Man, this one was a doozy. Just synthesizing all of my book notes took hours. But it was worth it. Alchemy is about a lot of things - marketing, consumer psychology, behavioral economics, logic (and why it pays to be illogical). It forced me to think about what really drives our decision making and why approaching problems 'rationally' has hidden costs when it comes to marketing and business growth.

"This book gives you permission to suggest slightly silly tings from time to time. To fail a little more often. To think unlike an economist."

"It is about how you and other humans make decisions, and why these decisions may differ from what might be considered ‘rationality’."

"You will improve your thinking a great deal if you try to abandon artificial certainty and learn to think ambiguously about the peculiarities of human psychology."

How This Book Works

The book is broken down into 7 Parts along with an introduction and conclusion

  • Part 1 - On the uses and abuses of reason
  • Part 2 - An alchemist's tale (or why magic really still exists)
  • Part 3 - Signalling
  • Part 4 - Subconscious hacking: signalling to ourselves
  • Part 5 - Satisficing
  • Part 6 - Pyschophysics
  • Part 7 - How to be an alchemist

Part 1 and 2 set the stage for Alchemy. Rory dives deep into rationality and logic to uncover what truly motivates our decision making processes. From his perspective, we've been trained to think too much like economists. This leads to "logical overreach" which destroys magic. He argues that it's incredibly important to practice magic - To think and experiment on stuff that conventional wisdom deems won't work.

"if we allow the world to be run by logical people, we will only discover logical things. But in real life, most things aren’t logical – they are psycho-logical."

The rest of the book works through the main reasons we've evolved in illogical ways. By understanding the "Four S's" we can grasp why people act irrationally when making decisions.

  • Satisficing - Finding satisfactory solutions in a realist world when an optimal solution cannot be determined.
  • Signalling - The need to send reliable indications of commitment and intent, which can inspire confidence and trust.
  • Subconscious Hacking - How a situation can be framed to provoke a different outcome.
  • Pyschophysics - How what we see, hear, taste and feel differs from ‘objective’ reality.

Key Concepts

Below, I've attempted to distill key concepts and takeaways from the book. Like I mentioned, there's a ton of good information here so highly recommend reading since I doubt I'll cover every nugget.

Rory's Rules Of Alchemy

  1. The opposite of a good idea can also be a good idea.
  2. Don’t design for average.
  3. It doesn’t pay to be logical if everyone else is being logical.
  4. The nature of our attention affects the nature of our experience.
  5. A flower is simply a weed with an advertising budget.
  6. The problem with logic is that it kills off magic.
  7. A good guess which stands up to observation is still science. So is a lucky accident.
  8. Test counterintuitive things only because no one else will.
  9. Solving problems using rationality is like playing golf with only one club.
  10. Dare to be trivial.
  11. If there were a logical answer, we would have found it.

Pyscho-Logic

Pyscho-logic is the alternative logic that emerges in our minds and operates unconsciously. This type of logic, while mostly ignored by rational actors, is far more powerful and pervasive in our decision making.

"if we allow the world to be run by logical people, we will only discover logical things. But in real life, most things aren’t logical – they are psycho-logical."

From a rational lense, this means that people are highly contradictory whether they like to admit or not. The situation or place in which we find ourselves may completely change our perception and judgement.

Psycho-logic design:

  • Mcdonalds removing cutlery so it's obvious you eat burgers with your hands
  • Sony removing recording function for the walkman

Decoy Effect

Choices often occur relative to what is on offer rather than based on absolute preferences. The decoy effect occurs when people’s preference for one option over another changes as a result of adding a third (similar but less attractive) option.

Here's an example Rory references from The Economist magazine subscription offer.

Essentially, you want to make the two alternative options so unattractive and unreasonable that a consumer chooses the higher value offer. Here's an article for further reading.

Benign Bullshit

We don't value things, we value their meaning. This is why people pay $20 for a plate of Chilean Sea Bass at a restaurant and pay zero dollars for the Patagonian toothfish (even though it's the same thing).

What things are is determined by the laws of physics, but what they mean is determined by the laws of psychology. You can create (or destroy) value it in two ways – either by changing the thing or by changing minds about what it is.

  • wine tastes better when poured from a heavier bottle
  • painkillers are more effective when people believe they are expensive
  • Everything becomes more desirable when people believe it is in scarce supply

The nature of our attention affects the nature of our experience.

There are 2 reasons for people's behavior

There's the ostensibly logical reason, and the real reason.

A perfect example of this is toothpaste. The logical reason we brush our teeth is to maintain dental health and prevent cavities. But if we were consistent with following that logic, we'd brush after every meal.

A real reason people clean their teeth is before those moments where they're frightened of the adverse social consequences of visible stains or bad breath.

"The trouble with market research is that people don’t think what they feel, they don’t say what they think, and they don’t do what they say."

The jack-of-all-trades-heuristic

We naturally assume that something that only does one thing is better than something that claims to do many things.

Example: Google is Yahoo without all the extraneous crap cluttering the page.

Signalling

Signalling is the need to send reliable indications of commitment and intent, which can inspire confidence and trust. Much luxury goods expenditure can only be explained in this way – either people are seeking to impress each other, or they are seeking to impress themselves.

3 big mechanisms that underpin trust - Reciprocation, reputation and pre-commitment

Engagement Ring Example - It serves no practical purpose as an object. However, the object – and its expense – make it highly redolent with meaning; an expensive ring is a costly bet by a man in his belief that he believes – and intends – his marriage to last.

Signalling must be costly - The fact that the meaning and significance attached to a something is in direct proportion to the expense with which it is communicated.

We must deviate for narrow, short-term interest - This is because we'll end up only operating under a rational lens. And for all it's strengths, rationality contains no meaning. Which means we can't generate trust, affection, respect, reputation, status, loyalty, generosity or sexual opportunity

Signalling options - signal to the opposite sex, signal to your own sex, signal to yourself.

The Reputation Reflex

We intuitively understand that someone with a reputable brand identity has more to lose from selling a bad product than someone with no reputation at risk.

Branding isn’t just something to add to great products – it’s essential to their existence.

Self-placebbing

We all spend a considerable amount of time and money essentially signalling to ourselves: many of the things we do are not be intended to advertise anything about ourselves to others – we are, in effect, advertising to ourselves.

The power of the placebo effect

The fact that something does not work through a known and logical mechanism should not make us unwilling to adopt it.

What makes an effective placebo - there must be some effort, scarcity, or expense involved. Rory also notes that it needs to be slightly absurd to work.

"The placebo effect might be strengthened if the drug requires some preparation, whether prior dilution or mixing. In addition, by creating a routine around the preparation of a drug before you take it you also create a ritual, which makes it much harder to forget."

Examples:

  • ‘If we position the product as a night-time cold and flu remedy, the drowsiness isn’t a problem – it’s a selling point. It will not only minimise your cold and flu symptoms, but it will help you sleep through them too.’
  • Redbull placebo effect - it’s expensive, it tastes weird and it comes in a ‘restricted dose’. small can means that it's particularly potent. "That must be really potent stuff if they sell it in a can that small"
  • Cosmetics are insanely overpriced and time-consuming to apply.
  • Alcohol, when you think about it, doesn’t really taste very nice

Satsificing

It’s surely better to find satisfactory solutions for a realistic world, than perfect solutions for an unrealistic one. We will pay a disproportionately high premium for the elimination of a small degree of uncertainty - It's why we pay a premium for well known brands, less likely that it'll fuck us up.

Brand preference theory - The idea, most simply expressed, is this: ‘People do not choose Brand A over Brand B because they think Brand A is better, but because they are more certain that it is good.’

Social Copying - Buying products or adopting behaviors and fashions that are popular with others – is another safe behavioral approach.

McDonald's Satisficing - The average quality might be low, compared to a Michelin-listed restaurant, but so is the level of variance – we know exactly what we’re going to get, and we always get

Pyschophysics

How what we see, hear, taste and feel differs from ‘objective’ reality. What really is and what we perceive can be very different. And what people perceive is sometimes more important than what is objectively true.

Example Milk Brand - customers complained about change of taste. They hadn't changed formulation in forever but they did change the shapes of blocks you would break off a bar, rounding the corners. Smoother shapes taste sweeter ← psychophysics

Context changes everything - Will people pay £100 for a pair of shoes? In Walmart, no chance, but in the designer store Neiman Marcus, easily.

Example JC Penny - Tried to reduce their reliance on couponing and sales, and instead simply reduced their permanent prices. In both cases, the strategy was a commercial disaster. People didn’t want low prices – they wanted concrete savings.

The Packaging Is The Product - People can notice a change in taste simply because a new formulation is announced. "kinder to the enviroment" might mean less effective in the eyes of the consumer. Same as "fat free" meaning less taste.

The Focusing Illusion - Nothing is as important as we think it is while we are thinking about it. When people are induced to believe that they “must have” a good, they greatly exaggerate the difference that this good might make to the quality of their life.

Ikea Effect (Don't Make Things Too Easy) - the effort invested in buying and assembling his company’s furniture added to its perceived value.

It is only the behaviour that matters, not the reasons for adopting it - Give people a reason and they may not supply the behaviour; but give people a behaviour and they’ll have no problem supplying the reasons themselves.