had a typical climb up the corporate ladder, did you? You've been described as the worst trainee, quote, Ogilvy and Mather ever had. Yes, I was actually so bad that I was booked onto a time management course, and I got the date wrong. So I turned up at this empty building expecting a time management course only to find it was the following week. Ogilvy and Mather is a gigantic global marketing and advertising firm, part of the even more gigantic WPP.

O&M was founded in 1948 by David Ogilvy, a legend on Madison Avenue. Born in England as a child, he lived in a house where Lewis Carroll used to live. The headmaster at his boarding school wrote that Ogilvy had, quote, a distinctly original mind, inclined to argue with his teachers and to try to convince them that he is right and the books are wrong. David Ogilvy's peers went on to become doctors, lawyers, politicians. He became, as he would later write, a chef in Paris, a door-to-door salesman, a social worker in the Edinburgh slums, an associate of Dr. Gallup in research for the motion picture industry, and a farmer in Pennsylvania. Ultimately, he took up advertising.

Ogilvy's firm was responsible for a number of commercials, with which you are likely familiar. Do you know me? I created the Muppets. Big deal! Everybody knows them, but not me. So when I travel, I carry the American Express card. That's Jim Henson with his Muppets. Don't leave home without it!

To say that David Ogilvie was an iconoclast is a bit of an understatement. You get the sense that he would have approved mightily of Rory Sutherland. Now, interestingly, in market research, you'll occasionally have a group where basically there are 12 people sitting around a table and one of them is a bit of an asshole. Not long ago, Sutherland co-founded a small unit within Ogilvy and Mather called Ogilvy Change. The main purpose of Ogilvy Change is really to imbue the agency with the best work that's being done in behavioral science. I mean, had David Ogilvie been alive, I think, for the what you might call renaissance in behavioral economics, I think he would have been an enthusiastic supporter.

An enthusiastic supporter, that is, of the kind of research we talk about in this program all the time, the work of people like Richard Thaler, Danny Kahneman. To Rory Sutherland, these men are like gods, not only because they're interesting, but because they're useful. I'm not a behavioral economist. I'm not an economist. I'm not a psychologist. I've had 25 years experience in the advertising industry. And really, my role here is to be a behavioral economics impresario, which is to make it safe for people within business to have conversations about these topics.

All right, let's have that conversation. From WNYC, this is Freakonomics Radio, the podcast that explores the hidden side of everything. Here's your host, Stephen Dupner. Rory Sutherland is an unabashed fanboy of the new wave of behavioral economics research, which does not make him a fan of standard economics. The problem with economics is that it's designed for the perfectly rational, perfectly informed person possessed of infinite calculating ability. It isn't really designed for the human brain as it has currently evolved.

In other words, economists have historically thought about human behavior in a way that very few humans actually behave, except perhaps for economists themselves. By assuming a world of perfect information where anonymous actors with stable preferences seek to maximize their expected utility in a series of standalone transactions, I freely admit, in such a world, which may exist in a parallel universe somewhere, there will be no advertising agencies. Because why, Roy? Because all the information is already there? Because one's preferences can't be shifted?

Because if everybody knows what they want and is absolutely committed to attaining it, and they know perfectly well that they can perfectly trust the person from whom they buy it, you don't need a marketing function. The fact is that those conditions exist in the real world somewhere between very, very rarely and never. Because those conditions rarely exist, and because most of us make decisions using our emotions as much as, if not more than, a reason, well, that creates opportunities for a man like Rory Sutherland and for his firm. Good morning, the Times and Sunday Times member services. You're speaking to Lynn today. How may I help? We are at a call center in Colchester, England, about an hour east of London.

Lynn works for News UK, which owns The Times and The Sunday Times. Could you please confirm to me your name and address? News UK, which is a subsidiary of News Corp, has hired Ogilvy Change to come in and teach the call center employees a few behavioral tricks. We'll introduce ourselves. So I'm Dan. And I'm Jules. And we are from a behavioral science practice that works with News UK. Dan Bennett and Juliet Hodges are what Ogilvy Change calls choice architects.

It's our job today to teach you some psychology that makes it easier for you to do your job day to day. It's been a tough time at the call centre. The newspapers raised their subscription prices. A lot of angry readers have been calling, wanting to cancel. News UK came to us to solve a problem with their call centers that were underperforming, basically. So we were teaching them techniques to help them to retain those customers without them having to use cash incentives to get them to stay. So Ogilvy Change listened to some of these calls and began to coach the call center workers how to respond. Subtle changes, often, based on behavioral research.

Here, for instance, Juliet Hodges does some role-playing. She pretends that she is a call center worker. Okay, you're through to the Times and Sunday Times. My name's Juliet. How can I help you? And she has one of her students, an actual call center worker named Chris, pretend to be the unhappy customer. Hello, I'd like to cancel my membership, please. So I can see you've been with us for 10 years now. You're such a loyal customer.

Why is it that you want to cancel today? Well, the price is going up and I don't really understand what I'm using. And to be honest, I just want to cancel. I'm not using it and I just want to cancel. Why do you find you're not using it and I just want to cancel. Why do you find you're not using it? I don't have time. I'm far too busy. I have kids that I have to look after and I work a 40-hour week and I just don't have time. Okay, with some facts established, Hodges is ready to start nudging the customer in a new direction. Knowing this customer has children, for instance, she's going to suggest a Times Plus subscription. It comes with discount

offers for kids' activities. And she's going to invoke social norming, which is essentially academic speak for peer pressure. We thought that if they knew what people like them were also doing, they'd be more likely to do it themselves. The way to do this is to start with the simple phrase, many people like you... Many people like you who are obviously very busy and have kids to take care of use our offers on The Times Plus to save money on cinema tickets or Meals Out and some exclusive events that we run. And I wouldn't want you to miss out on that if you cancelled down today. I wouldn't want you to miss out.

That is a naked appeal to what behavioural researchers call loss aversion. That is, we generally experience more pain with loss than we experience pleasure with a commensurate gain. Meaning, we hate to give up what we have, even if what we have isn't all that valuable to us. The customers who are cancelling would be losing out on all these benefits. I was like, I can get cheaper cinema, can't I? You certainly can. We run two-for-one offers.

Now the customer is hooked. Well, the fake customer, played by the call center worker. Still, he's hooked, but he does have a question. Okay, I think I'll take that up and see how that goes. Am I going to be tied into a long contract with that? Juliet Hodges tells us this is where a third principle of Ogilvy change comes into play. Positivity. Lately, a lot of customers have been calling to complain.

It's easy to feel negative if you're receiving that kind of feedback. But the call center workers have to stay positive, she tells them, even when they're talking about something as mundane as terms and conditions. We told them it would be important to reframe it as we are so confident that you'll love the product that you can cancel at any time. We're not going to pin you down in a contract. to reframe it as we are so confident that you'll love the product that you can cancel at any time. We're not going to pin you down in a contract. And how well has this collage of behaviorless technique performed for the call center?

We found that calls using one or more of these techniques were three times more likely to be successful. And in fact, 80% of them had a successful save of a customer or a successful sale. What's remarkable is how minor most of these changes are. Rory Sutherland again. If you want the world of business to understand the value of behavioral science, one of the first things you've got to get across, which sounds trivial, but it is vitally important, is the understanding that small changes can have very large effects. Consider another tweak that Ogilvy Change made at the newspaper call center.

Typically, there are three types of subscription packages available. Think of them as A, B, and C. And we simply asked the call center staff to change it to most people choose B, but if you like, you can also have A or C. And we made a couple of tiny other changes as well. Those three tiny and to a classically trained economist, irrelevant pieces of information tripled the conversion rate of the call center. So three times as many people calling actually upgraded to a sale to the previous finding when those sentences were omitted. And you attribute that to people wanting to participate in social norms, yes? To join the herd, essentially.

I think there could be a variety of things there. First of all, a decision, particularly on the telephone, we have evolved, I would argue, we have a social epistemology. I'd go that far and say that for very, very good evolutionary reasons, we feel a sense of comfort doing things which other people do, and a sense of mild anxiety doing things that not many people do. And the reasons for this, if you understand that we've evolved to survive not in a world of perfect information, but in a world where information is often incomplete, we have to survive on inference,

and we have to draw those inferences from wherever we can reliably find it. Then actually copying other people is a pretty good safe bet. I would argue that brands work in a similar way, by the way. People pay a premium for brands not because they think they're necessarily the best thing they can buy, but because a television, for example, or for that matter, a pharmaceutical drug that has a famous and valuable name attached to it is much less likely to be catastrophically bad. You might find these simple manipulations to be manipulative. Indeed, the more you learn about behavioral research, the less confident you are that we ever use reason when making decisions.

It's almost as if our reason lies dormant most of the time, allowing emotions to rule the day, our desires and fears, our insecurities and avarice. And if you can learn how to play those emotions in other people, you will have a much easier time of it, whether you're trying to sell them a newspaper subscription or persuade them to do something a bit more important. Now, we should make clear that this behavioral understanding of human nature is hardly new. Shakespeare understood it.

The book of Proverbs, to name just one book of antiquity, is full of it. But like all universal truths, the quirks of human decision-making is constantly getting rediscovered and, importantly, codified. That's what's been happening in academic psychology and economics lately, the codification of these behavioral anomalies established with empirical evidence. But as Rory Sutherland makes clear, the academics are late to the game. Quite a lot of what's been developed by behavioral scientists over the last 20 or 30 years was discovered by craftsmen in the advertising industry 40, 50, 60 years ago. As a matter of fact, we recently interviewed Jim Yong Kim, the president of the World Bank, who's been trying to get that rather conservative institution excited about the insights of behavioral science.

He commissioned a meaty World Bank report on the subject. If you were to go to Ogilvy or any of the big public relations companies and give them this, I mean, I think they would laugh at us in the sense that they have been utilizing these insights very aggressively for a very long time. What kind of insights? Rory Sutherland suggests we think about those for a limited time only ads you've heard. For a limited time, come into KFC and get 10 pieces of freshly cooked drumsticks and thighs for only $11.99. It was absolutely known that if you wanted people to take up an offer, you created an artificial endpoint to that offer and said, if you want to take up this offer, you created an artificial end point to that offer and said, if you want to take up this offer,

it ends in three weeks' time. That's right. Get $4,000 for your trade this Thursday, Friday, Saturday, and Monday only. Look at your time, act now, and pay $9.99. That's $9.99 for a set of two. And they realised that, you know, some creation of scarcity basically drove human propensity to act. The advertising industry understood this, but what we've never been very good at is

actually attempting to create a system of thought around all those things we've discovered and to codify it into something like a recognizable scientific discipline. I can imagine someone listening to you and saying, goodness, isn't it wonderful that an advertising and marketing executive is so interested in and conversant in the behavioral sciences? That will make the world so much more interesting. On the other hand, I can imagine someone else listening and saying, isn't this going to just make him and everyone else like him even better at selling me more stuff that I don't need? It's a very interesting question. First of all, and I think I ought to be honest about this, you can use this knowledge for evil, in a sense. Coming up on Freakonomics Radio. Okay, Rory, please teach us how we can use this knowledge for evil.

Also, how far can an employer go in monitoring the behavior of its employees? We think that that falls under the category of, quote-unquote, creepy data capture. From WNYC, this is Freakonomics Radio. Here's your host, Stephen Dubner. We've been hearing about how Ogilvy Change, a division of an advertising firm, is using behavioral insights to help call center employees sell us more newspapers. Good morning, you're for the Times and Sunday Times member services. You're speaking to Samantha. How can I help you today? So that's about helping call center employees succeed with their customers.

But let's think about those call center employees themselves. How do you know who to hire for those jobs and how to keep them productive and happy? My name is Michael Hausman. I'm the chief analytics officer for Evolve. Actually, Hausman is now the chief analytics officer for a business software firm called Cornerstone On Demand, which bought Evolve after we interviewed Hausman. But his mission is the same there, to bring science into the workplace, and specifically, to help firms gather data that lets them understand their employees better. It starts in the hiring process. So before they're hired, they essentially run through an online job assessment, and you can think of it almost as a personality test. It

runs typically about 45 minutes in length, and it tries to get inside their heads and understand what really makes them tick, the behavioral and psychometric characteristics that matter to these people. Once they're hired, Evolve software tracks employees using information it collects from the company that hires them. Things like when they were hired, when they left, if that happens, and then ultimately things like their supervisor shift, wages, overtime, really anything that we can get to understand what the nature of the job was. So let's say that Hausman's firm is brought into a call center,

like the one in England selling newspaper subscriptions. One problem with running a call center is the high rate of employee turnover. In the U.S., it's about 45% annually. And the hiring process is expensive. In this case, Hausman says, it costs the company roughly $2,000 to $5,000 per employee. So the idea is, if people stay longer, you make fewer hires. You don't have to spend $2,000 to $5,000 to bring someone into the organization. So, you know, most economists would say, well, if you want to keep people in their seats

or in their job, you'd pay them more. I'm curious what you can tell us about the relationship, the correlation, whether it's causal or not, between pay and either productivity, longevity, whatever metrics you're looking at. We looked specifically at pay in a research study that we had just finished. We found there is no question that pay enables people to stay longer and they perform better. But the magnitude of the effects were actually not as big as we had expected. So for every 10% increase in pay,

there's a 5% reduction in quitting behavior. So it's a less than one for one offset. And what's more is that when someone receives a raise, there are kind of these warm fuzzies that are associated with receiving the raise. There's this halo effect. We found that that effect lasts longer than a week, but not as long as a month. So what we took away from that was that... Is that you should never give people raises because it doesn't work. Exactly. Look, wages work as one of those levers, but our research has found that there are a number of other ways to keep people around that are as effective, if not more, and far less costly.

Like, for example, giving them a better supervisor, someone that they gel with a little bit more. We're trying to help them find those knobs and levers that they can really use in a really cost-effective way. And just how important is a good supervisor versus a bad one? Your supervisor alone accounts for about as much variance in terms of longevity in these roles as everything else combined. I mean, the effects are staggering. Anecdotally, this seems to resonate with people because everyone's had a bad boss that made them leave the job. And we've really made understanding that supervisor-employee relationship a priority of ours.

Because I came into this thinking that it was all about raw talent. You get the right person in the job and everything will work itself out. And that's really the key decision. Our research has actually shown that that's actually a relatively small piece of the pie, something in the range of 10 to 15 percent. Evolve also wanted to measure honesty. So they asked employees to choose between two statements. I follow the rules or I like to experience new things and meet new people. As it turned out, saying you're honest doesn't mean much. What we found was that people who said they were honest actually were 33% more likely to be terminated for policy violations.

So learned our lesson, which is you don't ask people if they're honest because you tend not to get an honest answer. Evolve, therefore, developed another way to get at this question. We came up with a very creative way of measuring what we think is honesty and integrity, which is that we asked them up front, early in the assessment, how are your computer skills? What's your typing speed? Do you feel comfortable with a keyboard and mouse, toggling between screens, so on and so forth? And then guess what? About five, six screens later, we tested them. We asked them, what's the shortcut for cutting and pasting text using a word processor. We actually measured their typing speed and accuracy. And what we found when we compared their self-assessed responses to their actual technical proficiency is that there were two

groups of people that came out. One group was relatively honest. They were what they said they were in terms of their technical skills. And the other group we will call a little bit creative in that they claim to be exceptional with a keyboard and mouse, but they couldn't type more than 10 words a minute. In turn, Evolve found that the honest employees tested better on just about every performance metric, which you might find heartening, the idea that honesty really is a valuable trait.

But there was one metric for which honesty was not correlated with better performance. Sales. Take all the dishonest people and put them in sales. That's the idea? I don't necessarily want to say that, especially since we have sales and marketing folks of our own and they're wonderful people.

And so I don't want to assume anything about them. But yeah, at the end of the day, we go about this work without making any sort of a priori judgments or hypotheses about the data. We like to let the data speak for itself. Another finding in the employee data, an employee's choice of web browser might be worth paying attention to. So what internet browser do you use, Stephen? I hate them all, and I use Firefox. Okay, great. So good news for you, because we have found that Chrome and Firefox users are the best employees. They perform better on virtually every metric and stay longer.

Now, is there any causal relationship that you can even think about there, or no? We don't know where the causality is. I don't think that finding means that our clients should immediately force all their employees to install Firefox or Chrome on their computers. That's not where we want to go with it. But my personal view is that I think the fact that you took the time to install Firefox on your computer shows us something about you. It shows that you're someone who's an informed consumer. It shows us that you care about your productivity and you've made an active choice to do something that wasn't default,

that wasn't handed to you. But even Michael Hausman admits that his field, known as workforce science, has its limits, legal limits, natural limits, and others. The use of personality tests in workforce hiring is boomed by one estimate, about two-thirds of job applicants in the U.S. now take one. The Wall Street Journal reports that the Equal Employment Opportunity Commission is currently investigating whether such tests are discriminatory.

When we called the commission, they would neither confirm nor deny. As an economist and someone who loves data, I want to get every piece of data that I can on everyone to figure out what it is that truly keeps people on the job, creates a good employee. Unfortunately, there are things that legally we're not allowed to touch, and then there are also things that we have decided as an organization we shouldn't touch. The obvious legal ones are race, sex, age. Those are off limits, and I completely understand why. But beyond that, we've decided to take a somewhat conservative approach about what we're going to use. And so we're not scouring your Facebook profile. We're not looking at your Twitter feed. And why is that? You say that's a choice. Why?

We think that that falls under the category of, quote unquote, creepy data capture. We want people to be supplying this data voluntarily. And so we don't want them to wonder what data is being used. And so we've made the choice to be very transparent of that. Ah, the fine line between data-driven and creepy. Much like the fine line between the good and evil uses of behavioral science in the dark art of advertising. Okay, great. Rory, can you hear me? This is Stephen. Yes, perfectly.

That is Rory Sutherland again, the founder of Ogilvy Change. I had asked him whether his embrace of behavioral economics is simply one more tool to get more people to buy stuff they don't need or to pay more for the things they want. I think I ought to be honest about this. You can use this knowledge for evil in a sense. Let's take an example when you go to an airline website and it says, it quotes your price for your seat to Sacramento, whatever it may be, and it says only four seats left at that price. Now, that works on me. I've spent eight years studying this stuff. I know it's an attempt to exploit my scarcity bias, but it still makes me click. Okay, that's just the way I'm wired. Now, implicit in that line is that subsequent seats will be more expensive. But actually, the person in their weasel wording hasn't exactly made that promise, have they? They've merely said, at this price.

At this price is not quite clear. It could be that the subsequent four seats are being sold actually at a lower price. And so our wonderful, powerful, but very suggestible brains think this over, or more likely, don't think at all. There's a part of the brain that does the talking, which isn't necessarily connected to the part that does the feeling or indeed the deciding. And it's the part that does the deciding that advertisers want to reach. Sutherland here subscribes to the theories of Daniel Kahneman, the author of Thinking Fast and Slow, who suggests the brain engages in two distinct kinds of thinking, system one and system two, Kahneman calls it.

System one can't talk. It doesn't seek to influence our behavior by the generation of argument or reason. It simply generates emotions directly. Fear, pain, heat, anxiety, etc. There's a much faster and more efficient way of keeping us alive. System 2 is slower, more deliberative. It tries to interpret what System 1 is feeling, but it doesn't do a very good job. We're very, very bad at explaining

the reasons behind our emotions. There's a wonderful phrase which is the talking part of the brain thinks it's the oval office when a lot of the time it's really the press office. What it's not really doing is actually coming up with good explanations. It's actually hastily cobbling together a plausible-sounding rationalization for a decision that was actually taken somewhere else,

which is what a press office mostly does. And so as Sutherland sees it, if you can learn what really makes people happy, or generous, or kind, or honest, whatnot, then you can help them. As an example, he cites a plan to build a new high-speed rail line that would shave about 30 minutes off an 80-minute trip between London and Birmingham. It would cost more than $30 billion, which Sutherland thinks would be very poorly spent. He has argued quite vociferously and publicly that the government could make travelers just as happy for much less money by simply installing top-tier Wi-Fi on the current trains.

My argument is that engineers were designing trains around a mathematical model where numerical factors such as speed, journey duration, use of rolling stock were the only things they were allowed to consider. Whereas a psychologist would say, no, no, no, the real solution here is actually not to make the train any faster. You can make it slower if you like, but simply to reframe the time you spend on the train so that it's pleasant rather than annoying. This pleasure principle, Sutherland believes, should be a foremost consideration in just about every public policy decision we make.

Choices should now properly be designed in line with system one thinking, with our evolved psychology, rather than designing a world for an imaginary species of homo economicus which doesn't exist and actually wouldn't survive if it did what's interesting though is that system two dominates policy making to such an extent it's the noisy part of the brain it's the talkative part that actually we're in

danger of actually designing a world for a very very small part of the human brain. Faster trains that are uncomfortable, that kind of thing. And yet, he says, solutions that take advantage of the way our brains really operate are often treated with suspicion. If you look at physical design, nobody thinks it weird that you steer a car with a steering wheel. Now, all cars have steering wheels from Formula One to other driverless cars, you know, to the smallest little town car. And the reason it has a steering wheel is it works well with your hands. Now, your hands didn't evolve to steer cars.

But a good designer will design an interface to work with the physical equipment we've got. No one actually says that steering wheel is absolutely scandalous. It's exploiting my hands for a purpose which was never intended. Now, the strange thing is when it comes to designing experiences or designing choices, we aren't designing for the evolved brain as we design doorknobs or kettles to work with our evolved physique. Instead, we design them for this weird kind of imaginary figure. Do you mind, Rory, if I ask you a personal question? No, not at all. No, go ask away.

On Twitter, you describe yourself as, quote, fat bloke at Ogilvy. So I'm curious, considering what you know about what people really want, about how people make decisions, etc, etc. Let me ask you this. Why are you fat? Knowing what you know? It's very, very fair question to ask. And I asked it of myself, of course. And the pathetic defense, which isn't really true, is that I'm a kind of method copywriter, that in order to actually tackle the growing obesity problem, I have to actually experience obesity myself. Thanks to Rory Sutherland, Michael Hausman, all the Call Center folks, and thanks especially to you for listening. I'm curious to know what you thought of this episode and the ideas in it. Did they intrigue you, disturb you? Did you find yourself shouting back in anger? Let us know on Twitter, on Facebook, at Freakonomics.com. And one more thing, I wouldn't want you to miss out

on any Freakonomics Radio episodes. Many people like you subscribe to this podcast at iTunes or elsewhere. We are so confident that you'll like it it that we're willing to give it away for free. Happy listening. And on the next Freakonomics Radio, we're always hearing about new ideas, new scientific breakthroughs. But maybe we should be putting more energy into killing off old ideas. How do we get rid of ideas that are in the way that are blocking progress? How do you move on? There's no mechanism to do this. More important, which ideas need to go? This is an idea that makes no physiological sense.

And the idea that I believe is ready to retire is the universe. I think an idea that is really bad, that's detrimental to society, is the idea that life is sacred. This idea must die. That's next time on Freakonomics Radio. Freakonomics Radio is produced by WNYC and Dubner Productions. Our staff includes Greg Rosalski, Caroline English, Susie Lechtenberg,

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