The Friendship That Created Behavioral Economics
A conversation with Michael Lewis about his new book on the research of Daniel Kahneman and Amos Tversky
The term “the economic man,” or homo economicus, is attributed to John Stuart Mill. It represents one way economists have studied people for decades—as rational, self-interested actors whose behaviors and actions can be modeled. But then came the psychologists.
Daniel Kahneman and Amos Tversky are often referred to as the fathers of behavioral economics, for demonstrating that the human brain relies on mental shortcuts and biases in decision-making, which often leads people to irrational ends. Kahneman won the Nobel Prize in economics in 2002, for "for having integrated insights from psychological research into economic science, especially concerning human judgment and decision-making under uncertainty." In 2011, he wrote a best-selling book, Thinking Fast and Slow, about his research with Tversky.
The pair might seem an unlikely subject for writer Michael Lewis, who wrote the bestsellers Moneyball, The Big Short, and Flashboys. In his new book, The Undoing Project, Lewis tells the the lives of Kahneman and Tversky, the friendship that ungirded their ground-breaking research, and ultimately how that friendship unraveled due to physical distance (when the two took jobs at different institutions) and tension over recognition of the work they did together.
I talked to Lewis about why he wrote about two academics, the impact of their research, and the 2016 election through the lens of Kahneman and Tversky. A lightly edited transcript of our conversation is below.
Bourree Lam: Why you decided to pursue this book project about Kahneman and Tversky and their research? In the preface, you mention Richard Thaler and Cass Sunstein’s review of Moneyball, which pointed out that what you described in that book was essentially behavioral economics. But The Undoing Project also seems to me a labor of love.
Michael Lewis: The reason I got so interested in the first place was just that spending time with Danny Kahneman was so interesting. I wanted to go back for more, without ever thinking that this was going to be a book. [The project] immersed me in him, and becoming immersed in him meant becoming very familiar with his relationship with Amos.
Then I thought: I had this privileged access; I had this combination of a relationship with Danny and a prior relationship with Amos's son, who was my student at [the University of California]. I didn't know he was Amos's elder son at the time, I just knew him as Oren Tversky, but I was very fond of him and we were friends. The Tversky family was willing to open up to me.
The more I learned about it, I thought: These guys were for the ages. If you could have been a fly on the wall with Freud, or Darwin, or Einstein … I thought these guys were a big deal, and nobody had told their story. I didn't have any doubts about the importance of the subject. What compelled me to do it—though I didn't feel like it was naturally my subject—was a feeling that if I didn't, no one else would because no one else would have the access.
Lam: How much time did you spend with Danny? And when did you decide it was time to start writing?
Lewis: (Laughs) You know, you stop counting. We first met in the end of 2007. We made a trip to Israel together. I went and helped teach his class at Princeton. We’d go for long walks in the hills of Berkeley when he was here three months of the year. I don't know how much time when you add it all up together, but enough time so that there wasn't anything I didn't hear three times.
I've had this with subjects often, where they think I'm stupid because I'm asking the same question in a different way for the eighth time, just trying to see if there's anything else there—a memory, an insight—and I could tell I was getting that way with him towards January of [last] year. There wasn't much left to talk about that we hadn't talked about 18 different ways.
In the course of thinking about the book, I laid it out over a period of a couple years, it becomes clear what you need, what material is necessary. Once all the gaps are filled in, I don't feel like there's much work left to do on the reportorial side. I just sense that I have the story in my head and I'm ready to write.
Lam: The three pillars of the book are biographical stories about Kahneman and Tversky, the way their personal stories informed their relationship—which led to their Nobel winning work. How did you see the balance and interconnectedness of those three elements, and what fascinated you about them?
Lewis: It's funny, I didn't think of the structure that way. I was telling the story of this relationship, but I knew I wanted to do something tricky with the structure. I wanted to cut out quickly into the world and show the ideas at play in the world. The book opens with 30 pages in a basketball front office, and my struggle was: How do I weave their relationship and the creation of the ideas together with the consequences of their ideas in the world?
I was constantly struggling with, how do I jam the reader's nose into the fact that this is not just two academics in a room spinning airy-fairy ideas that have nothing to do with anything in the world? How do I jam the reader's nose into the consequences, like life and death in the world, or decisions about human beings in the labor markets? That, for me, was the thing I just agonized over.
Lam: What was it like to write about academics, and specifically these two?
Lewis: I can't think of another intellectual project that touches as much of human existence as their work in such an interesting way. I think they're very unusually important and relevant. If they were just academics, I never would have even begun this project. What drew me to them was the life of their ideas outside of academia, and that they themselves were constantly thrust into practical affairs by Israel. The fact that they had spent time on the battlefield, and were constantly kind of on call by the Israeli government and the Israeli military... Their unusual interaction with the world outside of academia made the story possible. If it were just two guys in a room, I never would have written it. They're constantly being stimulated by stuff outside of the academy.
Much of their work is mocking the academy. Amos explicitly and Danny implicitly end up having very little time for their own field. They create their own subfield within the field, and then they go about poking holes in economics. A lot of their interactions with their fellow academics are … it's not hostile but it's certainly ironic and irreverent. I also thought that possibly a lot of academics would benefit from every six years going to shoot at people and get shot at.
Lewis: Yes. I think that it sort of puts everything in perspective. These guys were never going to have time for petty academic battles, and they had a gift for avoiding getting sucked into them. They've got the perspective of what people who are fighting actual battles go through. They're not interested in the little things; they're interested in the big things. I think they get that perspective because it's forced upon them, because this all might end at any moment. There's an urgency to their academic life, their intellectual life, that I think grows out of their experience in Israel.
Lam: Can you say more about what you found interesting about the way their ideas reach beyond academia? A lot of readers know you as a storyteller of narratives about money or finance. How does this book fit into the repertoire of your work?
Lewis: Some of my work, at least, is clearly exploring the weird things that markets do. They screw up the value of baseball players; they screw up the value of mortgage-backed securities. Even the political book I wrote, I found myself drawn to a candidate the process had no time for because his type wasn't valued. So the distortion of value that goes on in markets or in people's minds directly connects up to [Kahneman and Tversky’s] work.
Moneyball comes right out of their work. Why do professional athletes get so badly misvalued? Part of the answer is there are distortions and kinks in the minds of the people doing the evaluations, and these guys were exploring that. I wasn't interested in them just because I thought they helped explain some of their work, I was interested in them in particular because of the intensity of their feelings for each other.
But there's no question that in their work are ideas that I wasn't even aware had come from them. I've been obsessed since I left Wall Street with the problems of financial advice. I just don't understand why people take it. These guys have a lot to say about that, and they also have a lot to say about why people shouldn't take it.
Their work on randomness—how people see random sequences as not random and see patterns where none exist—you see this everywhere. You see this in people getting a reputation for being really great with money, you see it in people getting a reputation for being really great at picking hits in the movie business, or picking baseball players in the draft. Many of the things around us have a random component; a lot of luck involved. The human mind doesn't see the luck, it sees the pattern and this is one of their first great insights.
Lam: Another one of their great insights is how predictable and systematic mistakes and thinking errors can be.
Lewis: That's the very big idea that collides with economics. If the mistakes aren't systematic, then economics can ignore them. They're showing that we're hardwired for certain types of mistakes, so people are mostly going to make these mistakes. Then you have the beginning of a story where whole markets can go wrong, and this is what Richard Thaler picks up on. He thinks of them as having one idea: systematic error. That would be filtering it through the lens of an economist who's dissatisfied with the rational-actor model in economics.
I think they have dozens of ideas. So, back to your first question, about what got me into this. When I would go out for walks with Danny, this stuff just tumbles out of him. I thought, this is just gold. This guy is, and, even dead, Amos was full of all of these nuggets of wisdom that if you add them all up together, they're more important than the formal work.
Lam: Your work has been about market failures in different realms, so I have to ask, are you going to write about this last election?
Lewis: [Laughs] I have to ask, should I? Do you think anybody's going to want to read anymore about this?
Everybody wants to know what happened. Everybody wants their dream explained, because everybody feels like they woke up and are still in this dream. I have no plans to write about this, I certainly don't have plans to write about the election. That's not to say I won't. Now, if someone called me from inside one of the campaigns and told me, "You know, there's a part of the story no one's ever told. Here's all of the information," I mean, I'd be hard-pressed to resist it. But I'm not actively pursuing it. I'm more interested in what happens next.
Lam: I do feel like people are trying to gain some insight from The Undoing Project regarding the 2016 election though.
Lewis: Well, it's a market for a politician, but people have this sense that the market did something really screwy, and they're not unjustified. There's a very clear sense right now that a lot of the people who voted for Trump may not have been voting in their best interests. It really seems like an irrational act to put this man in office, especially to people who didn't vote for him. And so people want to understand what was going on in the minds of these people.
I did find myself listening with a kind of Kahneman and Tversky ear to what was going on around me after the election. But the first thing I noticed was how people undid it. You could predict, given their discussions, how the imagination works and how the undoing was going to get harder and harder. As Danny points out, when a tragedy just happens, it's easy to undo it. You start from the event, and the first thing that you can undo moving backwards in time and change the result, you change: So the FBI director's email, or the ground ball that goes through the first baseman's legs in the bottom of the ninth inning, or the field-goal kicker missing at the end of the game. This is all the same stuff.
But then what happens is, the consequences of Trump pile up. To undo the election, your mind has to undo all this other stuff that happens as a result of Trump being elected, and you just stop doing it. It will seem quaint in six months to be talking about the FBI director and what he did with the emails; people won't feel that it changed everything. There'll be a sense that this was always going to happen, that we were always going to have Trump as President, that whatever happens will feel more determined or more inevitable or fated than it actually was.
I was listening to that, this brief moment after the election where people appreciated that this wasn't a deterministic event and lots of things could have happened to prevent Trump from being president, but their minds fixated on just a couple of those things. I don't think Trump knows any of this. I think he's just making it all up as he goes along, but he's really well-suited to being both a victim and a beneficiary of the [human thinking] mistakes that Danny and Amos point out. He's pure intuitive judgment, and he's appealing to other people's pure intuitive judgment. There's no real strong rational argument he's making about why he should be president.
Lam: But that’s why many people remain confused that he won.
Lewis: That's right. He's saying, vote for me, trust your gut. If you look at what Danny and Amos studied, it's just that. Somewhere in the back of people's minds, when they're trying to connect my book up to the election, that's what's in their minds. But I didn't write it because of the election. I've been doing this for eight years. I didn't see any of this coming. I didn't connect any of it to the election or anything like that, so this is just an accident.