I tested Rory Sutherland’s business advice

- Nine months ago, I watched a YouTube video that changed how I ran my business. - Some things are not normal. - It's a video by the Australian YouTuber, Derek Miller, for his channel, Veritasium. And it's called, "You've likely been playing "the game of life wrong." - I mean, if you go out in the world and start measuring things like human height, IQ, or the size of apples on a tree, you will find that for each of these things, most of the data clusters around some average value. - This is so common that we call it the normal distribution. But some things in life are not like this. - What Derek went on to share reminded me of something worry-sufferling to told me years earlier. - A small number of things basically make 90% of the difference. - I've spent nine months testing this advice, and it has changed how I ran this podcast. In fact, it has changed my strategy to such a degree that I went on to talk about my new strategy on stage at the uplift live conference. - Here today to talk to you about something I've never spoken about before. It's the strategy I use to grow my own business. I call it 100 small bets. - Today on Nudge, I walk through this strategy and why I think you should consider it. But first, a quick warning that this episode contains some explicit language. All of that, coming up after the break. (upbeat music) - Most businesses have an overwhelming amount of data. It's typically scattered across the business in different tools with different teams, but because it's scattered, no one can use it. That is where HubSpot come in. HubSpot connects it all. Every interaction, every support ticket, every conversation, and they connect it into one platform that every team can work from. Because when you know more, you grow more. Check out HubSpot.com, the agentic customer platform for growing businesses. Hello, I'm Phil Agnew and you are listening to Nudge. So in this Veritasium YouTube video, Derek asks the viewer to picture a bell curve. Now most of us are very familiar with bell curves. They rise in the middle, drop off at the sides. Many, many things in life follow a bell curve distribution otherwise known as a normal distribution. Human height, for example, follows what's called a normal distribution. Most adults cluster around the average height for their gender, most are at the middle of that height. You get some people that are quite tall, some people that are quite small, but the majority cluster. You see this normal bell curve-esque distribution everywhere. You look IQ, for example, IQ, the intelligence test, that follows the same normal distribution. Some people are very smart, some people aren't, but most are of average intelligence. You get this major clustering around the middle. It happens in nature as well. The size of apples follow this rule. You get some small apples, some very big apples, but most cluster around the average. You're getting the picture, but the important point is that you will never get an apple, a human, an IQ level, that is 10 or 100 times bigger than average. Stephen Strograt, some mathematician known for his work on complex systems and synchronization, explains why we see so many normal distributions throughout the world in that YouTube video. Normal distributions, the traditional explanation, is that when there are a lot of effects that are random, that are adding up, that's when you expect normals. So like how tall I am, depends on a lot of random things about my nutrition, about my parents' genetics. All kinds of things, but if these random effects are additive, that is what tends to lead to normals. Essentially, you find time and time again that things have this normal distribution, and it can make us start to believe that everything in our world follows a normal distribution. And this is what human civilization thought was the case. We're really every part of human life, for millennia, until Wilfredo Perreto. I believe 1800's Italian engineer, Wilfredo Perreto, stumbled upon something no one had seen before. See, he suspected there might be a hidden pattern in how much money people make. So he gathered income tax records from Italy, England, France, and other European countries. And for each country, he plotted the distribution of income. Each country he looked at, he saw the same pattern, a pattern which still holds in most countries to this day. And it's not a normal distribution. You don't get a normal distribution. You get something completely different, and it is called a power law. People's wages don't cluster around an average. They exponentially increase for some workers. Perreto saw that the majority of people made back in the 1800's, say, 100 pounds. I think it was more like 20 pounds back then, but we'll say 100 in the UK back in the 1800's. But you then also had people who weren't making just 10% or 20% more. They were making 3,000 pounds, 50,000 pounds, 100,000 pounds, even all the way back then. You get these outliers, and this is not a normal distribution. With, for example, the normal distribution of height, you will never get someone who is 10 times taller than average, it is physically impossible. But with power laws, you will find someone who's not 10 times, not 100 times more, but 1,000 times more wealthy than average. These power laws aren't just interesting to anthropologists and historians. They can be vital for modern businesses. There are entire industries that are built on power law distributions. That is Caspa Meebus. He's a presenter on the Veritasium video. Between 1985 and 2014, private equity firm Horsley Bridge invested in 7,000 different startups. And over half of their investments actually lost money, but the top 6% more than 10x in value and generated 60% of the firm's overall profit. In fact, the best venture capital firms often have more investments that lose money. They just have a few crazy outliers that show extraordinary growth, a few outliers that carry the entire performance. In 2012, YC calculated that 75% of their returns came from just two out of the 280 startups they invested in. So venture capital is a world that depends on taking risks. In the hope that you'll get a few of these extreme outliers which outperform all of the rest of the investments combined. Venture capitalist firms are built to exploit power laws. They know that the majority of investments will make a tiny return and many will make no return. So they spread their bets. They make hundreds of investments for multiple different businesses because they know that one alone can be enough to pay off the rest of the bets. But publishers operate in a similar fashion. Most titles flop, but in 1997, a small independent UK publisher called Bloomsbury took a chance on a story about a boy wizard. The boy's name, of course, was Harry Potter and now Bloomsbury is a globally recognized brand. We see a similar pattern play out on streaming platforms. On Netflix, the top 6% of shows account for over half of all viewing hours on the platform. On YouTube, less than 4% of videos ever reached 10,000 views. For those videos, account for over 93% of all views. All these domains follow the same principle that Perrito identified over 100 years ago, where the majority of the wealth goes to the richest few. The entire game is defined by the where runaway hits. - These companies all understand that they operate within a market governed by power laws. And if you operate within a market governed by power laws, it means you need to play a slightly different game. Jeff Bezos, love him or hate him, gives quite a good analogy of this. He uses a baseball analogy. But for my conference talk, I referenced at the start of the episode, I switched this analogy to cricket. Here's a clip from that talk. - For those of you who know the rules of cricket, you hit the ball with a bat. You run between the sticks, every run you get, you get a point for. If you hit the ball along the floor and hit the rope surrounding the outside, you get four points. If you hit it right up in the air over the rope, you get the highest amount of points you can get, which is six points. That is the most amount of points you can get for a shot in cricket. I think, I don't know if you can run more than six, basically relevant. You can basically only get six. So even if you hit it over that building on the left hand side of the screen there, you would have still only get six points. In fact, if you hit a ball, so the best cricket shot ever played, you hit it over that mountain, you get it in the sea, the empire will still only give you six points. And Bezos says, well, that's normal in a world of normal distribution. That's normal in a world of bellcaves. It is not normal in a world of power laws, 'cause Bezos will tell you that in his world and business, his best shot, his best day is not a six pointer. It's six hundred points. It's six thousand points. Power laws are everywhere. We see them all the time, but it's important to know whether you are living in a world of power laws, in an industry and a company and a business full of power laws, or in a business or a company of normal distribution. Because whether you live in a normal distribution world or a power law world, does change based on the industry you work in. But not every industry can play this game. Like if you're running a restaurant, you need to fill tables night after night. You can't have one particularly busy summer evening that brings in millions of customers to make up for a bunch quiet nights. Over a year, the busy nights and quiet ones balance out and you're left with the average. Airlines are similar, and airline needs to fill seats on each flight. You can't squeeze a million passengers onto one plane. So it's the average number of passengers over the year that defines an airline's success. If you're a teacher, for example, you probably operate in a world of normal distribution, the best possible day. you can have as a teacher is creating an incredible class experience for probably no more than 30 children. You can't go above that. You can't have a day where you as a teacher because you have the best possible there as a teacher inspire not 30 children but 30 million children. If you were a teacher on YouTube, perhaps that might be different, but for most teachers there is a cap. However, I think most people listening to this podcast don't live in a world of normal distributions. I think they live in a world of power laws. I think you live in a world where small ideas can have exponentially large effects. Because fundamentally, I think that is the world marketing lives in. And this, I think, is where the Veritasium video makes its most important point. It explains how to act depending on what world you're operating in. We're used to living in this world of normal distributions and you act a certain way. But as soon as you switch to Israel that is governed by a power law, you need to start acting vastly different. It really pays to know what kind of world or what kind of game you're playing. Casper in the video then gives some advice. He explains how to act if you're operating in a power law world. And this advice, combined with some advice I got from Rory Sutherland, changed the way I ran my business. If you're in a world where random additive variations cancel out over time, then you get a normal distribution. And in this case, it's the average performance. So consistency, which is important. But if you're in a world that's governed by a power law where your returns can multiply and they can grow over many orders of magnitude, then it might make sense to take some riskier bets in a hope that one of them pays off huge. In other words, it becomes more important to be persistent than consistent. This is the takeaway. If you operate within a market governed by a power law, don't just be consistent. Don't only think about repeatable actions. Instead, think about taking a number of small, yet risky bets. Because one of these bets could trigger dramatic returns. It could score you not six points, but six thousand points. If you choose to pursue areas governed by the normal distribution, you can pretty much guarantee average results. But if you select pursuits ruled by power laws, the goal isn't to avoid risk. It's to make repeated intelligent bets. Most of them will fail, but you only need one wild success to pay for all the rest. And this is how I've started to run my business. Every six months I sit down and I make what I call 100 small bets, 100 small ideas, risky ideas that I otherwise wouldn't do if I was just being consistent, if I was just running my podcast day to day. However, I make time for these small bets. It could be something as simple as asking to speak in an event, asking to host a webinar, reaching out to a new client, testing a new strategy or running a new idea on TikTok. Whatever it is, it doesn't really matter. But there are 100 small bets that I otherwise wouldn't make because I know I operate within a world of a power law. And I know that one of those small bets could be the difference between me having a very average year or having an incredibly successful year. And after this very short break, I will share strategies that you can use, including one from Rory Sutherland, to make your 100 small bets. All of that coming up. (upbeat music) The Ross Simmons show is brought to you by the HubSpot Podcast Network, the audio destination for business professionals. I've been following Ross for a while. His podcast is great. And an episode I'd highly recommend is called Mastering Time, Prioritization Over Productivity. He gives some really well thought out tips on how to prioritize your time, including something I care a lot about, which is how a small percentage of your efforts can drive the majority of your results. So go and listen to the Ross Simmons show wherever you get your podcasts. (upbeat music) Hello, welcome back. You're listening to Nigel with me Phil Agnya. Now I'm a behavioral scientist, or at least I like to think like a behavioral scientist. I believe that psychology is an extremely powerful way to change opinions. So when I'm making my 100 small bets, I lean on psychology. I lean on the world of behavioral science. I use principles that are taken from the world of psychology, like input bias, I care effect, variable rewards. And I'm not alone. Ruri Sutherland, the author of the best selling behavioral science book, Alchemy, and Ogelby's vice chairman, he knows the power of small bets, and he uses behavioral science to help make his bets. The importance of butterfly effects, by the way, in behavior, small contextual cues, which, or indeed occasionally small reframings or repositionings, or even pieces of phraseology, which completely change behavior to a remarkable extent. One of the things I would absolutely advocate, which is test small things, the downside risk is generally trivial. The upside opportunity is surprisingly high, and you can actually exploit that asymmetry, even if you fail three times out of four, you still end up quidzim. - That's him talking on the retail is detail podcast. He gives a great example of a small bet that a national retailer like Boots could make, which could have exponential returns. And they multiply, that's the other thing. Those small nudges can actually multiply. I'll tell you one lovely thing, which I will tell to everybody, and I met Seb James recently for lunch, who is the, of course, CEO of Boots. And one of the things I kept running about, which I've been running about for ages, is if you're a retailer, particularly if you're Boots, but any retailer, don't just put the baskets at the entrance to the store, have a few of them in the middle. Trolley's, I take the fact that they're quite space consuming. Okay? - Yeah. - But a lot of people, particularly Boots, go into Boots and tend to do my one thing. - Shaving phone, right? - And they wander around and they think, well, now I'm here, or I never thought of this, but maybe I'll buy it. They end up buying far more things. Now, having gone in through the entrance and not picked up a basket, they're now limited in terms of what they can buy, by what they can carry. And you actually see this, there's absolute evidence of this, of people going around cradling their purchases like in child and their arms. And I kept saying, have some means, even if it's those funny little net baskets, have some means of people to go, well, I was only intending to buy one thing, but now there's a basket available. No one's gonna go back to the entrance to the store. Okay? And pick up a basket, not real. A small number of things basically make 90% of the difference. - Rory has made a career out of highlighting a small, psychologically inspired interventions behind some of the world's best inventions. He famously talks about the Uber map, which shows your driver heading towards you. It doesn't shave a second off the weight, but knowing where the car is removes uncertainty and it makes that weight less unbearable. That tiny psychological change catapulted Uber into success. He talks about Red Bull, for example. Their small, expensive can and the slight medicinal taste signals its potency, its caffeine-laced potency, whereas if Red Bull had decided to package itself in a large, cheap and fairly pleasant tasting drink, it wouldn't seem as potent. And when I spoke to Rory about these ideas on this podcast, he told me that making small bets isn't just a human trait. It is something that has been noted across multiple species and almost certainly has contributed to the survival of bees. - If you're looking at it in terms of bees, you have, I'm really sorry to be able to listen to me before because I always end up telling the story, but it's important because bees have been around for 20 million years, so they presumably know what they're fucking doing. And if we don't fucking up for them, okay? - Now before Rory shares this lesson on bees creativity, I'll just explain the waggle dance as it's a term Rory uses a lot. The waggle dance is a figure of eight dance that honeybees do when they find new flowers containing nectar and pollen. By performing this dance, the bees can share information about the flowers with the rest of the colony. Crucially, however, the colony relies on some bees who ignore this waggle dance and go off on their own path. Here's why. - 20% of bees, it hugely varies, but let's just take that as they ignore the waggle dance, right? And their purpose is to have a high chance of a failed journey, but a small chance of a massive wait for it, shareable upside. Now you can only tolerate the rogue bees, the 20% of bees who don't, the bees who have made the waggle dance, the algorithm's pretty simple, okay? You optimize pollen, you optimize, you minimize energy expenditure, that maximize collection of pollen nectar and some other shit resin, I think they collect. They make water as well. But okay, maximize value of collection, minimize energy expended in doing so. Very, very simple algorithm, okay? And it's very simple to quantify and so forth. If you had to kind of be a accountant, so they get that bit of the high right, okay? If bees had a accountant, which is mercilessly they don't, which is probably why they survived to 20 million years, okay, they get that 80% right. They basically get a formula and it would be, what are you doing? The waggle dance clearly said you should go over here. Don't you be very clever by the way, 'cause the bees, if they have information about a better pollen find, they do the waggle dance for longer. Now that's not because the bees notice how long the waggle dance is. They don't have to stand there with a stock watch. It's simply, if you dance for a long time, a lot of bees notice your dance. And if you dance for a short time, only a few bees notice your dance. So they have this relationship between length of dance and quality of nectar source, okay? Really clever, automatic sort of correcting feedback loop, if you said I mean, okay? Now, the reason you need the waggle dance bees is for adaptability, resilience and the charm. of getting lucky. Okay? Okay? All lots of other reasons other than optimizing instantaneous efficiency, which is what the count is trying to optimize short-term efficiency as if it's a proxy for effectiveness. It's not. Okay? It's a proxy for effectiveness in one part of the hive, but it's not a very good proxy for the random bees because their value is in required, dependent on them, occasionally making major and significant discoveries of new sources, on maybe 1% of journeys, and that's and in capital letters, and when they do so, sharing that information with the rest of the hive, so the explore information makes its way to the exploit bees. It's known in an algorithm as the explore exploit trade off. It occurs in animal foraging, it occurs in algorithm design. It's almost a kind of law of life that there is a trade off between discovering what you don't know and exploiting what you do, what you already do. Okay? Now, I think what we've done is by saying that every bee has to justify every journey, we've actually destroyed a large part of the resilience and the growth capacity of companies. Now, I mean, said that, it's absolutely vital that it's absolutely no use of the explore bees go off and keep it themselves. Now, the problem is that marketing is really the a large part of marketing, along with R&D and a few other functions, are the explore part of the organization. But they're downstream from the decisions made elsewhere, just as they are in government, okay? Do governments often say, okay, we've got a problem with pensions, let's call in a load of marketing guys. We've got a problem with setting the tax rates. Let's talk to some people at work in retail. They do not do that. They talk to economists and they talk to liars and they talk to nobody else. And then eventually, the marketing person or the R&D person or the inventor is presented with a fate of complete, okay? Because the problem has been defined in economic terms, so it can only be solved in economic terms. And the market, it gets to add a little bit of magic fairy dust, a little bit of icing on the cake. And that's all they're allowed to do. They're not allowed to design the fundamental program, because that's not how it works. The accountants and the liars get there first. And that's a fundamental problem, because what you're doing is you're effectively taking away the potency of the random bees, which is actually to suggest things upwards, not to take briefs downwards. And that's probably 80% of the value actually comes from that. Rui had a great example of a small bet having an unexpectedly large return, which he shared on the retailers' detailed podcast. A similar butterfly effect was someone from Diagio who said that in five years working there, they did one thing that was fat-tailed brilliant, which was they took Gordon's slow gen. They put it in the same bottle as ordinary Gordon's gen and they put it next to Gordon's ordinary gen on the shelf, because previously slow gen had been in the weirdo drink section of the supermarket. The triple-sec and all that weird shit, you know, a fern, a branca and all the stuff where we don't know what to do with it, right? And then the great thing is slow gen is only 20% alcohol, not 40%, but you can charge the same price for it as the ordinary gen if you put them side-by-side, because it's purple and cool, but because there's a lot less tax, you actually make quite a lot of money. But how should you apply this principle? How should you set your business up to capitalise from small bets? Well, I think you should take the advice of another previous guest on Nudge, Wilgidara. Wilgidara ran 11 Madison Park, which was ranked when he was running it as the world's number one restaurant, and he wrote unreasonable hospitality to talk about how he set up that restaurant and how he gave people more than they expected. On Nudge, a few months back, he told me that 11 Madison Park ran a unique budget, which allowed them to make a number of small bets. He called it the 95-5 principle. The rule of 95-5 is how I've always managed my businesses. In his book, Wil writes that the rule of 95 is to manage 95% of your budget down to the penny, but spend the last 5% foolishly. So the rule of 95-5 is an important one to understand when you're thinking through all of this stuff I'm talking about right now, because some people like to skip the rule and go right to the fun part saying, all right, I'm just going to start spending more money, and yes, you should, but you need to earn the right to spend it. The rule of 95-5 is how I've always managed my businesses, which means you manage 95% of your dollars like a maniac. I mean, no expense is too small to be poured over. And you do that so that 5% of the time you can spend foolishly. But I put foolishly in air quotes because I think that spending is some of the most impactful spending that there is. But you do need to earn the right to spend it because you need to save money, such that you have money to deploy. And gosh, you better earn it because if you are not spending that last 5% foolishly, I think you're you're being financially reckless. You're you're investing so much into today's dollars that you're not thinking enough about tomorrow dollars. We'll apply this rule in many parts of his business. But the example that stands out in the book is how he applied it to the restaurant's wine pairings. The wine pairings is a way that I in the book tried to paint the picture of what I mean in a restaurant. A fine dining takes too many restaurant and many people order wine pairings. They pay a fixed price for call it 10 small pours of wine. And every restaurant has a budgeted wine cost as in what percentage of what they sell wine for are they allowed to spend on that wine. Most restaurants when they think about pairings, they will take the amount that they are able to spend on 10 pours of wine divided by 10 and spend accordingly. Rather, what we would do was really do everything in our power to be as frugal as humanly possible on nine of those pours. Use connections, resources, find undiscovered wines that perhaps by virtue of being less popular, although just as good, whether you're a little bit less expensive than an alternative. But we would do that not so that we could spend less on the pairings generally. We did it so that we could spend foolishly on that 10th glass because I've been to so many restaurants and had the pairings and I don't remember a single wine I tasted. Whereas if you have pairings and one of those pairings is a little taste of Romani Conti or a first growth bordeaux or just something remarkable, now you'll remember it just requires managing your money a little bit differently, saving so you can spend foolishly. I think the 955 rule is a wonderful way to think about small bets. It suggests that you should spend 95% of your time, energy and money carefully, using it wisely, using it to create a consistent offering. But saving back 5% of your time, your energy and your money for small bets. For me, that means spending, for example, one day a week, every fortnight, working solely on small bets that I would never consider doing in my normal workday. And it is worth it because those small bets can have exponentially large returns. I want to finish with one final example of a small bet having a major return. And it's again taken from that wonderful Veritasium YouTube video. But if you select pursuits ruled by power laws, the goal isn't to avoid risk, it's to make repeated intelligent bets. And the thing is that beforehand, you cannot know which bet it's going to be because the system is maximally unpredictable. It could be that your next bet does nothing, it could do a little bit, or it could change your entire life. In fact, around three years ago, I was reading this little book. And in the book, there was this little line saying something like, "One idea could transform your entire life." So right underneath that, I wrote, send an email to Veritasium. A couple days later, I wrote an email to Derek saying, "Hey, Derek, I'm Casper, I study physics, and I can help you research videos." I didn't hear back for four weeks, so I was getting pretty sad and just wanted to forget about it and move on. But then a couple days later, I got an email back saying, "Hey Casper, we can't do an internship right now, but how would you like to research, write, and produce a video as a freelancer?" So I did, and that's how I could start it at Veritasium. And I've been making small bets like Casper's for the last nine months. Most of them have led to nothing, but some have led to opportunities that I think could have exponentially large returns. In fact, one of my small bets, one of these tiny ideas that I wouldn't have otherwise done, wouldn't have otherwise made time for, has led to me speaking on stage this first day at Nudge Stock. I'll be speaking on a day filled with amazing speakers, speakers like Rory Sutherland, but also Louis Farou, and I'll be speaking about an experiment that I've spent the last nine months running. This whole talk wouldn't have happened if I hadn't made time for small bets. But the outcome of this talk could be incredibly large, and stay tuned to Nudge because I plan to talk about this nine month experiment on an episode of Nudge in a few weeks time. But before then, I thought you might want to see some of the the other small bets I've run over the past nine months. So if you want to see 40 of my small bets, I have made them available to download. All you have to do is head to the show notes, click the link at the top of the show notes, enter your email and I'll send you to my 40 small bets. If you are already a nudging newsletter subscriber, then you already have the small bets list in your email. Just look at the PS in today's email. But for everyone else, click the link in the show notes, enter your email and you'll be sent directly to my list of 40 small bets. Thank you for listening to today's episode of Nudge Folks. Wish me luck this first day for my talk at NudgeDoc and I'll be back next Monday for another episode of Nudge, where we investigate why some of the world's largest fast food chains are masquerading as independence. See you then, bye-bye. (upbeat music) [BLANK_AUDIO]