Saturday, February 11, 2017

Michael Lewis On Freakonomics On Kahneman and Tversky

From Freakonomics, Jan. 4, 2017:

Our latest Freakonomics Radio episode is called “The Men Who Started a Thinking Revolution” (You can subscribe to the podcast at iTunes or elsewhere, get the RSS feed, or listen via the media player above.)

Starting in the late 1960s, the Israeli psychologists Amos Tversky and Danny Kahneman began to redefine how the human mind actually works. Michael Lewis’s new book The Undoing Project explains how the movement they started — now known as behavioral economics — has had such a profound effect on academia, governments, and society at large.
Below is a transcript of the episode, modified for your reading pleasure. For more information on the people and ideas in the episode, see the links at the bottom of this post. And you’ll find credits for the music in the episode noted within the transcript.
*      *      *
A quick update on my new podcast, a game show called Tell Me Something I Don’t Know: We tape in front of a live audience and we’ve just announced a batch of new taping dates, in New York City, Boston, and Washington, D.C. On January 25, 26, and 27, we’ll be at Symphony Space, in New York City; on March 6 and 7, we’ll be at 6th and I, in Washington, D.C.;  and on March 14, 15, and 16, we’ll be at the Wilbur Theater in Boston. So please come to the show! To get tickets — or if you want to be a contestant — just go to If you haven’t heard the show yet, check it out on iTunes or wherever you get your podcasts. It’s already got more than 3 million listens — so what are you waiting for? Our first six episodes are already up, and lots more will be coming soon. Now, on to Freakonomics Radio.
*      *      *
[MUSIC: Torches, “Fancy Meats” (from Heads Full of Rust)]
There aren’t many people in the world who write excellent books that also get turned into excellent films. Among them is this guy:
Michael LEWIS: My name is Michael Lewis, and I just think of myself as a writer.
What makes Michael Lewis’s rare feat even rarer is that his books wouldn’t seem at all conducive to the Hollywood treatment. Books like Moneyball …
LEWIS: … which was about the way the Oakland A’s managed to function on a shoestring budget in Major League Baseball. And the book was in my mind really about the way the market for baseball players misvalued those players. That the then-experts in baseball, scouts, would make big mistakes in deciding who was a good player and who wasn’t a good player. And the A’s were exploiting this by using statistical analysis.
Brad PITT (Clip from Moneyball): The problem that we’re trying to solve is that there are rich teams and there are poor teams, then there’s 50 feet of crap — and then there’s us.
Or, an even more unlikely book to be turned into a film, The Big Short, Lewis’s book about how a housing bubble turned into a financial disaster.
Ryan GOSLING (Clip from The Big Short): With something called a Credit Default Swap. It’s like insurance on the bond and if it goes bust you can make ten-to-one—even twenty-to-one return.
LEWIS: I was astonished that anybody bothered to make Moneyball, much less The Big Short. And so my experience with the movie business is peculiar because what seems to happen is I write the books that are ever harder to turn into movies and they work ever harder to make them into movies. 
His latest book may pose the biggest challenge yet. It’s called The Undoing Project. And it’s about a pair of academics, in a room alone, for a few decades, writing papers. They are a pair of Israeli psychologists named Amos Tversky and Danny Kahneman.
LEWIS: And one of their great discoveries is that people don’t make clean, clear choices between things. They make choices between descriptions of things.
No car chases. No doomsday scenarios. But it may still be movie material – for what Kahneman and Tversky did was nothing less than redefined how we humans think. Is that dramatic enough for you?
*      *      *
Stephen J. DUBNER: So as a fellow writer, I want to ask you this: Reading your work is so pleasurable and easy, and I don’t mean that at all as a pejorative. I love the way you use language and words to talk about ideas. It’s an incredibly rare ability. But because it’s so pleasurable and easy to read, one might assume that the writing of these books is easy and perhaps pleasurable. Is it? Are you, Michael, any less tortured than the average writer?
LEWIS: Yes. It is pleasurable and easy. I hate to ruin your punchline, but actually what is hard for me is figuring out in the beginning what I want to say. I spend a lot of time gathering material and organizing the material before I sit down to write. I’d say three-quarters of the time is that. When the actual writing starts, it’s, for me, fun. It’s just fun. I mean, it’s fun and hard, but if it’s hard, it’s hard in a fun way. And people like my wife, who has walked in on me while I’m writing — I write with headphones on that just plays on a loop the same playlist that I’ve built for whatever book I’m writing. And I cease to hear anything in the world outside of what I’m doing. And apparently I’m sitting there laughing the whole time. And so I think basically what I’m doing is laughing at my own jokes, and I wasn’t even aware of that. But people like my kids and my wife say that, “You’re sitting at your desk laughing all the time.”
DUBNER: What’s on your playlist? What kind of stuff? Is it pop songs with lyrics or does it have to be more background stuff?
LEWIS: It’s pop songs with lyrics, but I cease to hear it. So the playlist for The Undoing Project included two versions of “Jesse’s Girl,” the Rick Springfield song. It’s Meghan Trainor, some of Adele’s new album, a Cat Stevens song, a Jim Croce song. And then they just… It’s kind of a random assortment stuff. What it all has in common is it kind of gets me up, and after I’ve listened to it a few times while writing, I have this Pavlovian response to it. So if you played like a Meghan Trainor song right now —
DUBNER: You’d just start typing.
LEWIS: Yeah, I’d look for a keyboard. That’s exactly right. So it’s a very odd kind of conditioning mechanism for me.
[MUSIC: Johnny Fiasco, “Downward Spiral” (from Metropolis)]
The Undoing Project began to germinate more than a decade ago. Lewis had just published Moneyball. 
LEWIS: The heart of the story was that markets can really dramatically misvalue and misjudge people. And “If a baseball player could be misjudged, who couldn’t be?” kind of a thing. I thought it had kind of a universal message to it. What I didn’t do is ask why baseball scouts were misvaluing baseball players. And I didn’t really even notice that I hadn’t done that.
[MUSIC: Dot Dot Dot, “Can’t Let Go” (from Revel Revival)]
Lewis didn’t notice that until he read a review of Moneyball, published in The New Republic, by the economist Richard Thaler and the legal scholar Cass Sunstein.
LEWIS: And they said, and very sweetly, “This is a good story Michael Lewis has written, but he doesn’t seem to realize that these two guys named Danny Kahneman and Amos Tversky, psychologists, who’ve explored the biases in the human mind that lead people to make these sorts of misjudgments.” And that was the first time I’d ever heard of Danny Kahneman and Amos Tversky.
The fact that someone like Michael Lewis hadn’t even heard of Danny Kahneman and Amos Tversky tells you something about how obscure most academic research is. It also tells you something about Lewis.
LEWIS: I tend to have tunnel vision when I’m working on something and when Danny Kahneman got the Nobel Prize in economics in 2002, I was in an Oakland A’s dugout. And so I just wasn’t paying attention.  
And it’s not like Kahneman and Tversky are exactly famous today, outside of some rather specific circles. But those circles have been expanding. And even if you don’t know Kahneman and Tversky by name, you are living through a revolution that their research made possible. A revolution as basic – and important – as understanding how people make decisions. Small decisions, like what to eat for lunch; and big ones, like whether to start a war. This revolution has many components and several names, the most prominent being “behavioral economics.” Which is an interesting name for a couple of reasons. No. 1, shouldn’t all economics be behavioral? And, no. 2, a lot of what people talk about when they talk about “behavioral economics” isn’t really economics at all. Which makes sense, since Kahneman and Tversky were psychologists and not economists. But economists, as Freakonomics Radio listeners know, can be a grabby breed. So they put their name on it: “behavioral economics.” Anyway: what is it? Loosely defined, it’s a way of blending empiricism and common sense to understand how people behave; it marries the economist’s belief that people respond to incentives with the psychologist’s understanding that people often don’t respond to incentives as rationally as economic theory might predict. It all starts with recognizing the gap between how we think we make decisions and how we actually make them. The foundation of this field, along with much of its nomenclature, came from the minds of just two men: Amos Tversky and Danny Kahneman. They had a particularly intense and intimate intellectual partnership:
LEWIS: Danny is a fertile source of ideas. So he’s really generative. And it’s not that Amos isn’t capable of being generative, but Danny is off-the-charts generative.  He’s almost the poetic or novelistic mind in the room. And Amos is the diamond cutter. Amos is a pure analytical mind, who sees levels of abstraction in Danny’s ideas and generalizes them and formalizes them, so that they can be tested and expressed in a way that is academically respectable. But I think what they actually are doing is they’re laughing at stupid things people do. And Amos was asked once by somebody who said, “Does the work you and Danny do have any bearing on artificial intelligence?” And Amos said: “I’m much more interested in natural stupidity than I am in artificial intelligence.” And I think that they felt that it wasn’t a mocking spirit in which they operated, they were laughing also at themselves. At the sort of thing that they did that struck them as irrational, and they were mining that for gold. They have really a rattle bag of ideas that they end up trying to classify.
[MUSIC: Mark Ullrich, “Melting”]
Ideas that all revolved around a central realization: that when most of us make decisions, we essentially ignore the laws of probability and even logic. That we rely instead on primitive rules of thumb and shortcuts – or “heuristics,” in the language of academia – that are prone to error. One such heuristic that Kahneman and Tversky explored is known as “anchoring.”
LEWIS: Anchoring is the idea that your mind can be swayed by totally irrelevant information when you’re making a judgment. And they tested it by creating a wheel of fortune that had numbers 1 to 100 on it. You the subject, the lab rat, would spin the wheel of fortune and some number would come up – 20 or 47. And then they asked you to estimate what percentage of the countries in the United Nations came from Africa and what they showed is people who spun a higher number on the wheel of fortune placed a higher estimate there, and the people who spun a lower number on the wheel of fortune guessed lower. And they were anchored by just this number that had been mentioned before. The idea that you could have that kind of effect on an totally irrelevant judgment by just putting a number in front of it, I think it’s totally original. Although, every used car salesman sort of understands, right?
DUBNER: Exactly.
LEWIS: Right? Or Donald Trump understands. You name some huge number and that becomes what you’re centering your judgment around. But what they showed is that the number you’re shown has nothing whatsoever to do with the judgment you’re making and can still affect the judgment.
Another mental shortcut Kahneman and Tversky examined is called the availability heuristic.
LEWIS: It’s a fancy name for just memory — like what comes to mind easily and how that warps your judgment. For example, you’re driving down a highway and you’re going 75 mph like everybody else you’re kind of assuming it’s safe because nothing is alerting you to the probability of an accident. And then you see a horrible accident and everybody slows down to 50 because all of a sudden probability of accident is more available. It’s in your mind. So what comes easily to mind leads to all kinds of biases that people have named- the vividness bias. People think that a baseball player is a better baseball player than he is if his talents are very vivid – if he’s really, really fast or has a lot of power he is more likely to be overvalued than if he had subtle abilities, like plate discipline, because those aren’t vivid. Recency bias is a consequence of the availability heuristic. Whatever happened most recently is judged to be more probable and more likely. A hurricane hits New Orleans, wipes it out — everybody thinks hurricanes are more likely to hit New Orleans than they really are and so forth.
[MUSIC: Blindfold, “Rotation”]
A lot of Kahneman and Tversky’s research looked at how people think about risk – and how we typically give adverse events a lot more weight than positive events. That was the thrust of their most influential paper, published in 1979, called “Prospect Theory: An Analysis of Decision Under Risk.” It argued that the standard economic model for decision-making didn’t fully account for how real people make real decisions, especially if there’s the possibility of a bad outcome. It made sense that Kahneman and Tversky thought about this differently than economists – they were, after all, psychologists; also, they’d both seen some bad outcomes themselves. As a child, Kahneman survived the Holocaust, just barely, in France. Tversky was a paratrooper and an infantry commander in the Israeli army, and saw his share of death and disaster. Their own experience with risk, and adverse events, informed what they thought about as scholars. They were both obsessed with how people process information; with how cognitive shortcuts get in the way of long-term logic; and especially with how we try, in our minds, to explain or even undo our worst experiences. The Undoing Project – the title of Lewis’s book – was also the name of the last project Tversky and Kahneman worked on together.
LEWIS: And the nature of the project was they were going to explore the rules of the human imagination. They had come to the conclusion that imagination wasn’t just this free-flowing thing — that actually it obeyed certain rules.  And the way they thought they were going to study it was by studying the way people undid tragedies and tried to create alternative scenarios. When I saw the phrase I thought, “That’s a good description of their enterprise.” Because what these guys are engaged in doing, is undoing a false view of the human nature and the way that mind works, and that had infiltrated the social sciences and were just kind of in the air we breathed.
DUBNER: As useful as it is obviously to identify all these heuristics we use and all the errors they lead to, and honestly all the loss it leads to, how prescriptive were Kahneman and Tversky?
LEWIS: You know, they were very diffident about how their work was going to be used. So I think they thought — I know they thought — that people were never going to be as good at correcting for their own illusions, but I think they also thought that they might be good at correcting for other people’s illusions, that it was easier to spot the mistakes and inefficiencies and irrationalities in other people’s thinking and decision-making and judgment than it was your own and so that’s where you get checks from. That and also the whole Moneyball thing, that you use data as an antidote to the warping that naturally goes on when you’re making intuitive judgments....

...MUCH MORE, including audio