The Bromance That Turned Economics Upside Down

Who would guess that the modern sciences of behavioral economics and the psychology of decision-making owe their origin to a love affair (no, not sexual) between two men born early in the last century and so different that one could barely imagine them speaking to each other? Yet that is the story chronicled by the extraordinary nonfiction writer Michael Lewis in The Undoing Project: A Friendship that Changed our Minds, which, despite some quirks, is a compelling and worthwhile read.

Economics

Amos Tversky, whom Lewis describes as a “swaggering Sabra” or native-born Israeli, and Daniel Kahneman, a shy “Holocaust kid,” teamed up in the psychology department of Jerusalem’s Hebrew University in the early 1950s, and their names have been linked ever since. When Kahneman, a psychologist with no formal economics training, won the Nobel Prize in Economics in 2002, it was for work that the two men had accomplished years earlier, always working as a team. (Tversky died young, in 1996; Kahneman is hale and hearty at 82. The Nobel is given only to the living.)

Lewis’ narrative starts with a long digression on basketball. The author of Moneyball and The Blind Side (which were both made into two excellent movies, especially the latter), Lewis devotes the long first chapter of The Undoing Project to the quantitative side of basketball and does not even mention Tversky or Kahneman. Lewis notes, for example, that basketball players who look like champions are often overrated and overpaid. Those who are less attractive or charismatic are more likely to be a good deal for the team owner – they are not only cheaper, but may score more points or be better team players. To figure this out, one must look at the statistics, as Lewis’ hero Billy Beane, the manager of the Oakland Athletics baseball team, did to great advantage in Moneyball and in real life. (All teams now perform the analysis pioneered by Beane, reducing its effectiveness.)

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Some readers may wonder if they’ve opened the right book. But, with the basketball digression, Lewis slyly prepares us for a book-length lesson in the psychology of decision-making and its application to economics. If the tendency to overrate and overpay players who look good – even if they do not play particularly well – is a fundamental property of human nature, perhaps we should be aware of that. Maybe we can profit from that knowledge. And maybe such observations can be parlayed into a theory that can be applied more generally to human behavior and that can be used to improve the way that decisions are made.

“Two radically different personalities”

Lewis introduces his main characters separately, with Kahneman first; consequently, so will I. Kahneman spent much of his French childhood hiding from the Nazis. Later, the young refugee settled in Israel. Lewis describes him as “gentle, detached, disorganized, conflict-avoiding, physically inept… [not] anyone’s idea of a soldier.” But, in Israel then and now, everyone’s a soldier. (Kahneman even single-handedly invaded Jordan by mistake, almost provoking an international incident.) And in a young country full of young people it’s possible to advance startlingly quickly. At the age of 20, Kahneman, still an undergraduate, was assigned the responsibility of psychologically scoring every Israeli soldier using a test of his design. This “Kahneman number” is still in use 70 years later.

Kahneman displayed a quiet diligence, which Tversky would correctly describe as brilliance concealed by shyness. Tversky, in contrast, was cartoonish in his self-confidence and bravado. He once jumped off a high-diving board without knowing how to swim, having arranged for a swimmer to fish him out. As a soldier, he repeatedly placed himself in harm’s way when others were ducking it. When Tversky, an experienced paratrooper, flew a commercial airliner for the first time he was fascinated by the process of landing – he had taken off countless times but never landed, having jumped out of the plane every time before that.

By Larry Siegel, read the full article here.