Uncertainty premium

Rory Sutherland’s latest opinion looks at the illusion of choice.

Rory Pic

recently met Joel and Marikay Raphaelson in Chicago. Both were copywriters working for David Ogilvy in the 1960s, and he was co-author, with Kenneth Roman, of Writing that Works – still the best guide to good business English, and still in print. Together the couple helped found the Ogilvy & Mather office in Marikay’s native Chicago. Joel, a New Yorker, is the son of Samson Raphaelson, once a copywriter himself, but later the screenwriter for films including The Jazz Singer, Heaven Can Wait and Alfred Hitchcock’s Suspicion

We ate at Gibson’s Steakhouse at the DoubleTree Hotel near O’Hare, as I had only landed at 6.45, and it was characteristic of the couple to choose what must be the only great restaurant at an airport hotel. 

During our conversation, we discussed Joel’s 50-year-old theory about brand preference, which – most simply expressed – is: “People do not choose Brand A over Brand B because they think Brand A is better, but because they are more certain that it is good.” 

It was far ahead of its time as an observation on decision-making, and not too distinct from work done by Nobel Prize-winning economists Herbert Simon and Daniel Kahneman. What is really important about this insight is this – we do not think the way we think we think

When making a decision, we assume we must be weighting and scoring various attributes. But we think this only because it is the kind of calculation that the conscious brain understands and can describe. Our real behaviour shows relatively few signs of us operating in this way. Anyone who has been given one of those weighted scorecards by procurement – designed to lend a veneer of rationality to the process of choosing an agency – will be aware of this. You do not use your scores to inform your decision; instead, you choose the agency you want and then back-fill the numbers to arrive at the desired result. 

The fact that there are different ways of approaching a choice – only some of which lend themselves to verbal expression – seems rather important for market research. Someone choosing Brand A over Brand B would say they thought Brand A is better, even if they meant something quite different. They may unconsciously decide they prefer Brand A because the odds of it being disastrously bad are only 1%, whereas the risk with Brand B might be 2.8%. But unless you are conducting research exclusively among a group of game theorists – who might describe this process as ‘Maximin’, ‘Minimax’ or ‘Minmax’ – it’s unlikely anyone will have the words for what they are doing. And without the words, we lose the conception. 

It is like evolutionary biology, which has found that conventional language makes it very unwieldy to describe processes. So it resorts to phrases such as ‘teleologically speaking’ – ‘Teleologically speaking, we have opposable thumbs to enable us to grasp branches.’ 

I think Joel’s distinction matters a great deal, and it is borne out in many fields of decision science – not least in prospect theory. We will pay a disproportionately high premium for the elimination of a small degree of uncertainty. On eBay, people with a rating of 100% can charge more for identical goods than people with a rating of 98%. In an experiment with sellers of collectible postcards, people with a past-seller history received, on average, 14% more for everything they sold, compared with newcomers. In an economically rational world, someone who is 95% reliable but 6% cheaper than someone who delivers 100% of the time does, on balance, represent a better option. 

This matters because it explains the brand premium that consumers pay in more plausible terms. Is a brand name a guarantee that a product is the best thing you can buy? Rarely. On the other hand, is it a reliable indicator that the product is not terrible? Yep. That makes sense.  

Someone with a great deal of upfront reputational investment in their name has far more to lose from selling a dud product than someone you have never heard of. So, as a guarantee of non-crapness, a brand works. McDonald’s isn’t the most popular restaurant in the world because it’s really good – it’s just absolutely superb at not being terrible. Joel was right all along. 

Rory Sutherland is vice-chairman, Ogilvy & Mather UK 

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