HOW STEVE KNOWS THE GUEST

Steve met Rory at Nudgestock and Rory was taken with Steve’s write-up of the event – see How Lateral Thinkers Can Make Billions – and agreed to come on the podcast. After the recording, they both had to go to the City, Rory to do a reading at the Spectator’s carol service (he writes a column of the magazine) and Steve was heading to listen to Lael Brainard in discussion with LSEG CEO David Schwimmer. They shared a cab and had another hour of conversation which Steve didn’t want to stop. What an amazing experience, to start a podcast and to get to spend 3 hours in the company of tone of the world’s most original thinkers. Thanks to every listener who has helped to behind the Balance Sheet become one of the global top 1% of podcasts.

Transcript

Hi, I’m Steve Clapham and welcome to the Behind the Balance Sheet podcast where we meet leading investors and commentators and educate ourselves about the world of investing and the world. Our mission is to remove some of the mystique around investing and improve our understanding of successful investors, strategies and tactics. Behind the Balance Sheet is an investment training consultancy. We help professional investors up their game in financial analysis and we have an online school.

Over a thousand students, professional and amateur, have taken our courses. Our flagship, Analyst Academy, helped one young analyst land a dream job as a partner of a major London edge fund and helped another, a successful entrepreneur, improve his investing confidence. He made a seven figure sum in year one. Check out the school on our website, BehindTheBalanceSheet.com, where you can also find the show notes to this podcast. And while you’re there, don’t forget to sign up for our popular and free weekly sub-stack, hit the sign up button on the top right of the home page. I’m delighted to announce my continued sponsorship with OfficeSense, the number one market intelligence and research platform trusted by financial professionals around the world. OfficeSense has been my long-term partner and I’ve seen firsthand how they’re revolutionizing investment research.

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Stephen Clapham, Behind the Balance Sheet (02:23.738)
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That’s alpha-sense.com forward slash BTBS for Behind the Balance Sheet.

Introduction

Rory Sutherland is the best-selling author of Alchemy, Vice Chair of Advertising Giant Ogilvy, a behavioural scientist, TED speaker, organiser of the Nudge Stock Festival and one of the most original thinkers around. In this wide-ranging conversation, he explains what accountants and analysts miss, why he believes family-owned businesses are long-term winners, two reasons to own Costco, his views on luxury goods,

Why he thinks electric cars are such a powerful agent of change. What short selling has in common with behavioral science and much, much more. Rory isn’t an investor, but he’s a massive proponent of the Austrian School of Economics. And there’s so much in here for investors to take away.

Stephen Clapham, Behind the Balance Sheet (04:14.01)
But don’t need to be interested in investing to enjoy this wonderful conversation. We carried on for another hour after we pressed pause and recording and I still didn’t want it to stop. Please enjoy my conversation with Rory Sutherland.

Episode (04:31.826)
Rory, listen, welcome to the show. I always say to people, I was really looking forward to this, but I really, really was looking forward to this because you’ve been a hero of mine for years. And I just want to normally ask people, did you always want to be an investor? And it’d be a bit stupid to ask you, did you always want to be Rory Sutherland? But how did you, started off in advertising. So how did you end up as a behavioral guru?

Well, I wouldn’t go that far. I often describe myself as a behavioral science impresario, which is my main function in life is simply to make this stuff.

more prominent because psychology, psychological factors, marketing, all of these things are actually more important than they’re genuinely given credit for. And we love kind of what you might call reductionist, instrumentalist descriptions of why something happened. And my argument is, in fact, the business world is much closer to biology than it is to mechanics.

that a single thing can serve multiple purposes. Very small events can have monumental consequences. And I mean, if we take an amusing kind of what you might call almost a of Darwinian approach to looking at business rather than Newtonian approach, you see fundamentally different things. And so I’d almost describe myself as a commercial naturalist.

in that I try to treat consumer capitalism as kind of the Galapagos Islands of human behavior. And it’s just a very, very strange, enormous social science experiment where n equals 6.5 billion. And the observation of behavior, I think, if done with an open mind, reveals an awful lot of color.

in addition to the black and white in which the Harvard Business Review would want to describe something. That’s really interesting. I mean, it’s a bit ironic, isn’t it? Because marketing isn’t very good at selling marketing. Terrible, terrible. Why is that? Well, OK, this is why I, my theory and bear in mind. You’re like their best salesman. Well, you see, I didn’t do this in, well, maybe I did it instinctively.

Stephen Clapham, Behind the Balance Sheet (06:55.88)
But I didn’t do it consciously or intentionally in that what happened by accident really was that I was giving various talks and then someone in Ogilvy, a woman called Nicole Yershon said, look, you’re giving all these talks for free. I want to fund an innovation lab within Ogilvy. If I charge for you to speak, and it was sort of two or 3000 pounds a pop at the time, the money can go into the innovation lab rather than us having to fund it internally. I said, well,

no real loss for me there, fair enough, I’m doing it for free now, why wouldn’t I do it and serve some other end? And then I ended up speaking, of course, to audiences way outside marketing. Now marketing has a fundamental problem in that marketers tend to talk to each other, they’re obsessed with each other. And a brilliant colleague of mine called Alastair Graham once said, he said, the language of marketing is a bit like the language of astrology, which is if you’re talking to a fellow believer, it sounds fine, but if you’re talking to anybody else, you sound like a nut job.

brand iconography, try saying that in a board meeting. And so I ended up speaking to these different audiences. I realized pretty quickly, there’s not much point in talking to an audience of compliance officers entirely about advertising. Because with the best will in the world, only nought or one of them are ever going to have to produce an advertisement or be involved in its creation in the rest of their working lives.

So what I did, think, instinctively, is I stopped talking about what we did and started talking about how we think. And I think that repackaging was really, really important because what we do, first of all, undersells the importance of marketing. It’s effectively defensive. You we spent this and we got that in return. Whereas what’s really valuable about marketing and marketers and the marketing mindset

is how we think. In other words, we look at a business from the point of view of value creation at the end of the journey, not the upstream part. And how we think, and then of course, what I discovered very rapidly is that not that many people were interested in what we did, but there was an enormous audience for how we thought. And then I wrote the book Alchemy and.

Stephen Clapham, Behind the Balance Sheet (09:17.373)
Again, it was a kind of anomalous discovery. I kind of expected the audience for the book to be some marketing people, some creative people, et cetera. And in the end, you I wrote the book and it aroused extraordinary interest from sort of venture capitalists and hedge fund managers. And incidentally, a market we don’t serve very well in advertising, small businesses or startups. We’ve never really cracked the business model of working with early stage ventures.

which is a tragedy because they’re probably the people who could benefit from us the most. Well, why is that? God. This is almost too depressing. The advertising industry historically was paid by media commission going back to the early 90s and before. And I think we still have a muscle memory, which is our job is to be an accompanying side dish to

large media expenditure. In other words, rather than saying, look, a marketing mindset is completely complementary to, sometimes antagonistic to, by the way, but it’s certainly at the very least complementary to what you might call a McKinsey mindset, or a Harvard Business School mindset. And I think it’s actually necessary

in any sensible business decision making, I don’t think you can do business strategy without a marketing component to that. What you’re doing if you’re doing strategy without considering the customer, the competitive environment, the future, uncertainty, what you’re doing is planning, it’s not strategy. And it disturbed me to see, so there are two parallel problems, I think.

One of which is historically we sold what we did rather than how we thought because we’d made an awful lot of money in the 1950s and 60s, effectively riding on the back of 15 % media commission. And for a long time hadn’t seen the need to branch out into new spaces. And the second problem we face, I think, is that outside a narrow set of businesses which are genuinely marketing led,

Stephen Clapham, Behind the Balance Sheet (11:35.119)
whether it’s Diageo or Unilever or Nestle or P &G or Coca-Cola. Outside that narrow group of consumer packaged goods businesses, the stature of marketing within the organization, regardless of anything we do as an agency, all of our work is meaningless if the person for whom we do that work doesn’t have a board level position or significant influence.

What has increasingly happened is that the role of marketing has become subordinated to finance and has been forced to justify its existence effectively in very narrow financial terms. Now, lots and lots of things that are really important about marketing really lie outside that domain. mean, the value of fame, just to give you an example, is almost incalculable.

But the problem with finance is if something is incalculable. I mean, in value terms, incalculable is a good word. Yes, of course. We would say that the Mona Lisa is priceless. Now, that in normal conversation means it’s a good thing, because it’s almost unbelievably and unimaginably valuable. To someone with a finance mindset, the fact that it’s not calculable means that it effectively can’t count. In other words, if it doesn’t fit on a spreadsheet or a balance sheet,

we treat it as if it’s zero. And so an awful lot of what I think marketing does, well put it this way, I think an awful lot of what is really marketing isn’t the product of the marketing function. James Dyson’s decision to make vacuum cleaners transparent, which was widely ridiculed at the time, right? That wasn’t a marketing decision, that was a design decision made by the founder.

But nonetheless, it was undoubtedly a decision based on the idea of subjective value in the mind of the consumer. so marketing is much, much bigger than a mere department. It’s both a state of mind and it is a, I suppose you could say a parallel set of forces alongside the standard economic forces, which we generally talk about. It’s the weather.

Stephen Clapham, Behind the Balance Sheet (13:57.449)
If you like, yeah, we can talk a lot about how you steer a ship and how you fuel the engines, but ultimately marketing is the weather. Yeah. And, you know, some of it lies within your control. What also happens, I noticed with marketing is when it’s at its most successful, I you achieve a psychological breakthrough, which is game changing. So marketing is fat tailed. is the same. Taleb said this to me. And if the same Taleb says something is fat tailed, then it’s fat tailed. Sure.

A large part of the value of marketing is a little like the pharmaceutical industry publishing Hollywood in that your 5 % of outlier biggest successes produce disproportionately large amounts of value. But the way in which marketing is currently judged is that we’re held accountable for every penny of our costs, but we can only lay claim to a very small part of the upside.

So I’ll give you an anecdotal example I always give there. Someone in Ogilvy, for which they were probably unpaid, it might have earned $10,000, suggested in 1965 that you should put Member Since on an American Express card. Do you have an American Express card? I have. Member Since 99. You’re 99, I’m 95. Johnny come lately. But Member Since, you…

First of all, it changes the nature of the relationship because it makes it relational capitalism, not transactional capitalism. In other words, you feel you’re part of a lifetime thing. You’re also disproportionately reluctant to cancel your card because then if you rejoined, you’d feel all that sunk cost and you’d think, God, if I went back to membership since 25, I’d feel terrible. Now, talking to people at American Express, that single decision has been worth billions of dollars to the organization since 1967.

Now, my question is, Ogilvy only got paid maybe $20,000 for that, if at all. It might have been just thrown away free as a bit of a thank you for the media commission. But then it occurred to me, marketing no longer claims the credit for that either. So all that incremental revenue is effectively, when marketing creates enduring value over time, whether it’s through a brand or through an extraordinary idea,

Stephen Clapham, Behind the Balance Sheet (16:23.607)
It has no way of capturing the upside. And I mean the upside in two ways. No one would ever give it disproportionate credit for that idea and say, well, thank you, that idea is so valuable to us, your marketing budget next year is quarter of a billion dollars. But also over time, effectively you are only worth, it’s a bit like that phrase, you’re only as good as your last job. You’re only worth the value you created in the last three months, the attributable value. Now that strikes me as,

I’m sure it’s a very finance friendly way of evaluating marketing, but it doesn’t strike me as fundamentally fair. And so I’ve ended up being, if you like to use the language of your business, kind of accidentally ended up being the Michael Lewis of marketing, the money ball kind of person who tries to explain this to an external audience. And what’s fascinating is that of course, once you explain it to people as a game anyone can.

rather than there’s an arcane kind of weird discipline which is performed by those fluffy people over there with their crayon. And by the way, I think I can tell this story. A very good friend of mine, Mark Evans, was the marketing director of Direct Line Insurance. And he ran the marketing department and someone from one of those kind of insurance things like where you get all those nerdy people who do like calculations on Bayesian.

So someone put on secondment of the marketing department and said to him, joining, said, I have no idea why they put me in marketing because I’m rubbish at drawing. And you suddenly, I suddenly realized when I heard that story that this is genuinely how, what is a fundamental discipline. And actually every single really successful new business probably succeeds in large part.

accidentally or intentionally because of the way it markets itself. Absolutely, yeah. And yet, by the way, the analyst community don’t pay much attention to it. I remember reading the, it must have been the sort of initial stock offering of Orange. You remember the Futures Bright, the Futures Orange. It was an extraordinary brand. I mean, in the mobile phone industry, when it first came along. And I read the initial sort of stock offering and their brand and their advertising received

Stephen Clapham, Behind the Balance Sheet (18:49.333)
I think it was one paragraph in the entire document. Now, the UK, by the way, is worse about this than the US is. I think in the US, marketing is partly because of the sort of fetishization of the entertainment industry and so on and so forth, but marketing has a more elevated role in the US than it does in the UK. In the UK, it’s way downstream of finance. And in many cases, I think, if I get this right, even in the US, in the

in the Fortune 500, there are only about 14 companies which have a marketing person on the board. Oh really? Now, that’s concerning because when you think about it, you probably have board meetings entirely fetishizing the shareholder interest, whereas the customer interest is barely getting a look in. Now to an Austrian school economist, this would seem very, very strange. So the Austrian School of Economics,

which I think is basically right about everything. Yeah, yeah, absolutely. You’re the same. So Ludwig von Mises made the point that there’s no useful distinction to be made in a restaurant between the value created by the man who cooks the food and the value created by the man who sweeps the floor. And this is an analogy with manufacturing the value you create in the factory and the value you create in the mind. The cook is, I suppose, the factory. He produces the good.

whereas the man who sweeps the floor is the marketing person who creates the environmental context in which it’s possible to enjoy the food to its full extent. And that may be through simply creating a physical environment or creating a mental frame or creating an expectation or creating trust or confidence or creating whatever mindset is necessary to the full appreciation of the primary good. And the Austrians thought like that completely. I mean, it’s a bit extreme.

But yeah, I get, I really get the context. absolutely accept that marketing and advertising are as much a part of the value creation process. Now what we have now is a neoliberal Friedmanite idea, which bear in mind, okay, if you look at the assumptions that are necessary to make neoliberal economics work, it’s that people have known stable preferences. I think they’re transitive, aren’t they? I think as well, your preferences are transitive.

Stephen Clapham, Behind the Balance Sheet (21:09.503)
and they have a completely known utility function. So in other words, they know exactly to the last decimal point how much utility they will get from a transaction. And of course, know, can contrast that with what they’re expected to pay for it. And they’re operating in a world of perfect information and perfect trust. Good luck with that, right? It’s deranged. I mean, in reality, you know,

Trust, which no one seems to bother to measure, any activity that you do to deepen trust will almost certainly be viewed by the finance people as an unnecessary cost because it isn’t contributing to the production of the primary product or to the reduction of its price. I mean, are there people that you think that you look at, the companies that you look at, you think do a really good job of engendering trust? Family owned businesses.

which operates to a different time scale and because they don’t have shareholders, they can pay proportionate attention to their customers. They also have, if you like, they operate in multiple time horizons rather than the next quarter. They pay reasonable attention to looking after their staff, whereas the trend in PLCs is to treat your staff as a cost to be minimized.

unless they’re in the senior management, of course, in which case they are almost inestimately valuable. Absolutely, course. And so, by the way, outside those family businesses, it was interesting, I’ve mentioned this repeatedly, that the four out of the five advertising effectiveness award winners in 2024 were family-owned companies. McCain, Yorkshire Tea, Lathe Waits, and Specsavers. The fifth was Guinness, which is kind of a little bit like a family-run business.

And then you also get founder led companies also seem to be much better at effectively a kind of holistic approach to business as a nested set of ecosystems rather than the set of separate departments and processes to be optimized in isolation. So founder led businesses, Octopus Energy would be an interesting case that I’d be particularly admiring of. Then in the US you get businesses like Costco that do it well.

Stephen Clapham, Behind the Balance Sheet (23:34.199)
It’s worth noting actually, this is not me, this is John Kay, who is a bit of a hero of mine. He wrote that wonderful book, Obliquity, and he has been an absolutely tireless critic of the shareholder value movement. Hence Obliquity, his argument is that the direct pursuit of shareholder value tends not to produce that much shareholder value. And he did make the observation that if you think about it,

There are very few companies that have been kicking around in the FTSE or the S &P or whatever it may be for over 100 years. And they tend to be Nestle, Procter & Gamble, Unilever, Coca-Cola, which are consumer packaged goods companies which have a healthy level of focus on the customer. And I shared this with Dan Davis and he made a very simple point. He said, there’s one great advantage to customer focus, aside from all the other points.

customers actually live in the real world. So you are modeling yourself on actuality if you are customer obsessed, because Bezos would be another great example of total customer fixation. And you are then, therefore, you are judging yourself by real world criteria. Whereas if you’re using some sort of artificial balance sheet manipulation bollocks, which you chaps seem to love. Okay, right.

I’m going to defend myself in a minute. you. You must. You must. I’m sorry. I like just winding up. No, no, that’s fine. I like winding up the finance function to an extent as well. I think your criticism of being counterist is very valid. But what you may not know, but you’ll be interested in, is that family owned businesses outperform the stock market. the late and hardly lamented… By the way, can we have a little dig at the economist here? Because the economist has been railing against family owned businesses for…

and arguing in favor of professional managers for decades. really? don’t know. But family owned businesses, the Mittelstand, all those businesses. I was pottling around Texas and every time I came across a fantastic business, HEB, the retailer, you know, this HEB thing, that’s family, HEBUT, some guy in the 19th century, Buc-E’s, know, the Disneyland of gas stations, utterly fantastic. So the…

Stephen Clapham, Behind the Balance Sheet (25:57.687)
Bucky thing is very funny because did you know that they’ve now moved outside Texas? Yes. There’s one in West Virginia. No, they’ve, they’re all over the shop. So we were driving and my younger son said, dad, there’s a Bucky’s in 65 miles. Can we stop there? And of course I’d heard you, I hadn’t heard of it other than listening to you. thought, Oh, absolutely. And we’ve got to get one of the UK.

Well, I don’t know if we’ve got a big enough country for a Buc-Ease actually. People, there’s a podcast in which the founder who explains the philosophy by which he created the thing. And it is a glorious marketing led strategy, which is how, if I’m to open a gas station, it has to be more successful than the other gas stations around it. Therefore people have to hold on longer in order to go to a Buc-Ease rather than a, you know,

whatever it is, Conoco, whatever it might be. Who decides? His theory was it’s the female passenger in the car who will happily hold on for an extra 60 miles to get a better restroom experience. So the whole thing was not modeled around something that makes money, it was something that drives footfall. Which was, and I’ve never been obviously into the female restroom, I say obviously, but these things are getting more more blurred.

But they’re palatial and the men and then everything else was well if I need to have fantastic restrooms I need to have people cleaning them 24 hours a day if I need to have people clean them 24 hours a day I need to have a certain scale of business to justify the restroom experience and by the way, mean that’s That’s an interesting reflection actually on the advertising industry because the problem in the advertising industry is ever since we’ve been paid by the hour the people who make the decisions

based on the balance sheet. Think that where we make money is where we add value. Now an advertising agency is actually like a restaurant, which is you make money on the wine, but they come for the food. Now what happens if you get a very unaware accountant taking over a restaurant chain is they go, well basically you’ve got a very profitable bar business here, but this food thing is barely breaking even.

Stephen Clapham, Behind the Balance Sheet (28:20.449)
I mean, every Michelin-starred restaurant, I’m sure. Nassim Taleb mentions this. It’s very difficult to run a restaurant in Saudi Arabia because you don’t have that, you you have the high margin bit of the business and the low margin bit of the business, and they are kind of part of the same thing. And so what’s happened in the advertising industry is the creative magic, which is historically what was the restrooms of the business. They were why you held onto your bladder for 65 miles.

to go to Sarchi rather than Ogilvy or Ogilvy rather than the Sarchi has been under invested in. And likewise, Bucky’s restaurants do not make any money in and of themselves, but the effect they have on everything else is absolutely magical. So your children made you hold on, did they? And what you I didn’t even need gas particularly. No, no, no, no, no. You don’t need to need gas to go to a Bucky’s. I’d rent this enormous SUV, which had, I think a 600 mile range. yes.

But I really wanted to visit it. I was curious and I should explain for the listeners that Buc-ee’s is a huge service station with a, well, you called it a cost call on the side, hundreds of pumps. And it was quite an experience. have to do a very awkward thing. There are so many gas pumps that you fill up your car with gas and you then go into Buc-ee’s to shop without moving your car. Because there are so many pumps, you effectively treat your pump as a parking spot.

with a pump. Unless you’re married to my wife who insists on moving it to parking space. I did the same because I thought, I thought, I just, it just felt too painful. I felt like a psychopath leaving my car at the pump. But it was quite astonishing the number of people in the shop and what they were selling, know, it was dirty. Yep.

Well, I was, you know, I was all for buying a barbecue and a couple of chairs. bit of deer corn. Yeah. But it’s glorious. Do you buy any branded merch? They do jolly good branded merch. Well, we were, we thought we’d grab lunch and the kids didn’t like the brisket sandwiches for some reason. don’t know. Anyway, well, it was, it was, it was quite an amazing experience. I just wanted to come back to you because you mentioned Orange and it was a fantastic brand. Why is that brand?

Stephen Clapham, Behind the Balance Sheet (30:40.395)
You why don’t why don’t I have an orange phone? I’ve got an E phone now. Well, why is it? It’s it was it was it it had an extraordinary founder, Snoke, who was very, very marketing focused. And you generally find this that, as I said, it’s family owned or founder led. Yeah. And then there’s this I’m to really make enemies here.

But there’s always this dismal process where the CFO takes over the CEO. Now, I’ve got a mathematical theory about why this often goes wrong, which is not mine. comes from somebody I met, I was really privileged to meet about two or three weeks ago at a meeting, which is Stephen Wolfram. And almost in en passant, he made this fascinating point, which is one of those points which is a sentence which sticks with you for years.

And he said, the reason evolution works in nature is it has quite a loose fitness function, which is effectively the rules of evolution are if you can stay alive long enough to reproduce and you can rinse and repeat, then you stay in the game. That’s it, right? Now there are thousands and millions of ecological niches in which you can either succeed or fail at that particular endeavor. But that’s it.

Whether you’re a patch of moss or you’re a basking shark, the rules are exactly the same and they’re loose. And you are given considerable scope for interpretation within those constraints. Now, I was talking to someone who, by the way, this is also how, for example, Octopus Energy and Shopify run their customer service departments. They give them very, very clear objectives typically to do with customer satisfaction, not cost control.

And they are free to use their own initiative and imagination to achieve those ends. So you get all that kind of explosion of inventiveness and discovery and actually even more important, luck. Half the shit we’ll discover in a business that’s of real value happens because of an anomaly or a chance event or a, I always say that’s true of penicillin, it’s true of,

Stephen Clapham, Behind the Balance Sheet (33:02.981)
There’s one of the great things that seemed taught me is that David cleavley has written a brilliant book called serendipity. It doesn’t happen by chance. And the seems point is you can increase you. can’t control luck, which is why finance people hate it, of course. But you can at some cost. Expand your surface area exposure to positive upside optionality. In other words, now, if you give your customer service staff a degree of autonomy and an.

a degree of freedom to exercise their own initiative. What will happen is every now and then one of them will discover a phrase or a tonality or an interaction, which is just disproportionately effective. If you force your call center staff to follow a script, you won’t discover a damn thing. There is no potential upside. Okay, you’ve minimized the downside, whoop did fucking do, right? But there’s no remaining upside.

And this question of how you calibrate exploit versus explore in business is really important. Now what seems to happen is if you get a CFO put in charge, the danger is, is they want every unit of expenditure to be attached to a known unit of incremental revenue. Now when you make your fitness function too tight, you just end up with a lot of moss, but you never get a shark.

In other words, so I think this demand for sort of variance reduction and predictability, the real concept, the only concept that matters is the opportunity cost. So costs are always immediate and quantifiable. And I think there are disciplines within business a bit like procurement or the gain share agreements which management consultancies engage in, which is you will give us a certain percentage of the cost savings we identify.

which are fundamentally asymmetric games which shouldn’t be allowed. Because what you’re saying is you can claim credit for any reduction in cost without being held responsible for any destruction of opportunity. And that’s not a balanced scorecard means of decision making at all. Because you go, look, I mean, I’ll give you the classic example of this, self-checkout in supermarkets.

Stephen Clapham, Behind the Balance Sheet (35:21.249)
I’m sure a load of people who installed that technology have claimed all the credit for the reduced manpower you need, but they haven’t been held responsible for the loss in sales. Is there a loss in sales? put it this way. I like self-checkout. no, no, no, no. Whoa, whoa, whoa, whoa, whoa, whoa. Just to be clear, technology arrives as an option and ends up as an obligation because the ticket machine at the station was wonderful because you, oh, there’s a queue at the bloody ticket.

I know exactly what ticket I need. There’s a bloody queue at the ticket window. Brilliant, I’ll just go and tap five times and tap my credit card and I’ll get the ticket I want. Until then, the finance people notice that the cost of a ticket machine is lower than the cost of a human being. And suddenly, the window’s not manned anymore. And so on those occasions when you haven’t got a clue what ticket to buy, you’re screwed. You’re completely flummoxed. So don’t get me wrong, technology is an option. Self-checkout, I like every day.

But you wouldn’t like it if you had a family of five and you had a whole trolley full of goods. So, obviously, if you impose too many self-checkout barriers, my own neighbor who’s fairly minted but over 70, refuses to go to our local Waitrose because they have too few conveyor belts. And by the way, it’s both human-centered, which is some people prefer, when I go shopping with my wife,

I basically go and self scan and my wife wants to go to the bloody checkout like it’s 1973. What then happens is I self scan all the while lecturing her about how she should be self scanning. And then we come to pay, the technology goes wrong and I look totally stupid. the point I make is that then what happens is there’s almost no one in the store. So there are all these knock on effects. But also you can’t really do a big family shop.

if you’re expected to actually check the stuff out yourself, it’ll drive you insane. And so what will happen is people stop doing big family shops. But it’s much harder to measure that decline than it is to lay claim to the cost savings that are, as I said, immediate. And also, basically, if you work for a large PLC, every time a decision is made that everybody there thinks is stupid,

Stephen Clapham, Behind the Balance Sheet (37:41.609)
The reason for that decision is someone wants to put a bullet point in the investors presentation, which says back office savings through gains to scale and tech consolidation. It should have been, there’s these narrative phrases like, know, scale efficiencies, back office consolidation, which they’re like mantras in religion. I’m not sure there are gains to scale in lots of businesses. There seem to be, because every business that gets larger just seems to accumulate more and more bureaucratic.

baggage as far as I can see. Yeah, and there’s also diseconomies of scale. Total diseconomies of scale. Yeah. But yet they’re kind of things which just get everybody, you if you’re a 27 year old, you know, teenage scribbler or whatever, okay, they’re the kind of things that everybody nods along to. know, one of the things that really worries me is that anything you say that’s consonant with a very narrow school of business theory, again, like, know, scale efficiency, or if you reduce the price, demand will go up.

Those things should be tested empirically because sometimes the opposite is true. But if you suggest a course of action which is consistent with standard boring economic theory, generally one, you won’t get blamed when things go wrong, and two, everybody will basically agree with you very quickly. If I said let’s reduce the price of this thing so demand will go up, very rarely will someone say we need to test that. Whereas if you said let’s put the price up,

because I think it’ll make the product more popular because price is a quality signal to some extent. Or because in the competitive environment or the choice architecture within which people are choosing us, it makes good sense to be in the middle, not at one of the extremes, for example. So let’s put the price up so we’re now mid-priced rather than, I mean, famously, this is the genius people at Procter & Gamble, before they launched

Pampers, disposable diapers. They launched a premium range of disposable diapers at a very high price point and advertised it. They had no intention of making anything of that brand in the long term. It was there so that when Pampers arrived, they looked good value by comparison. Are you a professional investor? How many 10Ks an annual reports do you look at in a year?

Stephen Clapham, Behind the Balance Sheet (40:08.861)
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I wanted to talk to you about pricing because I mean I I do that I’ve got an online school so if you want to learn how to invest in a stock market and We’ve got a very high price product which makes the other products look relatively cheaper because there isn’t a universe of the you know, My utility function and in any case, I won’t know what the utility function of your course is until I’ve done it anyway No exactly. how should I mean? How should people think about pricing and you have any sort of?

Stephen Clapham, Behind the Balance Sheet (42:35.115)
Good for him. I’m sure you’ve got lots of examples. One of my examples is that, two examples, one of the problems you have is that if there’s an economic explanation for something and there’s a psychological explanation for something, the economic one always takes precedence. So I’ll give you an example. Let’s take the Harrods sale, annual event, crowds outside the store, big bag saying Harrods sale and saying there’s a sale at Harrods.

Now, what will happen is a lot of people went, we sold a lot more in those two weeks because the prices were lower. End of story, nothing to see here, move on. And my contention is that probably more than 50 % of those incremental sales were generated by the razzamattaz around the event. Social proof of people queuing outside, the scarcity value of if I don’t buy this now, it’ll be more expensive in two weeks time. Oh, I disagree. I would never buy full price Harrods.

No, no, but, okay, what’s full price Harrods? You don’t know, right? Now my contention is if Harrods dropped their prices for two weeks by a third and kept it secret, they would barely notice any increase in sales. All right? Now I’ve actually got proof of this, which is I wanted to do the most evil experiment in the world, which is I wanted to know if you have 50 % extra free on a bag of oven chips,

What proportion of the incremental sales generated is due to literally the lower price per unit as calculated by the consumer and what proportion of it is generated by, wow, there’s a deal, I better take advantage of that. It’s a bit like my argument with, you know, those Marks and Spencers three for eight pounds things. yeah, yeah. Do you ever actually check that the three things come to more than that? well, you’re asking the wrong person because of course. you check everything. I check everything, yeah, any You probably have a spreadsheet, don’t you? As you go around,

My contention is most of the time I don’t actually check that I’m saving any money or quantify it. just go, well, I’d feel a bit of a pratt buying two of these, so I better go and find a third one. You know, so I get the deal. Anyway, I was talking about this mischievous experiment where I wanted to put 50 % extra free on something and put the price up by 50 % as a way of measuring what part of it was purely economic and what part of it was psychological.

Stephen Clapham, Behind the Balance Sheet (44:55.603)
And the person I was talking to, who I can’t name for obvious reasons, it’ll subsequently become obvious, said, I know the answer to that question. I said, wow, it’s completely illegal experiment. Because we’re an enormous multinational company, and a few times a year we do it by mistake. And I obviously said, can you give me the data? And he said, for obvious reasons, no. I said, can you give me a clue? He said, put it this way, you wouldn’t believe how much money we make. It’s interesting.

So my argument is that an awful lot of what is going on is driven by heuristics, instinct, know, all manner of psychological evolved instincts, which are

Exogenous to economic theory. Yeah, effectively particularly anything to do with trust because in economics trust is just set to one I mean Gary I know you’re not the biggest fan of Gary’s economics But Gary makes one very good point, which is nearly all economic models rely on a single representative agent Yeah, which is nonsense. Yeah nonsense. Absolutely not the idea that if you’re good for the average we have to assume it’s good for everybody and Gary quite rightly argues that

We failed to actually look at income inequality as a problem because, know, merely the act of creating a couple of billionaires is enough to reassure you that you’re doing a good job. It always interested me, by the way, why consumer packaged goods companies don’t campaign for more income redistribution. Because if you’re Coca-Cola or you’re McDonald’s or you’re, you know, Nestle, you’d much rather have a large middle class population, okay, all buying your stuff.

that Jeff Bezos spends less on shampoo than I do, for obviously physical reasons in his case. It’s not like when these people become super rich, there’s a corresponding benefit to those large consumer packaged goods companies. so my argument there is that there is this economic story which always predominates. Now in the case of the Harrods sale, effectively, okay,

Stephen Clapham, Behind the Balance Sheet (47:00.425)
there is a very big difference between seeing a jacket at 600 pounds and seeing a jacket that says 600 pounds was 900 pounds. Fundamentally different thing. And so the idea that you can allow economic.

what I call it, dogma, to drive business decision making in the absence of considering psychological factors. Never mind, by the way, I’m talking about the consumer relationship of a business, never mind the relationship with its own employees, where it’s more or less assumed that people are purely motivated by the paycheck and by financial incentives. There is enormous evidence, by the way, this is a really interesting investment thing you ought to explore because Dan Ariely is involved in this investment fund.

in the US where the principle measure by which they determine where to invest is employee satisfaction. I’ve read about And they argue it has quite a lot. Now, the great thing about employee satisfaction, I would argue it’s a windscreen, not a rear view mirror. Exactly. It has some predictive value. And they’ve now got, I think, about five years of data. And it’s pretty damn robust. I Costco would be a fantastic example.

And I said, you’re actually at a disadvantage because you’ll almost certainly find that employee satisfaction is higher, much higher at either founder run or, you know, or in many cases, family owned businesses, which of course we can’t normally invest in. I mean, there are quite a lot of family owned businesses and Well, for many of course, it’s technically sort of family owned, isn’t it? But Credit Suisse used to have this index and outperformed. I Credit Suisse obviously not there. don’t think, I haven’t noticed that UBS is…

produce something to follow up. But just going back to the pricing, I mean, clients come to you and talk about, so like my issues, I’ve got a product that doesn’t have very many comparables. It’s got an infinite value to a rich person because you can spend, I charge 1800 pounds, so 150 quid a month for a year, right? For a course. the way, the 150 a month and 1800, give people the choice of paying in either way because

Stephen Clapham, Behind the Balance Sheet (49:13.441)
Now, Klarna, the argument, you see, this is another case of my, the economic theory always prevails. An economist would look at Klarna and go, it’s a three month interest-free loan, bullshit. Three times 150 is a totally different price to 450 quid. I study these biases, I’ve done it for 15 years. I was buying one of those Dyson, another family owned business, by the way. I was buying one of those Dyson air purifiers. It was 450 quid. I looked at it said, that’s batshit crazy. Then it said three payments of 150. I went, okay.

So I mean, it’s the point is that to economists, price is a number to consumers, price is a feeling. No, absolutely. And by the way, to stock market investors, it’s a feeling as well. Let’s be absolutely honest. Yeah. Well, they are people. Yeah, they are people. are human. But how do you advise people that have that sort of problem? You don’t have a direct comparable. If you’re 30, you do my course, you might be investing for 35 years.

The money that you would make out of that is your around the world. way if you frame that. But how do you frame? By the way, and there’s an interesting one there, which is nearly all investment advice is predicated on comparison with somebody else’s investment advice. Yeah. And I keep saying to the financial advisor community, your real value is rather like a personal trainer. It’s not what you do. It’s the fact that you make me do it. I’m not very good at the bodily example of this, but

Actually, to be honest, you’re better off investing and saving badly. Not terribly, but you know, you’re better off consistently putting money into this stuff and doing it non catastrophically. Let’s let’s let’s, know, suboptimally, but consistently, then you are getting obsessed with the optimization of the thing and therefore doing less of it. Yeah. And so it is one of those things, which is to be honest, you know, there’s good sex, there’s bad sex, but actually

getting some sex is probably, you see what I mean? That’s 90 % of the value. But the financial industry, financial services industries crap at marketing. So, mean, generally. It’s also not allowed to market very well because you have these restrictions. I’ve always said that, for example, the restrictions of both investment and loan advertising, which is the APR.

Stephen Clapham, Behind the Balance Sheet (51:41.649)
understate the effect of borrowing, cost of borrowing, and understate the value of saving. And I’ve always said it should be legal to run an ad that says double your money in X years, because that’s a concrete promise. Yeah. Okay. And people will go, okay, I get that. So that would capture the compounding effect. Yeah. But APR makes borrowing look cheaper than it really is. You know, it’s quite interesting because I’ve actually got a Monzo card.

which tells me the interest cost of every purchase I make if I don’t pay it off immediately. I’ll now set it off, set it mostly to act as a charge card. And you look at this, you go, shit. Okay, if I pay this offer over 12 installments, I’m paying 12 quid extra for this Goddam pizza, right? And I was, I’ve got an A level and an S level in mathematics, okay? I was never really consciously aware of that.

It’s kind of going yeah, whatever, know, etc. And so, so in fairness, you know, this this weird thing where the need for direct comparison limits your creative opportunity, I think. But you think you think it does. mean, Terry Smith, I don’t know if you’ve come across him, Funsmith, course, I he’s a genius. And everybody always competitors hate him because he’s accumulated a huge amount of assets and he charges actually not unreasonable charges, but

You know, he’s now moved to Mauritius and so he gets his income and a slightly lower tax rate, although we don’t know how much tax he pays. he’s got a brilliant market. the Mauritian government. That’s the really fashionable thing to do now, isn’t it? I shouldn’t comment on his tax situation because he was interviewed in a podcast and my friend William Green said, told him that

My mother really doesn’t like you because he thinks you’re one of these fuck off rich people that are not paying any tax and he took great exception to it. So I don’t mean to make any, any assumption about it, but his competitors hate him because he’s accumulated all this, these assets and because it is businesses incredibly profitable. And I think it’s because partly because he’s very good at what he does.

Stephen Clapham, Behind the Balance Sheet (54:00.135)
But it’s also because his marketing is genius. I also suspect he’s in the lucky position either temperamentally or circumstantially of not really caring what the other people think. well, absolutely. So reputational paranoia undoubtedly drives an enormous amount of institutional decision making. I Dan Davis’s book, The Unaccountability Machine is fascinating. Yeah. There’s the brilliant quote by John Maynard Keynes where he said,

Worldly wisdom teaches it is often better for the reputation to fail conventionally than to succeed unconventionally, which was Keynes writing about investment, funnily enough. And this is why often someone who comes into the field from, you know, comes in from left field or simply doesn’t give a shit has an extraordinary power because most people are so frightened of rocking the boat because they won’t get invited to a dinner party or something.

I suspect he has, you he’s fairly thick skinned or at least… he is, but I think the genius is he’s… I mean, his slogan is, buy good companies, don’t overpay, do nothing. Do nothing. And it’s three bullet points. So simple. By the way, lot of people… Warren Buffett sort of did. But Warren Buffett’s not advertising, right? No, no, no. But I mean, that as a slogan is absolutely ingenious. I mean, there’s a lot of empirical evidence to support that.

Yeah, no, absolutely. mean, but why do you think that’s not more that sort of approach isn’t more common? What he probably is, because this is true undoubtedly of Buffett and Munger, it’s undoubtedly true of Jeff Bezos. Fundamentally, a lot of very successful people in business, what you notice is they have an unusual mode of decision making. Quite often, certainly in the case of Jeff Bezos and in the case of Munger,

it’s informed by behavioral psychology. Isn’t it a Warren Buffett phrase which is if the phone don’t ring, you’ll know it’s me? In other words, once I’ve bought you, I’ll more or less leave you alone. And that’s probably again the loose fitness function. And I think this is so important philosophically, which is particularly in the West, where we find it incredibly difficult. My Hindu friend calls this monotheorism.

Stephen Clapham, Behind the Balance Sheet (56:19.741)
They said the trouble with you bloody Westerners, he says, is you have to have one theory to explain everything. Or you have to have one metric to decide everything, for example. And it’s by analogy with monotheism, which is he said, my mother goes to a temple in India on the altar. There are three gods. There’s a monkey, there’s an elephant, and there’s Jesus. And there’s no particular conflict between these. We can cope with multitudes. can cope with pluralism or yin and yan or whatever.

And fundamentally, a great business has to do two things, which comes down to something which occurs in algorithm design, it occurs in animal foraging, it’s the explore exploit trade-off. Which is what proportion of your resources are you deploying to do what you already know works. That’s kind of deterministic, it’s certain, it’s short-term, it’s immediate. It’s very important, by the way. Last thing I’m suggesting is that you go to Amazon and say,

I wouldn’t worry too much about efficiency in the warehouses. I’m not suggesting that for a second. But if you don’t deploy some of your resources to the opposite, which is the bees that ignore the waggle dance and go off at random, well, one, you get trapped in local maximum. You get over-optimized on the past. You’re incapable of adaptation. You’re incapable of growth. And you’re incapable of getting lucky. Now, that’s quite a long list of negatives. And what it is,

Now this is where it gets really interesting. The Austrians were right about everything. Do you remember? agreed on that, All those sort of Hayek von Mises people who were at least dealing with the complexity of things rather than crudely shoehorning them into a kind of convenient model. They only have one definition of a cost. This is why you can’t get a job teaching Austrian school economics because they basically don’t do maths.

And one of the reasons they don’t do math is their only definition of cost is opportunity cost. So they say you don’t have a utility function, that’s nonsense. Preference is ordinal, not cardinal. You might choose to buy that rather than that. But the idea that I prefer that 1.1 times more than I like that, they argue is just psychological nonsense in praxilogical term. And the only, the cost of me buying that only

Stephen Clapham, Behind the Balance Sheet (58:42.095)
exists to the extent that it prevents me from buying that. Now, what we have, which I think is a problem in nearly all business metrics and measurement, is that costs are immediate and quantifiable, and opportunity costs are nebulous, often deferred, and hard to, and actually require subjective judgment. Heavens, offend, you know, that we should use instinct or intuition.

no, no, we was based, every decision on pure pre-existing data, but there’s no data about the future. The guy you really need to read about this is Roger L. Martin, who is the absolute doyen, I think, of business writers. I’m just hanging off his shoulders, to be absolutely honest. But the opportunity question, the extent to which you can make a lot of money within a large business, reducing costs while destroying opportunities.

know, strikes me as quite alarming. And actually, very interesting question about this, which is, I got very cross about back to the office mandates in certain workplaces for a completely different reason to everybody else. And I also support electric cars, the electrification of cars, for a totally different reason to everybody else, which is optionality. Now, whether an electric car is better or worse than a corresponding petrol car in 2025,

is not an irrelevant question if you’re buying a car in 2025. But if you’re trying to support government policy, what you can say is that there is a limit to how much innovation will be produced via the internal combustion engine. Compared to the Cambrian explosion of innovation, electric scooters, cargo bikes, there’s a weird little Citroen thing called the Elo, which is like a little house on wheels being produced. The Heathrow Pod.

All the interesting shit that’s happening in transportation, ground level transportation, and actually drones come to think of it, is a product of electrification. Okay. Now, in the same way, it’s perfectly possible that having your staff work remotely in 2025, as far as your balance sheet goes, is a bit less productive than 5 % less. Actually, all the evidence suggests the opposite, but let’s park that. There’s also a huge, by the way, there’s also a huge gain in terms of staff retention, which might be the most valuable thing of all because

Stephen Clapham, Behind the Balance Sheet (01:01:09.523)
To be honest, the old joke is only a third of staff are any use, because a third of them are just joined and they don’t know what they’re doing, and a third of them are planning to leave so they don’t really care. So the people in the middle who are sticking around are the people who really do the heavy lifting stuff. But my point is that if you look at it from a short-termist point of view, which is, now, my view would be if civil servants are 3 % less productive when working from home, you just go.

Right, here’s the deal, if you work from home, you work an extra hour a day. Now shut the fuck up because nearly everybody will take that deal. But anyway, ignore that. My argument is, hold on, remote and flexible working provides the world of business in aggregate with the opportunity to invent completely new business models and to explore completely new talent pools.

and to explore complete new means of remuneration and interaction in a way that everybody goes back to the office doesn’t allow for. I could be, one of the examples I’ll give, a very simple example, which is a consequence purely of video conferencing is nearly everybody on the planet will give you an hour of their time for a thousand bucks.

Now the value of that, not everybody, but you know, let’s say I want to, you what would you do? That’s my rate. Okay. Fantastic. Now in a world in which we have to meet face to face, you’re not going to do that because you know, saw that I’m on holiday that week. Okay. Now I’ve actually done this where people pay me a small amount of money to talk to them for, you know, for an hour. And I’m actually on holiday and I go, well, I sort of, you know, pays for the hotel for a few nights.

So this I’ll come in from the beach to have the decency of putting a shirt on do the conversation. Thanks for that pop back. Yeah, exactly. Thank you. You wouldn’t want that image that we see it on your retina for life. I’ll give you an example from evolution. There were two possible routes you get. This is why I support electric cars very largely. by the way, also, they can run on any kind of fuel, whereas a petrol car can only run on refined crude oil. Yeah, not quite true, but you know.

Stephen Clapham, Behind the Balance Sheet (01:03:21.735)
Right? So optionality, which Naseem Taleb taught me, this by the way, beoys my wife. Well, actually, in fairness, my wife has largely bought into my Taleb philosophy, which is, should we do this or this? And one of us will always say to the other, well, they’re about equal on the face of it, but option B gives us more optionality. In other words, you know, in other words, I’ll take the back road to the airport because although it’s slower if something goes wrong,

I can find another way of getting to the airport. If the M25 gets gridlocked, I’m dead. So we’ll quite often frame that into literally which cafe we go to. Cafe, by the way, offers you more optionality than the restaurant. Because in a cafe, you sit down, order a coffee, and then you choose whether you want to eat or not. In a restaurant, once you’ve seated down at the table, you’re basically committed. Is it very complicated in your household? Because everything has a behavioral dimension. Everything. Yeah.

Yes,

I would argue it’s worth the price because your decision making apart from anything else, mean, you leaving aside everything else, it pays to cultivate eccentric tastes. Yeah. Because if you have mainstream tastes which are imposed on you by other people, it’s a bit like going on holiday in August. I never understand why people without kids go on holiday in August. know, everything’s more expensive, everything’s more crowded, et cetera, et cetera.

And you get nice weather in London. The exact time when you want to be in the UK, precisely. So, yeah, does get a bit strange sometimes, but I imagine it’s equally strange if you live with a currency trader. I love the story in Gary’s economics, by the way. This is fantastic. So they have an Italian colleague on the trading desk who would go along and I think early in the morning he’d buy a single espresso for a

Stephen Clapham, Behind the Balance Sheet (01:05:18.863)
ATP. then three hours later he’d go and buy another single espresso for ATP, whereas you could have a double espresso for £1.30. Now what’s fascinating, okay, is this drove the other people on the trading desk practically insane because he was failing to, I suppose it’s a form of arbitrage, it not? is, yeah. Yeah, yeah, yeah, okay. So failing to take advantage of money on the table through arbitrage by buying, and he said yes, but…

The second half of the espresso will be shipped three hours later. But you’re paying an extra. Now these people were all highly rich, but it drove them nuts. There’s some weird Italian rule about coffee though, isn’t it? You’re not allowed to have a double espresso. I think you go to jail in Italy if you order that. And also if you have a cappuccino after sort of 11am. By the way, part of that, don’t allow the Italians to tell you that’s because they’re sophisticated. Because a large number of them are lactose intolerant. Oh really? Yeah.

So for some reason first thing in the morning, I don’t know, maybe you’re still within range of a toilet or something. I have no idea. But apparently a large part of this, you know, the other thing is that nearly all Italians put a ton of sugar in the thing. Yeah. So we think they’re there being really sophisticated, having this unbelievably sour drink, but they’ve actually dissolved about three sugar lumps. I like a bit of sugar in my mix. On the electric car, so do you still have the Mustang? No, I’ve now got a Lotus Electrae, which is fantastic.

And what I want to ultimately do is to have the barbell strategy. My wife has a Mini Cooper electric. I want to buy, my wife’s getting slightly crazy about this, a Microlino, one of those tiny electric bubble cars. Because then you’ve got, literally, you’ve got all the bases covered. The Electre as a motorway car, as a large, it’s a bit too big. I mean, that is a problem we’re gonna have in the UK, because of course we have a globalized car market, and we’re a country with unusually narrow roads.

Fortunately, I’ve discovered in London what you lose in maneuverability you make up for an intimidation. So I think that’s why people have Range Rovers. It’s not that they’re easy to drive around London. It’s just that everybody gets the hell out of your way. But the Lotus electric, the Bat-String was superb, by the way. I thought it was absolutely excellent. I’ve got one criticism of it. It’s kind of a generic criticism of cars today and indeed of modern culture. There’s a guy with a white

Stephen Clapham, Behind the Balance Sheet (01:07:45.369)
electric Mustang around the corner. And in the old days, even later model Mustangs were identifiably a Mustang. An electric Mustang looks like anything else. why is that? It’s got some of the brand codes, the rear lights. The rear lights. why is there, you know, this lack of design singularity?

And it’s not just cars, it’s everything. Buildings, logos. That’s why I bought the Electrae, because I thought it was actually a kind of eccentric work of art. And my argument is that electrification ultimately will make cars actually very reliable. It’s effectively software. Yeah. Therefore, all of those urges we all had to buy an Alfa Romeo, which was sort of suppressed by the fear of parts availability or unreliability, it might

electrification should give us permission to be much more eccentric. This is what I mean by Cambrian explosion. So just to give an example in evolutionary terms, a fly, insects have convex eyes and you see you have these little cellular things that detect light. Now the problem with a convex eye is given the size of a fly, doesn’t do a bad job. There is no way, well, not quite, but it’s extremely difficult to evolve from a convex eye to a lens.

If you’re a lizard with a concave eye, what happens is you do exactly the same thing as the fly only in any not an outie. And then what happens is you evolve a covering maybe to protect the eye from dirt. Then the covering turns into a pinhole, which means you’ve now got a pinhole camera. So you’ve got real resolution. You know, you’ve got the world in HD. Then you evolve a transparent covering to cover the hole. Then the transparent covering gets bigger and you’ve got yourself a lens.

Now, my argument is that the internal combustion engine, for all kinds of reasons, does not provide us with the tools for getting to a lens, as it were. It’s an evolutionary kind of cul-de-sac, whereas actually the electrification of transport is, you know, actually the Cambrian explosion was probably, in evolution, was probably made possible by the evolution of some sort of eyesight. That probably is what led, in fact,

Stephen Clapham, Behind the Balance Sheet (01:10:04.787)
They’re not they’re not quite sure. mean, I’ll probably get a lot of evolution biologists, you know, I doubt many listen to this podcast. Yeah, they don’t. But no, it’s interesting. I agree with you because just the architecture of an electric car allows you to have a much more individual design. mean, who would have thought? Have you got an electric? No, I know.

I bear that idea. I do no miles at all. I live in central London, I don’t go anywhere. just get a tiny electric going by microlino. No, but it’s not fun. You’ve never driven a microlino, have you? I’ve driven electric cars, I haven’t driven microlino. Pop down to West Kensington and keep a Lotus Electri, or one of the new Jags, out of town for driving big distances.

The microline at 50 % of the joy is the smiles it brings to the faces of passes by. By the way, if you’re a young man and you wanted to pull, I’m 60, so I’m rather out of that game. I’ve been married for 40 years or something. But if you’re a young man and wanted to pull, just advice to all the young listeners, just invest 17 grand less this year. Because, by the way, this is Darwinian investment. So I remember talking to the government about how you encourage young people to save. Yeah.

And one of the things I said is we can come up with various behavioral ideas, the save more tomorrow pension, you’ll obviously know about, which will make saving easier. But we said, bear in mind one thing, that we’re also humans. And whereas you’re looking at this purely from a wealth optimization point of view, I would argue that for a lot of humans aged between 20 and 30, the principal challenge in life is finding a high quality partner. And generally,

not many people on Tinder boast about their savings accounts. Whereas if you had a microlino, you’d be beating them off with a shitty stick. Okay? I’m not paid by microlino, by the way. Although if they want to offer me a discount, I’d be very, very imagine they’re the ones on its way around right now. It’s one on its way. But when you think about that in the wider, by the way, I bet a lot of six-year-olds on Tinder do talk about their pension.

Stephen Clapham, Behind the Balance Sheet (01:12:17.009)
Yes, probably. All right, okay, I bet that’s probably the lead factor if you’re a 60 year old on Tinder. But if you’re a 20 year old on Tinder, it’s not very, know, actually what people want is to show you’ve got resources to spare in some ways. Absolutely. And hence luxury goods and costly signaling and everything else. You’ve been very rude about luxury goods. No, no, I’m completely conflicted. And actually there are two kinds of luxury goods. Well, actually there are three kinds.

There is Hermes and a few other entities which are genuine quality where it’s worth it for what you might call cost per entertainment hour or lifetime value. So Paul Dolan, you ought to get him on actually, the great LSE guy who writes about happiness. When I met Paul Dolan, I was slightly weirded out because he had a Rolex. And I said, you know, you’ve written all this stuff about happiness and yet you’ve got a Rolex. And said, no, no, no, it’s just a bargain. Because he said,

It’s not a man, you know, he’s an academic, doc jewel encrusted or anything like that. But he said, first of all, it gives me a small amount of pleasure every time I look at it. I’m going to get that pleasure 10 times a day for the next 20 years. Then I’m going to give it to my son. And so it’s that famous thing, is is it? It’s the of lifetimes. You know, you never actually own a Patek Philippe. yeah, exactly. You’re kind of holding it in trust for your. Although I never understood that, because what happens when you’ve got two kids?

You know, I don’t need to go out and buy another a Patek Philippe. You need to. Yes, you would. Yeah, definitely. I suppose if you’ve got two children, either gender, it’s his and hers. can just you can just make that work. But there is, you know, there are certain things I buy which are expensive, but entirely justified because the duration of the pleasure they they give is, you know, actually makes them quite cheap in a funny kind of way. Then there’s kind of what you might call bling. And.

There is, in my view, there’s a risk that the inverted commerce luxury goods industry ends up overplaying its hand and actually becomes slightly, loses its cachet. Which we’ve seen, for example, with Gucci. Yeah. And so you have this, the thing is that, know, there is, I have a counter argument, which I’ve made occasionally. if you look at, if you look at the succession, everybody’s wearing Max Mara.

Stephen Clapham, Behind the Balance Sheet (01:14:44.243)
Okay, and it’s all very tasteful, it’s understated, and only your fellow billionaires know that it’s Max Maher and it’s all very subtle. And a colleague of mine said, you know, that’s real luxury. I said, well, yes, except you’re still worrying about what somebody else thinks. Okay, so I said, in a way, the happiest people are probably the people who wearing Versace who just go, I’m minted and I don’t care who knows it.

no self-awareness or anxiety about how it may come across. So there’s a whole complicated relationship between how you frame this and what makes you happy. Then there’s also a weird part of luxury, by the way, in which my car purchase may play a part, which is in many cases, early stage extravagance. In other words, the urge to show off or human neophilia drives early stage funding.

for inventions and technologies which ultimately permeates down to the rest of the population. So there is a form of, okay, I’ll go back to evolutionary biology again. There is a theory that birds evolved wings for feathered plumage for sexual display before they became large enough for transportation. And so what it is is that the urge to show off drives the early stage funding

And that’s why the wings get bigger and bigger and through kind of a Fischirian runaway, think it’s called. In other words, through hyper competition for elk’s antlers, size peacock’s tails, et cetera. In other words, the wings were like a peacock’s tail. They were just on the sides rather than at the back. Rather than the rear spoiler, they were the gull wing doors. And the idea is that what happens is that people buy these things to show up the car actually.

The computer to some extent was a hobbyist device. There are long periods in the development of new technologies where they have more signaling value, to be honest, than they have actual utility. I would argue that it’s the job of rich people to some extent to fund, my grandparents, this is a fascinating fact, my grandparents were the fourth family in Wales to own a dishwasher. Now what’s interesting to me about that story is,

Stephen Clapham, Behind the Balance Sheet (01:17:06.707)
One, it was insanely expensive. in 90, by the way, it still works. It was made in New Zealand. It’s a brand called Dishmaster. There’s one in the Science Museum and it still runs. mean, it’s basically made. I think they bought it in the late 50s. The interesting thing is they paid 80 pounds for it. They lived in a five bedroom house in Crickowell. They bought the five bedroom house a few years earlier.

for 4,000 pounds. So this is an interesting fact that actually bothers me, which is that we should have much more consumerism than we do, but unfortunately, all the surplus discretionary income is taken up by the property market. So I haven’t even started on Henry George yet, which is my other great passion. Fundamentally, I believe in land value taxes, because it’s a tax that you don’t have to pay, because the consequence of taxing land value is that land becomes cheaper to buy.

I’m just trying to work out. was going to a 10,000 pound dishwasher. So yeah, if you, if you take that ratio, which is what is it? Forty two percent. Okay. So yeah, you’d have it. Even if you bought the most expensive dishwasher you could buy, that would mean that pro rata, their house would have cost a hundred thousand pounds in modern money. So Mike, so if you look at this, I learned this the other day, the typical American household in the fifties or early sixties, if you added up what they paid for their car, their, you know, their furniture, their

other than their television, their, in other words, the appliances, their clothing, their possessions. Typically, that came to a sum pretty much identical to what they paid for their house. Now you couldn’t find any other than some of them in art collection or massive jewelry collection, you couldn’t find anybody in London whose possessions were worth more than their house. It’s true, yeah.

And actually the ratio would most likely be, so probably people paid for a car, maybe a fifth, a quarter, I don’t know. know, certainly if they had two cars. There are people in London who have a house worth two million and a car worth 2,000. Now, one of my concerns about this is that free market capitalism has done this extraordinary job of giving people better things at lower and lower prices.

Stephen Clapham, Behind the Balance Sheet (01:19:33.105)
The double income household should have led to an extraordinary increase in discretionary disposable income. But what has actually happened, particularly in London and the Southeast, is that effectively all of the gains which should have accrued to discretionary spending have ended up effectively being soaked up by the massive fund sponge, which is the property market. Either rent or

if you’re younger or just mortgage cost if you’re, we’re fine, right? We got in before the wave. I’m assuming you did. Did you buy in Scotland or in London? That’s me. I haven’t lived in Scotland for a long time. But you know, I had to stretch to buy my house. I think it’s a real problem because if you look at the younger generation, how did they afford to have place in London? very, very, very difficult.

Well, actually, when you think about it, I mean, my father was a landlord and I always make this point to other people. And we lived in enormous Victorian house, which was split into apartments and we lived in the biggest one. And then we had five other tenants, you know, in various bits of what had been this ludicrous Victorian house. What I remember is, you know, of all the sort of 20 or so tenants who passed through, who rented from us, most of them.

Not all necessary. The majority of them could have bought a house if they’d wanted to, but they’d chosen not to. Interesting. So in other words, as a landlord then, you weren’t really extractive. You weren’t taking the bottom of Maslow’s hierarchy of needs and basically holding it hostage. You were saying, here as a landlord, I’m giving you a residential option for people who prefer flexibility, optionality indeed, or who, in some cases, they might have just got divorced and they were kind of recovering themselves financially.

But you didn’t see yourself as being fundamentally extractive. You didn’t see it as rent seeking in that sense. Whereas now, when my daughter moved to London, I said, you’re not moving to London, you’re moving to 19th century Russia. You’re just basically a glorified serf working for your buy to let landlord. And we have all this talk, by the way, about, people will move to a low tax jurisdiction. But if you’re under 40, moving to a low rent jurisdiction will make more difference to your life.

Stephen Clapham, Behind the Balance Sheet (01:21:57.444)
Really? And that’s their working from home. Well, I mean, you know, I mean, as a Georgist, I was driven practically insane by this back to the office mandate because I saw because, okay, if you listen to Georgists who believe the George, the Georgist insight is that if any form of economic activity becomes dependent on its location for its performance, then the gains will increasingly go to the landowner, not to the person doing the useful work.

And the classic example of that, Tim Halford gives is railway station coffee shops, where you don’t actually make very much money because you’re dependent on a railway station for your location and more and more of your margin just goes down the more of network rail or whatever. And here’s the argument of wonderful guy who’s written a book on progress and poverty. The guy’s called Lars Doucet. I met him in college station in Texas, fantastic guy.

And he argues that the reason we had economic growth at various periods of human history is that people managed to escape from the depredation of the landowner. And there were variously, you could say the railways, the American frontier was an extraordinary thing because if you didn’t like what rent you were paying somewhere, you just moved a hundred miles west. To some extent, I would have argued the car.

By the way, the car is inordinately important because if you think about it, if you’re a good enough pub, people will drive to you. Yep. I know that sounds totally trivial, but so one of the things as a Georgist I’m really uncomfortable about is the obsession with mass transit. no, we need to get under buses and trains and tubes. Buses and trains and tubes all concentrate people in very high traffic areas and leave the areas in between virtually empty.

whereas the car kind of smears economic activity. So, know, go and buy a derelict pub in the middle of bloody nowhere, and if you make it a good enough pub and you’ve got a car park, people will come to you. And therefore, it’s really interesting, in East Kent, it’s absolutely full of really interesting restaurants and bars and things. And the reason is, what it is, is people who, basically, they want to start a cafe or restaurant in London, and they realize that the rent and rates are so high, you’ll be working for somebody else for the first nine months of the year.

Stephen Clapham, Behind the Balance Sheet (01:24:24.666)
So they go and find a crap place in Kent and they turn it into something amazing. And so my argument is this back to the office mandate, we had the chance at a new frontier, a new Georgia’s frontier where people could escape the tyranny of location. And you could, by the way, I mean, some interesting Georgia’s would extend the same thing to fossil fuels, by the way, that you should tax land ownership and fossil fuel production.

because those things are not actually the production of the creation of man, they’re a gift of God. And people therefore shouldn’t be allowed to create a toll gate access to those things. Instead, they should be used to government collective benefit. You could, you went really extreme, if you were a digital georgist, you’d argue that say, Metta and Facebook are to some extent extractive. In other words,

They own the Grand Central Station of the internet and they’re simply stripping the margin out of all the coffee sellers. I like that But it’s very interesting in economics because they all economists make this distinction between rent seeking and value creation. But I’ve never heard of a single proposed economic policy that suggests you should treat the two as if they’re different. Yeah, it’s interesting philosophy. I don’t see Rachel Reeves rushing around to see you. tax.

The mansion tax was a start and the reason I’m interested by it is that once you introduce a new property tax, you suddenly burst the bubble which everybody believes. And by the way, I think you’re doing God’s work as a Georgist because the more you can do to encourage people to put money into productive investment instead of putting it into the property market which is effectively extractive. Okay?

then fundamentally, what we’ve done is we’ve created a sanctified asset class in property where everybody needs to put money in property. Government can’t touch it, right? They can’t really tax it, because if it meant that an old woman had to move out of her home, there’d be a sob story in the Daily Mail and they’d be forced to retract. And so we had this idea that, bizarrely, what is a terribly illiquid and stupid form of investment, which is property,

Stephen Clapham, Behind the Balance Sheet (01:26:42.854)
is the best and safest investment. One, because you can borrow far more money to buy property than you can to buy stocks. Secondly, because for fundamentally emotional reasons, the government will never be able to touch it. In other words, you try putting up capital gain on property. Even inheritance tax is treated as if it’s an absolute monstrosity. Whereas weirdly, if I make 300,000 pounds out of IBM shares,

I’ve got to pay the full bloody whatever it is, capital gain. So the great thing is it’s a shot across the bow is this Manchin tax, because it just creates enough fear, because everybody knows that when a tax starts at two and a half million, it’s going to creep all the way down. It’s not going to stop at that. And so if it simply bursts people’s excessive confidence in the sanctity of property as an asset class, I would also make the point that there will be some sob stories in the Daily Mail, but my argument would be

If you’re living in a two and a half million pound house, but you can’t afford two and a thousand pounds a year, one, that house is gonna look pretty fucking dilapidated in 10 years time, because it costs about 15 grand, 20 grand a year to look after a two and a half million house. But also, what the fuck are you doing sitting on a seven figure asset if you can’t afford two and a half thousand pounds to go and have a jolly once a year?

No, absolutely. mean, genuinely, it’s deranged, right? This is a difficult subject, but I want to ask you, both my sons knew of you, which is quite funny. And one of them said he might even listen to this podcast, which is unprecedented. has happened before. I said- Absolutely no idea what the hell is going on with my youth popularity. Partly there was a genius guy called Hugo.

who started taking snippets from my podcast and putting them on TikTok. And you bought that channel, have you? No, not really. It’s still independent. I’m kind of like, yeah, sometimes I feel a bit like the Leonard Cohen of podcasting in the sense that, you know, I’m being ripped off by various intermediaries and capturing none of the money myself, you know. But I will get round to monetizing these things, but actually there may be a weird advantage to this. Go on. Which is

Stephen Clapham, Behind the Balance Sheet (01:29:05.9)
It’s okay, it’s opportunity versus, you see what mean? That by, I’ve always wondered this about patents. If you’re too possessive about intellectual property, the hidden cost you pay is that your IP gets used less and less. And actually, I’ve always wanted to create a patent, right, which works like this, which is anybody can use my idea.

I mean, some people have borrowed the idea of flat white or fuck off, which is my new coffee chain where we only serve one type of, it’s the Henry Ford of coffee. You tap your card, it’s two pounds 80 or whatever it is. You pick up a flat white, which has been manufactured in advance and you go and catch your train. Because when you’re catching a train or a plane, you don’t want to be queuing behind someone who wants some ice based customized bloody drink. And so the idea is it’s reintroducing, know, Motown.

and Henry Fordist efficiencies to coffee production. It’s the opposite of a good idea is another good idea. But I’m perfectly happy to take that idea. I don’t mind, right? I’ve got others. Just to be clear, the only thing that will make me resentful is if they end up worth 20 million quid. So I want a system of patents where anybody’s free to try out the idea. Now a lot of those people will fail. That’s fine, that’s just how capitalism kind of works. It’s highly.

This is the Austrians again. The Austrians see business and capitalism as a process of exploration. The purpose of a business is to explore new forms of value exchange in the adjacent possible, in the adjacent spaces. They don’t see it as an efficiency optimization or profit optimization game. The primary purpose is discovery. Now, if I came up with a really clever idea for a widget, I would love 10 people to try out that widget.

Now, my only demand for recompense will be you can have that for free until you start swanning around in a yacht in the south of France, in which case, you know, I want some payback. And I think there should be a patent system where effectively your idea is free to use up to a certain point. That’s interesting. It’s a fascinating idea. No, so one of my children had remembered the Red Bull comparison and Coca-Cola. The other one,

Stephen Clapham, Behind the Balance Sheet (01:31:28.558)
Something new. I’m a big fan of yours. I hadn’t heard this one. And it’s similar to the Flat White or Fuck Off. It was the bacon sandwich restaurant. And what I wanted to tell you, what I wanted to share with you was we were in Tokyo. Two summers. Not a place that screams bacon sandwich, but go ahead. it is absolutely. So we went to a one Michelin star restaurant. It serves one dish, which is pork curry. And it’s a guy from Nepal.

And he has this tiny restaurant, is seven seats. And you can, you get your pork curry, it’s like five quid. Literally seven seats. You pay five pounds, you can only have the pork. You can only have the pork curry. And to drink, you can have Dom Perignon, or water, or the most expensive Johnny Walker whiskey. And I will give you, will.

I’ll find this man is my absolute hero and he was such a lovely guy because we I mean he said you’re very lucky because we arrived very very late he says there was a queue two floors down it’s in because that weird thing in Japan they have restaurants on like the third floor it’s like an office floor yeah in a a suburb wasn’t a suburban streamers in just in shibuya i was you know that big pedestrian crossing was just around the corner and he was such a lovely guy it is a brilliant story i wonder there’s also interesting psychology there

Because if their queue’s around the block, almost everybody would tell him to put his prices up. But something about the authenticity of the restaurant, I’m sure he makes a lot of money anyway. No, I think he just, he’s happy. You know, he’s just kind of like. Well, that’s another perfectly. No, it’s funny. That’s another perfectly valid argument, which is also, if you put your prices up, you’re now a different kind of business.

And I suppose the odd person comes in and buys the whiskey or the champagne. What’s also very clever about that is you allow for high margin. That’s your upside opportunity. No, no, there will be. The people who are going there as a Michelin star restaurant experience will buy the Johnny Walker blue label. It was funny. Now I want to finish by talking about books. God, I’ve got to go there. By the way, I might as well give a… I’ll just wait for my stomach to stop rumbling.

Stephen Clapham, Behind the Balance Sheet (01:33:46.87)
Actually, Nepalese restaurants, Gurkha restaurants are very, very good. There’s one called, I think, Annapurna and Folkestone. And it’s very much the same. It’s not particularly expensive. It doesn’t look particularly pre-possessing from the outside. Food’s sensational. The only tip is if they’re ex-Gurkhas, so don’t do a runner. Oh, right. Right. I I just… I usually pay. You usually pay, yeah. I want to finish on books. I always ask people about books. I wanted to ask you, I want to ask you why you’re so well read and so broadly read and how you find

people like Dan Davis, who I used to work with many, years ago. We were at the Bank of England. No, after he left the Bank of England, he joined an investment bank and we didn’t work together, but we worked on the same So there’s this weird community of people which probably formed on X to an extent. it’s, the way I describe it is it’s behavioral economics adjacent. Yes. It’s full of heterodox economists who…

And by the way, I think the only honest economist is a heterodox economist because the mainstream economics, the Samuelson stuff has been, you know, I think is genuinely deserves to be rejected. And it’s. Effectively, I think it probably is people who instinctively optimize around possibility, not certainty. But what I wanted to ask you was how.

How’d you find a surprising number of us a half Welsh by the way Dan’s half Welsh. I’m half Welsh. Look at the line. It’s half Welsh. Look at the line is extraordinary Italian thinker. There’s only Peters on ergodicity. But where’d you where’d you find all these people? I don’t think it’s okay. There are I know you’ve got some book recommendations or tons. Yeah, I would I ought to put it up on a website actually. Dan Davis is book by the way, the unaccountability machine will be very high on the list. The whole of Nassim Taleb.

would be very high on the list. Matthew Syed, again, I mentioned, I’m not just talking about half Welsh people here, that’d be, let’s have a bit of diversity and inclusion. Margaret Heffernan, another person, for instance. Her latest book’s amazing, actually. absolutely, the Uncertainty, Embracing Uncertainty, it’s called, it? Well, this, I think, the title of her book, along with David Clevely’s book, Serendipity, It Doesn’t Happen by Chance.

Stephen Clapham, Behind the Balance Sheet (01:36:10.304)
is effectively, I suppose, what people are trying to do is accepting the fact that real life and therefore economics is kind of probabilistic. There isn’t any equilibrium necessarily. There never has been any equilibrium. It’s capable of remarkable creativity, but also extraordinary acts of collective insanity. Effectively, it’s looking at life through the lens of a naturalist rather than the lens of a

Mechanic but what I was curious about was so I know Dan Davis I know that his boots coming out and I learned of Dan through Nicholas Gruen in Australia So Nicholas Gruen had interviewed down on his podcast To be honest, it probably is all a bit incestuous to be honest. It’s because you’ve just got such a wide circle people and and you’re on you’ve been on loads of podcasts Yeah, I’m totally indiscriminate and my argument is look. I mean if you spend

one or two hours of your time and the audience is over 100, well, simple network effects, it doesn’t matter whether the audience for a podcast is 100 or 100,000, it’s a better use of your time than talking to one person at a time. I think, it always amuses me how people don’t always appreciate the potency of network effects in the sense that I always remember when we first put Nutsduck online, people were going.

yeah, yeah, we’re getting a live audience of 130,000 people watching it online. This is during COVID. And I suddenly went, that’s the Melbourne cricket. That’s bigger than Wembley. Everyone’s going, you by comparison with, know, Coronation Street in 1983, it’s a small audience. But by comparison with a physical audience, it’s insane. network effects are kind of fascinating.

because that’s part of my christen of the advertising industry because it always does one client at a time. It’s never worked out a way to capture the upside and it’s never worked out a way to exploit network effects. And what I suddenly discovered when I ended up accidentally becoming famous is that by repackaging it by not this is what we do, but this is how we think, the size of the audience goes up a hundred fold. And as I said, you get contacted by people in venture capital and you know,

Stephen Clapham, Behind the Balance Sheet (01:38:33.286)
But the entrepreneurial mentality, by the way, is similar, which is, the distinction I always make is that if you suggest anything anomalous, if you mention anything that’s an anomaly to a bureaucrat, they try to ignore it, because it interferes with any view of the world. If you mention any anomaly to an entrepreneur, they see it as an arbitrage opportunity, and they immediately want to exploit it. So the attitude that people take to outliers. Very different. Is totally different.

So, so where would you much to work with Dan at an investment firm? Did Yeah, so he was in the bank sector and I did a different sector. So we, you know, we were, you know, we would see each other. I remember we both went to presentation training. Yes. And, know, it’s awful. I mean, I’m not. you both in the awkward squad? Were you during the presentation? Well, it was just the two of us doing it. I don’t know why. Yeah. He and I happened to be, happened to be doing it together. And

I mean now, you know, when you have to present and you’re doing it all the time and you know, I’m effectively a financial influencer, right? So I’ve got to do all this stuff. you’re doing God’s work if you persuade people to. But the thing is that I always hated doing it. And now, of course, I’ve got training business. I have to stand up in front of people. And then once you’re forced to do it a few times, it’s easy. But I remember watching myself in the video and cringing.

And I can barrier to entry to public speaking is I should really give this away, should I? Because now we’re in it from now on, we’ll be paid like fifty seven pounds to give a talk. But it’s really if you could do it about eight times in a month. You don’t stop being frightened, but effectively, it’s very much like stand up comedy in that you get the feedback. Yeah. And fundamentally, you’re continually refining the set.

in response to feed apparently you can go to these sort of tiny comedy clubs in kind of Philadelphia and you’ll suddenly find Chris Rock will appear and he’ll tell 20, you know, 20 riffs and actually three of them are a bit crap. And then the next time he appears, those three have gone. And the whole thing is done by rapid feedback. Yeah. And so it’s a combination of, if you only speak once a year, it’s terrifying. If you speak once a week, you’ve got the nerves within check. I’m not saying

Stephen Clapham, Behind the Balance Sheet (01:41:02.266)
you know, I don’t care or that I’m blasé about it, but it’s, you know, it’s not that terrifying. And the second thing is it’s that feedback thing. You know, it’s an effect that you go, that went over really well. By the way, it sometimes gets a bit annoying because everybody goes, you didn’t tell the Eurostar story.

I forgot to ask the Euro Star story. The annoying thing is, I always assume that everybody’s heard the bloody Euro Star story. I’m not going to tell the Euro Star story. And then it’s a bit like going to see the Eagles and they don’t play Hotel California. If I don’t tell the fucking Euro Star story, everybody’s pissed off. But they know it. Exactly. I’m a great believer. So when I have a guest on the podcast, it’s been a lot podcasts. I Carson Block on who’s the world’s top short seller.

And I said to him, you know, he’s got this fantastic backstory of how he got into short selling, which he found this Chinese fraud and he talks about how he went to China. I said, Carson, every podcast you’ve done, you talk that story and it takes like half an hour. I said, why don’t we just, it’s a good, it’s interesting and it’s relevant. So why don’t we just do five minutes of that? We did five minutes of that. I said, so Carson, how’d you do this short selling stuff? And then, you know, I was expecting him to fob me off with some, you know,

Well, you know, I can’t talk about it. He then proceeded to explain his playbook and it was fantastic. And so I think it’s much better doing the more. imagine that short selling involves an awful lot of behavioral science. it? Absolutely. Because effectively you’re looking for what does everybody else believe or not even believe they may just assume or it may be tacit or unconscious. Well, it’s behavioral. It’s you’re looking for.

Fragile and behavior approach to AI by the way, I’d love to know what what his approach to AI is I don’t know. I I saw him a few weeks ago I mean, I think with this I think with AI you can do a lot of Linguistic processing which is much more difficult to do as a human But the the the numbers stuff and you can do some of it with AI But I’d it’s actually quite weird, isn’t it? Because AI is quite inconsistent. Well, I found terrible

Stephen Clapham, Behind the Balance Sheet (01:43:12.24)
Terrible trouble. Interesting. I did a webinar last night with a guy who’s a former analyst and he’s an expert in AI and he was explaining he’s built these routines which are self-checking. And I’ve found incredible inconsistencies where you give the machine instructions and quite detailed instructions and ask it to self-check and it doesn’t work. the interesting question is, will we use it to reinforce our confirmation bias or will we use it for what you might call blind spot detection?

which is what are we all ignoring here? I always find that very interesting, is that I’m the short selling thing. Funny enough, of course, the big short is my favorite film, pretty much, because it is a bunch of people who realize that there is collective insanity and complete misalignment of incentives going on. I feel really sorry for the guy, what’s his name, Lou Ranieri, wasn’t it, who invented the

collateralized debt as I the CDO wasn’t it and he invented the securitization of mortgages and It was a brilliant idea. Really wasn’t it? Why would you feel sorry for him? He’s rich. No, no, I’m sure he’s enormously rich but Equally, he must feel a bit like jay robert op and iber which is you’ve created this monster And I think he says something similar himself He says, you know, it was basically a very good idea to begin with but it effectively became gamed. Yeah

And that’s what happens in financial services industry. Listen, I really appreciate you doing this. I’ve so enjoyed the conversation. We’ve had the advert for your Nepalese restaurant in Folkestone. Yes. So we’ve got that in. Is there anything else that I’ve missed that we should talk about or I should just say? It’s funny we talked about that Japanese restaurant because I find the restaurant industry very interesting.

whether it’s the quick service restaurant industry or the high end restaurant industry, Will Gadara’s book, by the way, Unreasonable Hospitality, is utterly fascinating for that. And one of the things I suppose we could sort of echo down a bit here, and also Gary Hamill and his book, Humanocracy, which is, think we could ask the question, what are the really big barriers to economic growth?

Stephen Clapham, Behind the Balance Sheet (01:45:31.962)
and

Often I think we’re looking at the wrong place. I think the cost of bureaucracy is not how much you pay these civil servants. It’s an opportunity cost. It’s in other words, and actually it’s often just a time cost. In other words, I will not embark on anything if a definitive decision isn’t available within six months. So you know, this extraordinary cost of bureaucracy in terms of the things that never happen.

simply because the process is too painful or too ridiculous. Then I think there’s internal bureaucracy within organizations which has run rampant. I think at some point HR and finance went on a way day and decided they ran the company. And I think one of the things we can’t safely say, which we might have been able to safely say in the 80s is that, you

The private sector doesn’t have a problem because it’s got the profit motive and dah, dah, dah, dah. The public sector is of course, ridden with bureaucracy. It seems to me as if the private sector is now just as capable of suffering this kind of corporate oncology as the public sector is. Where you effectively get self-replicating bureaucracies, the cost of which is not really a salary cost, it’s the extent to which it paralyzes decision-making or risk-taking or imagination or

or lucky accidents actually. that may be the most weird thing of all which is that the biggest problem of trying to be right is that the hidden cost you pay is that you’re no longer capable of getting lucky. And that is a fantastic point in which… Perfect! Rory Sutherland, thank you so much. I really, really appreciate it. was an absolute joy. was hugely enjoyable from beginning to end. Thank you. Rory has views and everything.

Stephen Clapham, Behind the Balance Sheet (01:47:27.393)
and they’re always original and thought-provoking. From an investment perspective, my main takeaways were his focus on family-owned businesses, which can invest for the longer term, to look for companies with marketing directors on the board, and to try to check for employee dissatisfaction. Satisfaction is much harder because companies game the systems. And one line stuck with me. People pay us not for what we do, but for how we think. That’s not just true of

advertising but very much so for investment. Thank you so much for listening. Without this podcast and you, the audience, there’s no way that I would get to spend three hours with Rory Sutherland. It was such fun and I really appreciate the support of every one of you. Thank you.

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