Fascinating book about the birth of the field now known as Behavioral Economics. Part biography, part history, part research summary, this is the story both of the evolution of a friendship and collaboration as well as the melding of two previously disconnected fields: Economics and Psychology.
After their first meeting around 1968, Amos Tversky and Daniel Kahneman were rarely apart. The decades long tight collaboration that resulted produced a stunning number of key insights and seminal papers on the psychology of Judgement and Decision Making. The primary idea: there is systematic bias in the way people make decisions. Their work was responsible for the fall of the concept of the “rational man.”
They studied the cognitive basis for common human errors and elaborated on a set of heuristics (simple rules) and cognitive biases that subconsciously influenced the way people formed judgements or made decisions. Many of the resulting concepts — such as Anchoring, Framing, Hindsight, and the Halo Effect — have become household terms. Their “Prospect Theory,” created in 1979 and developed in 1992, was a “psychologically more accurate” description of how people made decisions, replacing the previously accepted Utility Theory which claimed that people made decisions by rationally calculating the utility (or value) of all potential outcomes. Applications of this work are widespread, ranging across medicine (evidence based medicine), sports, finance, and military uses.
Some of the heuristics:
• Representativeness heuristic: the decision making shortcut that determines probability based on how well the subject is representative of a stereotype.
• Availability heuristic: the mental shortcut that makes decisions based on examples that come immediately to mind.
• Anchoring and adjustment heuristic: the influence of a previously suggested reference point (the anchor) on a person’s assessment of probability.
• Simulation heuristic: the shortcut for determining an event based on how easy it is to imagine – or “the power of unrealized possibilities to contaminate people’s minds.”
Some of the biases
• Recency bias: Decision making based on the relative ease of remembering something that happened recently rather than long ago.
• Vividness bias: bias based on the ease with which an option can be recalled.
• Hindsight bias: the tendency of people to overestimate their ability to have predicted an outcome that they could not have possibly predicted.
• Present bias: The tendency of people to undervalue future with respect to present.
The structure of the book follows the story of the two men. Though the closest of friends and collaborators until the last few years of Tversky’s life, their personalities and background were quite different. While both Israeli, Amos came from an aggressive Zionist family, while Danny and his family escaped from Nazi Europe; Danny was an appeaser, Amos a bully; Amos loved theory while Danny liked practical application of psychology, “Amos was built to fight, Danny was built to survive.” The book includes captivating detail about their backgrounds and interactions, and the process by which the work took flight and captured the interest of researchers and practitioners around the world.
The journalistic style of the story makes the personal bits easy to remember, with the research results a little harder to grasp in its entirety. The narrative jumps around a bit and the down side of watching a theory evolve (and not necessarily in a linear order) is that it can be harder to comprehend the whole. I found reading the Wikipedia articles on Kahneman and Tversky helped supplement my understanding of the actual work.
Some great quotes:
Asked if their work was related to AI, Amos said: “We study natural stupidity instead of Artificial Intelligence.”
In response to evolutionary psychology proponents Amos said, “The mind was more like a coping mechanism than it was a perfectly designed tool.”
On “Creeping determinism,” Amos says: “He who sees the past as surprise-free is bound to have a future full of surprises.”
“Economics was meant to be the study of an aspect of human nature, but it had ceased to pay attention to human nature.”
“Theories for Amos were like mental pockets or briefcases, places to put the ideas you wanted to keep.”
One thought on “The Undoing Project by Michael Lewis (Non Fiction)”