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TEDxOxford – Rory Sutherland – Charitable Yield Management

TEDxOxford – Rory Sutherland – Charitable Yield Management


Translator: Ellen Maloney
Reviewer: Denise RQ Certainly a premiere of the idea by me, it’s perfectly possible that someone
will come up afterwards and say that this is
absolutely nothing new, and someone’s been doing it for years, but I think it’s worth sharing. A very simple approach to life; if people ask me for advice
on their future career, or what they should do,
or how they should specialize, I always say, “Try and be good
at more than one thing.” Being brutal about it it’s easier,
probably to win in a triathlon than it is to win the 100 meters. But more than that, if you decide
to be good at one thing, there’s almost certainly
someone else in the world who’s actually better at it than you. If you combine two obscure,
and often unrelated things, actually being really good
at those two things is quite a bit easier. That’s my little bit of career advice
which is generalized, specifically. (Laughter) What I find absolutely fascinating – I’m actually a Classicist by background, which is marvelous
because being entirely useless, it gives you a complete license
to get interested in something else – but the three things that interest me
specifically, is I suppose, the sweet spot that comes in the overlap of three, ostensibly very different, but actually highly interrelated things. I think the combination of technology
and psychology is fascinating. There’s a brilliant phrase which is that if you are involved
in interface design, whether you like it or not,
you are engaged in social engineering, Because how you design an interface has
profound effects on the way people behave, even if they aren’t aware of it. That’s one fascinating thing
I suppose which is partly involved in “nudge theory,” for example. Psychology and economics: the overlap between those two
really gave us behavioral economics; the significant moment being in 2002, when Daniel Kahneman won
he Nobel Prize for Economics, without actually being
an economist; he’s a psychologist. His point was to show
that in many, many significant ways, actual human behavior
differs from that predicted by hyper-rationalist,
neoclassical economic models; and hugely important. Then, technology
and economics is fascinating; how does technology disrupt
established businesses and so forth? The sweet spot is
if you never come to anything where two or more of these three things
overlap, I’m already interested. I’m a big fan of Ludwig Von Mises as well,
the Austrian School economist. It’s a school of economics
generally despised by everybody who actually
has any economic training, but which seems to be right
about quite a lot – to be honest -on this. What it seems to be right about,
and Von Mises was insistent on this – as an advertising man,
I particularly like it – is the point that actually,
all value is subjective, and is judged, and in many ways, created,
in the mind of the consumer. It’s tempting to look
at advertising or brand value as being something
entirely bogus and dubious, which is a false shimmer
of an outer carapace, or a veneer that’s placed
on the outside of something which fundamentally isn’t very good, to give it an illusion of attractiveness. Of course, it can work that way. But Von Mises makes a beautiful point with a very, very good analogy
in his book on “Human action.” He was important because being
an economist, in Vienna, at the time of Freud, he accepted one fundamental thing
which most economists, I think, don’t, which is that actually,
economics has to be, to have any validity,
a subset of psychology. Actually, if you don’t subordinate your economic thinking
to psychological thinking, what you’re probably doing is making
models more important than people, which isn’t generally a great way
to look at the world. But his beautiful point about subjective
value and the primacy of psychology, is he makes the point
that if you run a restaurant, you cannot make a distinction between the value you create
in the kitchen by cooking the food
and preparing the food, and the value you create
by sweeping the floor. There were some early economists
called the French physiocracts who believed that the only authentic
creation of value happened in agriculture; if you were a shepherd or a quarry-man,
or you extracted value from the land, that was genuine economic value. If you bought wool from a shepherd
and turned it into an attractive hat, you were somehow exploiting the shepherd. Pretty quickly, people realized
this was completely bonkers and insane. But Von Mises made the point
that actually, in many ways, most modern economists
make the same mistake with relation to advertising
and marketing. They think that genuine value
is cooking the food; bogus value is sweeping the floor. Whereas in fact,
your enjoyment of the food is actually inseparably connected both
with what the food is and how it’s cooked, and the atmosphere and environment,
and mental frame of mind in which you consume it. Attempts to separate the two,
he argues, are completely wrong, and are attempts to deny
the importance of subjective evaluation in what economists might call “value.” So that’s interesting. One of the important things
we need to understand – if indeed it’s true that you accept that psychology
deserves primacy over the economics – is that our very perception of things,
of which value is only one of many, is almost entirely relativistic. We don’t have an absolute inner measure called the “hedon,”
which is a unit of pleasure, which we can compare between sex
and coffee drinking, for example. We don’t have a mental
accounting system which says, “In order to get one “hedon” of pleasure,
I’m prepared to pay 3.95 dollars.” (Laughter) We don’t have that measure. What the single unit of pleasure
would be, if we were to invent it, is an interesting one,
and it might be smutty. But nonetheless, we don’t have one. There may be other creatures
which do; we don’t. If our perception of everything, – not only value, not only pleasure – is extraordinarily relativistic; have a look at the two squares
labeled “A” and “B”. You’ll generally agree, looking at them that A” is one of the dark squares,
“B” is one of the lighter ones. No doubt about that. Until I actually change the context
and give you about five to ten seconds, at which point, you realize that “A”
and “B” are actually the same color. It’s only their context which changed our perception
of which was dark and which was light. This isn’t one of those
strange optical illusions. where once you’ve seen it,
you see it forever. Like one of those magic eye things. If I go back to the original,
it’s now impossible for you to see that those two things
are exactly the same color. And there are perfectly good
Darwinian reasons for this. We want to recognize in a tiger what makes it different
from its background. We don’t want to have
an absolute measure of a tiger based on specific lighting conditions. If you think about it. We want a relative form of perception. It would be no good
if we had, “Tiger; dangerous”, then three hours later, see that same
tiger, under slightly different lighting, and go, “What on earth is that?” (Laughter) But nonetheless, nearly all, are forms
of perception in terms of perfect pitch, as a tiny exception, but nearly all are perception
in terms of pain, volume, temperature, and virtually everything else;
we actually perceive, relatively. And we judge things by comparing
them with something else. For this reason, one of the most
important marketing insights is that actually, Coke needs Pepsi. But to be on your own in a category
of one, is a really dangerous place to be. Because people don’t know
what to make of you. I’ve made this argument about price; that people can only decide
whether something is good value or not if you have something to compare it to. I’ve said to Spotify repeatedly,
and Nokia made the same mistake; they offered a brilliant
and spectacularly good product called “comes with music”,
in the case of Nokia. Spotify gives you infinite music
downloads for £9.99 a month. I said to them, “It’s only
little old me, and I may be wrong, – this needs testing – I think people would think your product
was better value for money if you artificially limited it
to 200 tracks a month. Maybe 500, maybe 150,
maybe 40; but not infinite.” “Why on earth would that be? How could anything
be better than infinite?” I said, “The trouble with infinite music is nobody knows
what infinite music is worth. It’s such an ingraspable,
incomparable product, that it’s almost impossible
to put a price on it.” It’s like me going to you and saying,
“Would you like to buy my unicorn?” You have a bit of problem coming up
with what might be a reasonable price for something
you’ve never seen before. My argument is, say 200 tracks
a month, and people go, “200 tracks, that’s about 20 CDs; normally in the old world,
that would have cost 100-something pounds; therefore, 9.99 a month
makes sense, that’s good value.” Infinite, weirdly, just confuses
the hell out of us. I think the importance of understanding
the behavioral economics and the psychology
of human decision making is we can spontaneously and inexpensively
occasionally come up with ideas to the betterment of humanity
that don’t cost very much to implement. My view, when you come up
with one of those, – and I’m in the home, of course,
a place where three scientists came up with a way
of manufacturing penicillin, and then promptly gave it away. This is Chain, Heatley, and Florey. The correct thing to do if you come up
with those ideas is to give them away; that any attempt to profit
from them is silly. This is my idea to get people
to complete their course of antibiotics; very simply, don’t give them 24 white pills
and say, “Take all these pills,” give them 20 white pills
and four blue ones. Say, “When you finish
the white ones, take the blue ones.” Doesn’t matter what’s different
about the blue or the white ones; simply telling people to do that will massively increase the chances
that they will finish the course, and then reduce effectively the chance of resistant strains
of bacteria developing, because huge numbers of people,
once they feel a bit better, stop their course of antibiotics. Which is an extraordinarily
dangerous thing to happen. Little ideas like this, just understanding
how humans really make decisions, – not how they are supposed
to make decisions – can bring great advantages to humanity. One of the most interesting ones
– I’ll just refer to this very quickly – is our perception of anything,
and our enjoyment of any experience may be massively and disproportionately
affected by how it begins, or how it ends, rather than what happens in the middle. That’s important to anybody
running a service business, but it’s also important – I think it’s a presentation
by Daniel Kahneman on the difference
between experience and memory. The difference between an experience
and what we remember of it, which was, at one point, of enormous
importance in colonoscopy operations. When they are very, very painful, they were so painful, people often
refused to have a second procedure. What they discovered is, provided
the last minute or two wasn’t too bad, their memory of the experience changed, and their readiness to have
the procedure again was different. Doctors were told, “Leave the camera in for the last minute
or so and don’t move it about very much. Then remove it.” I think they solved the problem
with smaller cameras, which is ultimately a better solution. (Laughter) Nonetheless, that is a hugely
important insight. I’m massively an opponent
of high-speed rail, because I’d argue that duration
is one of the least important things in contributing to human experience. I think it’s perfectly
possible that actually, reducing the journey time between Paris
and London has made the experience worse. Quite a few people complained because they preferred the journey
when you had a good three-hour sit-down. It’s an engineers fallacy that making things faster
makes them necessarily better. Other things that fascinate me
is how people relate to choice. “Still or sparkling?”
is one of those choices where it’s not acceptable to come
to someone saying, “You’ll have water,” because that’s all you’ll have. If you give them a small amount
of choice, that seems to be acceptable. Still or sparkling;
red or white; tea or coffee. Those things are minuscule choices
in the scheme of things. What “red or white” is saying is, “Don’t get any fancy ideas
about whiskey or cocktails, mate.” You can have a drink
that doesn’t taste very nice, but you do get to choose
what color it is. (Laughter) But that is important because there’s
an important component there to our appreciation, or our dislike,
of the National Health Service. Which is not that we necessarily want
to design our own healthcare from scratch, but that any organization
which gives us no choice at all is failing to click with human psychology. If the BBC license fee just came with, “OK, 10% you get to choose;
sport or Radio Four,” we’d all feel a bit better
about paying it. But things that give us at least
what you might call “symbolic” choice will be better than things
that give us no choice at all. We don’t actually want complete choice; I don’t want to decide
the entire budget for the BBC, but some sort of indicative,
say, would be nice. We seem to like trade-offs. Actually, we prefer in a way,
“Do this, and get this for less.” “Pick-Your-Own” strawberries
being a perfect point. That means something completely different
from the phrase “cheap strawberries.” If you offer cheap strawberries, the natural human instinct is to go,
“They’re probably a bit rubbish.” If you make a very clear trade-off, “Yes, these strawberries
will cost you less, but that’s because
you contribute the labor,” people seem to prefer that. Understanding
these little psychological things and the effect they have
on what we value and enjoy is simply worth any business doing. because the cost of doing it’s trivial, and the value can be extraordinary. I mentioned high-speed rail before; in my search for all this, and my belief in the importance
and primacy of psychology, I’ve come across one idea which I thought the only thing you can reasonably do with
is to give it away. I could spend the rest of my life
trying to make this happen and fail; alternatively, I can give it away
in a TED talk, and it will happen in Bangkok
in three years’ time. This is an interesting guy; Robert Crandall was the Chief Executive
of American Airlines. he was the inventor of the airline
frequent flier program, and also the man who coined
the phrase “yield management.” “Yield management”
being that pricing system some of you may think of
as EasyJet pricing; where the price of a seat varies massively according to both the level of demand
and how early you book. The purpose of yield management pricing
is that actually, you might argue, though the economics behind it is complex,
is it’s environmentally beneficial. Because it means that when planes fly,
at least they don’t fly empty. It’s arguably socially beneficial
because it means that actually, people with far, far less money
than once could fly, now can. This is a far more democratic system. You’ve got to be a bit flexible, but if you are retired or a student,
and you can fly on Wednesday lunchtime, you can fly for a quarter of the price
someone would pay on Monday morning. But it also benefits the business, because actually maximizes
the revenue it gets per seat, and therefore, makes
the business more profitable. It’s one of not many examples
in the business world where actually arguably,
everybody wins from this. It’s now being extended,
as you’ll see, to train travel, where huge variability
in the price of train tickets is arguably making
much better use of trains, rather than using them
in the middle of the day, just to transport air
across the countryside, which seem to be their principle role. It’s also helping to spread out
passenger numbers, which reduces overcrowding. It’s a very, very important idea. Because genuinely, everybody wins. This is another form of yield
management which doesn’t happen; I’ve never had this happen
when I book a hotel room. You are about to arrive today, hotel notices, “We’ve got six suites free
and no chance of selling them full price.” why not just text me and ask me if I’d like to upgrade
for an extra 50 pounds to a suite? It’s a really intelligent thing;
the hotel makes more money selling a resource that after all,
it otherwise would have left unsold, I get a better room for much less
than I’d have to pay, they actually benefit by capturing
more of my consumer surplus. Because they get the kind of money
I’d be prepared to pay for the suite, whereas in reality, there’s no chance
I’d ever pay full price anyway. Those of you who know hotels
know that full price in hotels is bonkers. You need three things for yield
management, at least these three. There’s a fixed amount
of resources available for sale, resources sold are perishable,
or there’s some limit to resale – actually, I don’t need to put
a perfect definition – but the third thing is
different customers are willing to pay a different price for using
the same amount of resources. This took about 15 to 20 years
in the airline industry, For ages, if you sat next
to someone on a plane and found out they’d paid less
for their ticket than you had, you blamed the airline. Now, 20 years on, you blame yourself, “I should have booked earlier.” But it has taken 20 years
to gain acceptance. The basic principle of airline flight
was, until 1950 or 1960, that London to Budapest on British Airways should be the same every day of the week, pretty much all the time, It took a long, long time to get people
to accept this variability. There are still huge numbers
of areas in human life where actually, it’s still not accepted. This idea came to me
when I was stuck in traffic having to leave Heathrow with my family, with four non-refundable flights, and was about to miss a flight and piss 2,000 pounds worth of air tickets
to South Africa up the wall because I was stuck in traffic. It occurred to me: any sensible country
would allow you to pay 40 pounds to drive at 20 miles an hour
on the hard shoulder. So that those people
who had the most desperate need of getting to an airport,
or a funeral, or other thing could actually make use of that resource. Which is a resource which is
only valuable if it’s rationed, if you think about it. If you make the hard shoulder
available to everyone, you just get a five-lane traffic jam
not a four-lane traffic jam. But I mention this to various people
and most people basically said, “Yuck.” They said, “Yeah, all I’ll see
is a load of rich bastards, fleets of jags, whizzing past me
on the left hand side, and I’ll feel resentment and distaste.” I said, “Fair point. OK.” (Laughter) This is one of those problems. I’ve argued it would be good
if when you are at the airport, you need a faster security lane
when you go through the X-ray machine. For those people whose flight
is leaving in 20 minutes, – you’ve seen those people;
on the wrong side of the x-ray machine, their gate closes in five minutes, there’s a 20-minute queue
at the X-ray machine, and they are in a state
of complete befuddlement and pain – wouldn’t it be nicer if you could pay
to go through a high-speed lane? Most people also said, “Yuck.” Then they also said, “Double yuck.” Because I’d suspect that the airport
was deliberately creating queues at conventional security, just so they could maximize the profit
they could make by charging an extra price to go through
the high-speed security lane. So that was a “double-yuck.” Then there are bizarre things,
like the price of concert tickets, which economists cannot understand. Genuinely, economists don’t understand why bands and promoters
don’t use yield management pricing to sell concert tickets, rather than allowing touts to profit
from yield management themselves. There’s a huge debate about this. Most economists can make
no sense of it at all. One of the reasons is that bands
don’t like to be seen to gouge their most loyal fans, and so weirdly, what they do is they off-load the embarrassment of yield
management and high prices onto a tout rather than being seen
to exploit their fans themselves. This is one of the explanations. There is another case where yield
management could hugely improve the allocation of concert
tickets but doesn’t. Instead we have touts getting the profit,
rather than the band or the promoter. Parking: another thing that got people
saying “yuck” is I said, “Every tenth car parking space should be
four times the price of all the others, so that if you are really desperate
to park, you can always find a space.” I saw a poor guy at my local station
who was almost in tears because he had a job interview,
and he could not park his car. I said, “Actually, every car park
should have ten spaces which cost four times as much
as the conventional space.” The purpose being that a car park
that fills up is actually useless. You need to guarantee using pricing
some degree of constant availability. So some bugger who turns up
for a job interview doesn’t miss his interview
and lose out on a job, simply because there was
no parking available; he should be able to pay
20 quid for a space. Just as disabled people
get disabled spaces, you should have
“desperate” spaces, as well. (Laughter) And everybody else said, “Yuck.” They said, “This idea’s horrible; it’s the kind of idea economists
come up with, and it’s sick, sick, sick. We don’t want to live in a society
where every damn thing – the quality of it
and and the availability of it – is simply determined
by the wealth of the purchaser. We’d actually prefer to have
a degree of luck involved. Coca-Cola tried to use yield management
on a vending machine; a general disgust and dislike;
and bad reaction from the public, caused them to cease development on this. This would price Coke according
to how much was available in the machine, so that prices would go up
according to scarcity. Finally, there’s no way, unfortunately, you can ban or arrest retired people
from shopping on a Saturday. I would like it if there were; it drives me practically insane that people who have had
Monday to Friday to go shopping decide to come out on Saturday. (Laughter) But there’s no way
you can discourage them. Cattle prods and things on the entrance
would generally be frowned upon. (Laughter) Then the idea came to me;
what actually is partly wrong here is we have a brilliant economic idea
on yield management, but actually it doesn’t work because of our own
psychological revulsion. So here’s my new idea:
charitable yield management. If you want to go through
that high-speed security lane, it costs an extra 10 pounds, but the 10 pounds goes to charity. Every tenth parking space
may cost five pounds more per hour, – it’s for the desperate –
but the five pounds go to charity. In every case, we’ll actually benefit. A car park is more attractive
if you know that actually, if the worst comes to the worst,
I can still park there, it just requires an act
of generosity on my part. The question is: can you destigmatize
some of these more cynical, “Thirty pounds to drive
on the hard shoulder,” but it goes to charity. Will you hate the person
in the left-hand lane a bit less if you know that Cancer Research UK
get 30 pounds to help him get to the airport? I don’t know the answer to this question for the simple reason
that only you can answer it. but it does seem to me that if you want to shop
at the busiest time of the week, bear in mind, it will benefit shops
enormously if customers visit more evenly; you reach a point
where shops are so crowded that no one can buy anything there, this is true of electronic
shops in particular. Do you attach a one-percent
charity premium on Saturdays to encourage more price sensitive,
or retired people to go Monday to Friday? Airlines: who gets the seat next to them? Well, you could charge for that. An empty seat next to you in economy
when the plane is two-thirds full; be an airline and make
a bit of profit out of that. Or what about, it’s 30 pounds
for Cancer Research, and you get first dibs
on the empty seat being next to you. Had a friend who went
on a plane and was told, “Very good news, the seat
next to you is going to be empty. The bad news is it was going to be
Jerry Hall sitting in it.” This is incidental; a brilliant idea
for economy airline seating, where you stagger the seats so people can lean and fall asleep, without sexually harassing
the person next to them. (Laughter) I think it’s clever. The question is:
what might we do with health? I always said, very cynically,
that my grandfather was a doctor, and 50% of his business
was visiting people. Now, no doctor will visit you
at all; it’s impossible. Which means GP visits
are about 85% female. And men never go to the doctor,
either because they are busy or because they hate going,
or because they are wimps. Is it possible that you say,
“OK, there is a charity donation, if you want an appointment between six pm and eight pm,
at your doctor’s surgery, you can do it, but you have to pay a donation,
not even specified, to the charity in order to get it.” Say what you like about Harold Shipman;
at least he did house calls. (Laughter) (Gasps) The point there is: are there ways in which you can actually take resources allocate them more efficiently, without the “yuck” feeling
that conventional yield management brings, and in the process, I would argue, take money that consumers
are willing to pay, and direct it by the million
towards charitable causes? Only you know the answer. Thanks very much indeed. (Applause)

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