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So the power of reframing things cannot be overstated. What we have is exactly the same thing, the same activity, but one of them makes you feel great and the other one, with just a small change of posture, makes you feel terrible. And I think one of the problems with classical economics is, it’s absolutely preoccupied with reality. And reality isn’t a particularly good guide to human happiness. Why, for example, are pensioners much happier than the young unemployed? Both of them, after all, are in exactly the same stage of life. You both have too much time on your hands and not much money. But pensioners are reportedly very, very happy, whereas the unemployed are extraordinarily unhappy and depressed. The reason, I think, is that the pensioners believe they’ve chosen to be pensioners, whereas the young unemployed feel it’s been thrust upon them.

There’s an experiment I think Daniel Pink refers to, where you put two dogs in a box and the box has an electric floor. Every now and then, an electric shock is applied to the floor, which pains the dogs. The only difference is one of the dogs has a small button in its half of the box. And when it nuzzles the button, the electric shock stops. The other dog doesn’t have the button. It’s exposed to exactly the same level of pain as the dog in the first box, but it has no control over the circumstances. Generally, the first dog can be relatively content. The second dog lapses into complete depression. The circumstances of our lives may actually matter less to our happiness than the sense of control we feel over our lives.

Nick Chater, who’s the Professor of Decision Sciences in London, believes we should spend far less time looking into humanity’s hidden depths, and spend much more time exploring the hidden shallows.

Why were we not given the chance to solve that problem psychologically? I think it’s because there’s an imbalance, an asymmetry in the way we treat creative, emotionally driven psychological ideas versus the way we treat rational, numerical, spreadsheet-driven ideas. If you’re a creative person, I think, quite rightly, you have to share all your ideas for approval with people much more rational than you. You have to go in and have a cost-benefit analysis, a feasibility study, an ROI study and so forth. And I think that’s probably right. But this does not apply the other way around. People who have an existing framework — an economic framework, an engineering framework — feel that, actually, logic is its own answer. What they don’t say is, “Well, the numbers all seem to add up, but before I present this idea, I’ll show it to some really crazy people to see if they can come up with something better.” And so we — artificially, I think — prioritize what I’d call mechanistic ideas over psychological ideas.

An example of a great psychological idea: the single best improvement in passenger satisfaction on the London Underground, per pound spent, came when they didn’t add any extra trains, nor change the frequency of the trains; they put dot matrix display boards on the platforms — because the nature of a wait is not just dependent on its numerical quality, its duration, but on the level of uncertainty you experience during that wait. Waiting seven minutes for a train with a countdown clock is less frustrating and irritating than waiting four minutes, knuckle biting, going, “When’s this train going to damn well arrive?”

Here’s a beautiful example of a psychological solution deployed in Korea. Red traffic lights have a countdown delay. It’s proven to reduce the accident rate in experiments. Why? Because road rage, impatience and general irritation are massively reduced when you can actually see the time you have to wait. In China, not really understanding the principle behind this, they applied the same principle to green traffic lights —

Really successful businesses — Google is a great, great technological success, but it’s also based on a very good psychological insight: people believe something that only does one thing is better at that thing than something that does that thing and something else. It’s an innate thing called “goal dilution.” Ayelet Fishbach has written a paper about this. Everybody else at the time of Google, more or less, was trying to be a portal. Yes, there’s a search function, but you also have weather, sports scores, bits of news. Google understood that if you’re just a search engine, people assume you’re a very, very good search engine.

One of the great mistakes, I think, of economics is it fails to understand that what something is — whether it’s retirement, unemployment, cost — is a function, not only of its amount, but also its meaning.

Von Mises, interestingly, believes economics is just a subset of psychology. I think he just refers to economics as “the study of human praxeology under conditions of scarcity.” But Von Mises, among many other things, I think uses an analogy which is probably the best justification and explanation for the value of marketing, the value of perceived value and the fact that we should treat it as being absolutely equivalent to any other kind of value.

We tend to, all of us, even those of us who work in marketing, think of value in two ways: the real value, which is when you make something in a factory or provide a service, and then there’s a dubious value, which you create by changing the way people look at things. Von Mises completely rejected this distinction. And he used this following analogy: he referred to strange economists called the French physiocrats, who believed that the only true value was what you extracted from the land. So if you’re a shepherd or a quarryman or a farmer, you created true value. If however, you bought some wool from the shepherd and charged a premium for converting it into a hat, you weren’t actually creating value, you were exploiting the shepherd.

Now, Von Mises said that modern economists make exactly the same mistake with regard to advertising and marketing. He says if you run a restaurant, there is no healthy distinction to be made between the value you create by cooking the food and the value you create by sweeping the floor. One of them creates, perhaps, the primary product — the thing we think we’re paying for — the other one creates a context within which we can enjoy and appreciate that product. And the idea that one of them should have priority over the other is fundamentally wrong.

Excerpted from https://www.ted.com/talks/rory_sutherland_perspective_is_everything/transcript?language=en