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Book review: Alchemy, by Rory Sutherland

Rory Sutherland's new book Alchemy: The Surprising Power of Ideas that Don't Make Sense continues his 10-year campaign against the traditional, logical pursuit of business advantage, through a scientific lens that includes several cognitive economics themes. As ever, a curated series of amusing anecdotes about people or companies who took an unusual angle on marketing or product invention, fuel a philosophical wander.

That philosophy could be summarised as: if it makes sense, someone's already tried it. So try something that doesn't.

The ideas that underpin the book are broadly based on behavioural economics and cognitive science, with bits of evolutionary theory, statistics and old-fashioned advertising intuition thrown in. At first it doesn't look like a behavioural science book as such: the theoretical backbone takes a while to show. Rory's style is discursive: an after-dinner-talk of anecdotes, dismantling of conventional wisdom, ever-so-slightly outrageou…

From Behavioral to Cognitive Pricing

Below is an article by Leigh published in INsights magazine. The magazine published by the Neuromarketing Science & Business Association. See the article in its full glory here or just the text below.

Behavioral pricing has been used for many years but is essentially based on changing customers' behavior without creating new value. Cognitive pricing is a new paradigm in which the customer's positive mental experience can be given a monetary value.

The ability of companies to earn premium prices for their products and services is under threat. The rise of the Internet in general, and price comparison websites in particular, makes it easier for consumers to compare products, harder for brands to stand out from the competition, and risks turning many categories of product into commodities. And being commoditized usually means lower profits and less innovation. The emergence of behavioral economics gave marketers a new set of tools to maintain an edge: the techniques of beha…

What is cognitive economics?

What's happening inside your head right now? What thoughts, feelings, ideas are spinning around in there? Are they important to you? If you were not able to think those thoughts, would you care? How much does your internal mental experience matter to you?

To an economist: not at all. Traditional economics explicitly rules out any consideration of how people think, and what is going on in their minds or hearts. Economists only trust what they can observe: specifically, the things you buy and sell. This can include selling your labour (for a wage) and buying and selling services, but in practice it mostly means the physical goods that we buy and consume.

Yet most of us know there is more to life than buying and selling. The activities inside our heads are a major – maybe the major – contributor to our quality of life. Are you happy? Do you have purpose in your life and work? Do you feel appreciated? Are you looking forward to the future or anxious about it?

Our state of mind is of …

Why endings matter [spoiler-free Game of Thrones references]

It probably has not escaped your notice that the Game of Thrones TV series finished this week. If you use social media at all, I suspect you also saw some anguished squawks about how awful the ending was. How the incompetent writers screwed it all up. Maybe you even signed the petition, along with 1.5 million others, to have the last series remade with a different conclusion.

Personally I thought it wasn't a bad outcome, but I seem to be in the minority. Either way, why does this have such significance?

I read a counterargument a few days ago: You've had 70 hours of enjoyment already – it's in the bank. You enjoyed episode 1, 2, 3, …and you can't go back and "unenjoy" them now. One bad hour at the end can't rewind the clock and eliminate the last 8 years of pleasure?

Yet this feels wrong. The ending can ruin the beginning. Why should this be?

A model from cognitive economics may have the answer. The theory of "cognitive goods" says that watchin…

What makes a useful theory?

If conventional economic theory is so wrong (as we are repeatedly told) why does it survive so well?

This post by UnlearningEcon prompted me to think again about why economics, despite widely accepted empirical data from behavioural econ, is broadly taught in the same way as before, and why its basic assumptions still underpin much modern research.

Some have a sociological explanation for this. In this view, economists are invested in the old approaches, have spent decades honing specific mathematical skills, and effectively collude to make sure new ideas do not displace the old. The top journals only accept papers that cite the same old work, perpetuating the models. Science, as they say, advances one funeral at a time. No doubt there's something to this, but I don't think economists are quite so closed minded.

There is a clue in the above article:
"...Euclidean geometry, despite being incorrect, is more effective than non-Euclidean geometry in some engineering and archit…

Reporting back: the Cognitive Economics session at the AEA conference

[Tara posting today]

We had a great response to our Cognitive Economics session at the American Economic Association’s conference a few weeks ago.

For those who weren’t there, here’s a quick summary of the four papers presented, and the discussion at the end.

Dan Benjamin, Kristen Cooper, Ori Heffetz, and Miles Kimball presented What Do People Want?

The key question of this paper is: how can we measure happiness? And how do we account for the biases and differences across different groups and demographics?

The authors have built a model that examines the multiple dimensions of wellbeing by asking individuals a huge number of different questions. Any single question about your true wellbeing will be affected by a lot of “noise” - i.e. biases. They reduced this noise by asking individuals multiple questions including tradeoffs and interpersonal comparisons.

By statistical analysis, they found a small number of underlying factors that best predict the different dimensions of wellbeing.

The a…

Three systems: a mechanism for mental and social narrative

Alex Rosenberg says here that we are instinctively driven by stories, narrative and theory of mind - a very useful instinct on the small scale - although that instinct can be misleading on the larger scale of history and politics. His book on this claim is also out, though I haven't read it yet.

It seems uncontroversial that the idea of narrative has a powerful hold on how we think. There are thousands of discussions of storytelling as a way for us to bond with other people, and the biases that come from our desire to see a natural story behind events. I don't think many would disagree that stories are compelling to most people, and that we naturally like to see the world through narrative.

I've been exploring how the mind might implement this, and what the consequences might be.

Readers may recall the System 3 theory from earlier posts. This is how I think narratives fit into that, and how the process works in the mind:


People (and other animals) are very good at learning…