January 15th, 2018

Lessons Learned from the Original Behavioral Economists in The Undoing Project by Michael Lewis

Reading Time: 3 minutes

In Michael Lewis: The Undoing Project, he explores the partnership of Amos Tversky and Daniel Kahneman, two of the most famous psychologists you’ve never heard of. Though the pair live in obscurity outside of academia, their work—often considered the scientific community’s first foray into behavioral economics—includes some of the most often-cited academic papers of all time, and have completely changed the way we understand and interpret human behavior and decision making.

In the beginning, scientists, economists, and marketers all saw people as rational, left-brained individuals who were capable of using hard data to make decisions without being swayed by emotions, instincts, or false beliefs. Not only is this not true, as Kahneman and Tversky would spend their whole careers proving, we’re almost the complete opposite!

People are nowhere near as rational as they think they are

In their decades of research, Tversky and Kahneman coined a number of terms that still exist in behavioral economics today. One such term is “heuristics,” used to describe the cognitive shorthand people use to make decisions. Most of the time, heuristics are harmless or even advantageous when it comes to helping us make everyday choices. However, they can also be deeply flawed, and even dangerous.

One type of heuristics is known as Anchoring, something we’ve talked about on this blog before. When we need to estimate something, like the value of a bottle of wine or how tall a tree is, we tend to start from a readily available number—or anchor—and then adjust it until we reach a plausible conclusion. This can be a useful skill, but these anchor numbers can often be completely arbitrary. For example, after writing down the last two digits of their social security numbers, research subjects were asked to bid on items like chocolate or computer equipment, and subjects with higher social security numbers bid much higher than those with lower numbers.

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Representativeness is another type of heuristic Kahneman and Tversky identified in their research. The idea behind representativeness is that people tend to make conclusions or link events to each other that might have no correlation at all. NBA player Jeremy Lin was a remarkably talented basketball player in high school but received no athletic scholarship offers from universities, nor was he immediately drafted by the NBA, despite his remarkable credentials. The reason? As an Asian-American, he simply didn’t “look” like a basketball player.

Another heuristic type, Availability, causes people to assume the likelihood of events based on how easily they can recall something like it happening before. When asked if they think gun homicides are more common than gun suicides in the United States, most people will agree that they are, when in fact gun suicides happen nearly twice as often. Gun homicides get more media coverage, however, so we assume they must happen more.

Understanding our predictably irrational behavior can help us make better choices

Kahneman and Tversky’s word laid the foundation for modern behavioral economics and completely changed the way we view human behavior. Their discoveries about the irrational ways we judge situations and make decisions have altered how professional athletes are drafted, how economists monitor the stock market, and how medical professionals assess patients.

When we understand the processes that guide our behavior, we can better work to combat these cognitive biases that may be distracting us from making rational judgments. Fortunately, our behavior may be irrational, but it is irrational with remarkable consistency. We universally apply heuristics to our everyday thinking, for better or worse, especially in situations where we are uncertain.

Despite how it may sound, heuristics do come with benefits. We can use the recognition heuristic to know when someone is choking based on a single cue, like if they cover their throat with their hands. The one-good-reason heuristic helps us weed out less-important information by focusing on one particularly compelling piece. If a baby is crying, for example, there might be a dozen reasons for it, but a pungent smell emanating from them would likely have more weight as a cause than anything else that might be happening.

Our mistake isn’t using heuristics when we make decisions, but doing so without awareness. Once we’ve recognized that our decisions aren’t always made rationally—and that, in fact, our logic is more often completely irrational—we can remind ourselves to think more carefully before making decisions, which will hopefully lead to making better decisions.