What do the following things have in common?
1. The fact that large, normally carnivorous fish desist from eating cleaner fish, such as wrasse.
2. Those posh rope-handled carrier bags you get when you spend an appreciable amount of money on women’s clothes or cosmetics.
3. The free extra scoop of fries they give you at Five Guys
4. Spending a fortune on a wedding
5. A hotel waiving your modest minibar charges
6. The marble and oak lavishly used in nineteenth century bank branches.
7. That fancy training course your company sent you on in Kitzbuhel.
8. A lavish advertising campaign
9. A restaurant giving its patrons a free glass of limoncello after their meal
10. Investing in a brand.
Looked at from the standpoint of simple, short-term economic rationality, none of these behaviours makes complete sense. A bank could conduct its business perfectly well from a portakabin. Those rope-handled bags are expensive, but aren’t even waterproof. Limoncello costs money and a lot of people don’t like it. Was the training course really worth £5k? These things only make sense if we assume that some signalling is going on.
All of them, I would contend, may signal a variety of things. But they all are examples of a behaviour which is costly in the near term and which will pay off, if at all, only in the longer term. They are thus - if nothing else - reliable signals that the person, animal or business engaging in that behaviour is acting on the basis of long-term self-interest rather than short-term expediency.
This distinction matters. A lot.
Unlike short-term expediency, long-term self interest, as my friend the evolutionary biologist Robert Trivers has shown, often leads to behaviours which are indistinguishable from mutually beneficial cooperation. The reason the large fish does not eat its cleaner fish is not because of altruism but because over the long-term “the cleaner fish is more valuable to it alive than dead.”
The cleaner fish could cheat by ignoring ectoparasites and eating tasty bits of the host fish’s gills instead, but its long-term future is better if the big fish becomes a repeat customer. (And they do. Fish, it seems, exhibit surprising brand loyalty towards individual cleaner fish.)
What keeps the relationship honest, trusting and mutually beneficial is nothing other than the prospect of repetition.
In game theory this prospect of repetition is known variously as “continuation probability” or ⍵. Robert Axelrod has poetically referred to it as “The Shadow of the Future.” It is agreed by both game theorists and evolutionary biologists that the prospects for cooperation are far greater when there is a high expectation of repetition than in single shot games. Clay Shirky has even described social capital as “the shadow of the future at a societal scale.” Yet businesses barely consider this at all (in fact procurement, by setting shorter and shorter contract periods, may be unwittingly working to reduce cooperation).
Yet there are, when you think about it, two different approaches to business. There is the “tourist restaurant” approach, where you try to make as much money from people on their single visit. And then there is the local pub approach, where you may make less money from people on each visit, but where you profit more over time by encouraging people to come back. The second type of business is much more likely to generate trust and to yield positive sum outcomes than the first.
How might people distinguish the second type of business from the first? Well, the scoop of extra fries you get at Five Guys is one such gesture - an immediate expense with a deferred pay off. It is a reliable signifier that you are investing in a repeat relationship, not milking a single transaction. Likewise when your company pays your salary this month, it says you are worth that money for now; when it sends you to Kitzbuhel, it signals that it is committed to you for a few years at least.
If fish (and even some symbiotic plants) have evolved to spot this distinction, it seems perfectly plausible that humans instinctively can do the same, and instinctively prefer to do business with brands with longer time horizons.
This theory, if true, would also explain some counterintuitive findings in customer behaviour. It has long baffled people that, if a customer has a problem and a brand resolves it in a satisfactory manner, the customer becomes a more loyal customer than if the fault had not occurred in the first place. Odd, until you realise that solving a problem for a customer at your own expense is a good way of signalling your commitment to a future relationship.
The theory of “continuation probability” would also predict that when a business focuses more narrowly on short-term profit maximisation, it will appear less and less trustworthy to its customers. I suspect that, to anyone who has been awake for the last thirty years, this possibility seems all too plausible.
By Rory Sutherland