We caught up with Rory Sutherland, Vice Chairman at Ogilvy UK, to help us get inside the heads of buyers and business decisions.

Are buyers and their business decisions rational?

RS: I’d question the whole business definition of rational. You have to get beyond the idea of how people think they make decisions to the way they actually make decisions, instinctively.

Generally, we think we’re weighing up choices rationally when, in fact, we’re post-rationalising. The logical buyer wants the best thing possible at the lowest possible price. But evolution has equipped us with a mental mechanism which makes us look at the problem from a more complicated angle.

Every decision you make is a bet. And, like every bet, it has a probable outcome and a variance. In other words, if it’s not great, what are the chances that it will be total shit? The brain process is: How good is this on average? How consistent is the delivery?

Now, that difference is hard for us to grasp mentally unless we really exaggerate the distinction. For example, what if I came to work with a suitcase containing ten million pounds and I went to ten people and said, “Okay, I’m going to offer you a million quid to play Russian roulette once.”

I suppose there’s a tiny chance someone might take me up on it. But imagine I took the cash and went around saying, “Will anybody take the ten million quid in exchange for playing Russian roulette ten times in a row?” Clearly, no one in their right mind is going to take that bet.

One might look at the first scenario and, applying rational logic, think the bet is worth it – the gain somehow outweighs the risk. However, most won’t see it like that because evolution and instinct compete with economic logic in decision making. However, businesses still require us to go through this massive pretence that decisions are arrived at by following the theories of neoliberal economics.

What else is driving buyers’ decision-making?

RS: When I’m staying at a hotel five times, I’d rather stay at a hotel that’s pretty good all the time than stay at a hotel that’s even better four times, but total shit on the fifth occasion. I’m placing my bets again. It’s also one reason why relationships (contrary to what procurement thinks) aren’t a rational way of doing business without a sense of carried-over obligation between both parties.

A good business relationship has a degree of insurance built in. For example, every time I take a taxi, I ring five firms and ask for a quote. And depending on what quote I get, I use a mixture of five firms. Now, there would be two downsides to this. First, all five firms would think I was a bit of a wanker. Secondly, I wouldn’t be particularly valuable to any of them.

So, one day when it’s snowing and my wife breaks down and she’s stuck somewhere and I need the taxi firm to do me a favour, they’re not going to give a shit. I’m just the guy who rings up and occasionally asks for a quote. But if I’m the guy who gives them quite a few Heathrow and Gatwick jobs and generally always uses them, they see me as a source of future revenue which they can’t afford to lose. As a result, they’ll pull their finger out to try and look after me.

So, does loyalty benefit the buyer more than the seller?

RS: It’s simply an action in variance reduction. Placing the promise of my lifetime value is what, to some extent, keeps people honest.

This is a foundation of many of the longest-standing, deepest agency-client relationships. It’s the reason why clients start asking agencies to use their creativity to solve genuine business problems.

Sadly, the most valuable – the untapped – stuff that an ad agency would and could do are things clients have never asked for. And how much they will do that depends on the extent to which they feel they can invest in the relationship.

Does the buyer respond to the emotional or the rational?

RS: If you have a creative idea that is non-rational in the conventional sense you must submit it to a huge number of apparently rational people who will do feasibility studies, costing, cost-benefit analysis, all the rational stuff. So, every creative person is heavily policed by rationality.

However, the same rule does not apply the other way around. If you have a rational suggestion, no one will take it to a creative team and ask for a different stance, a cheaper or weirder way of doing this or solving that. But creativity is a harder sell because it always involves a degree of irrationality – which makes it hard to judge through the normal business lens.

So, is rational decision-making flawed?

RS: The Ellsberg Paradox highlights a flaw. It says that, given the choice, we nearly always take risks on known probabilities rather than place our bets where the odds are difficult or impossible to calculate. Even if the potential win is bigger.

For any buyer, what’s rational over time is not the same as what is rational in the short term. Being short-term cheap and short-term efficient can run counter to long-term effective. People think they’re being rational because they’re focusing on the bit of the business which is scientific and measurable. But, in fact, they might be doing something pretty ineffective with their money.

For instance, to boost sales of matinees, a London theatre started selling tickets 30% cheaper. On the face of it, a rational decision – lower price, more demand. However, if you factor in the average journey into town, logistics, food and so on, then the price of theatre tickets is neither here nor there. And the unintended message of discounting makes things seem less appealing… a bit desperate even. Matinee in an empty theatre, anyone? While pricing seems a simple lever, when it ignores buyer behaviour, it flops. No prizes for guessing box-office sales went down.

So, when you’re next considering if a business decision is all that rational, think about those hotels, taxis and tickets. Because sometimes we’re caught in the trap of not doing what’s actually best but doing what looks best at the time.

 

Read more from the Creative Conversations series here.