The Undoing Project: A Friendship That Changed Our Minds by Michael Lewis Journalist Michael Lewis (Moneyball) examines the friendship of two Israeli cognitive psychologists, Nobel laureate Daniel Kahneman and the late Amos Tversky. Kahneman, a Holocaust survivor who lived in hiding as a child, and his younger colleague, Tversky, a war hero, left Israel early in their careers for academic positions in North America. Their work is responsible for the development of the field of behavioral economics.
The hallmark of the academic legacy of Kahneman and Tversky is that humans rarely make rational decisions when confronted by complex statistical data. Strong psychological biases prevent clear thinking when making life choices. In addition to economics, Lewis describes how the work of Kahneman and Tversky has led to practical applications in the fields of sports management, medicine, aviation, and military science.
Kahneman and Tversky (and their collaborators) found that humans make decisions based on the initial information they receive (anchoring), prefer to avoid losses when taking a risk (loss aversion), put too much emphasis on winning or losing streaks (the clustering illusion), rely too much on their memory (the availability heuristic), ignore general information (base rate theory), are terrible about making future predictions (the representative heuristic), place too much value on their own possessions (the endowment effect) and have their thinking distorted by how a problem is described (framing).
Perhaps the simplest concept discovered by Kahneman and Tversky is the “conjunction fallacy.” Humans are fooled into believing a more detailed narrative is more probable than a simpler narrative because it confirms their biases. Consider the “Linda” example. According to the research of Kahneman, Tversky, and Slovic (1982), the vast majority of people consider choice #2 more likely than #1, even though it is statistically less likely to be the case:
Linda is 31 years-old, single, outspoken, and very bright. She majored in philosophy. As a student, she was deeply concerned with issues of discrimination and social justice, and also participated in anti-nuclear demonstrations.
Which is more probable?
1. Linda is a bank teller.
2. Linda is a bank teller and is active in the feminist movement.