This is a great book, and indeed, coming from Michael Lewis, it is hard to imagine how it could have turned out to be a bad one. It tells the story of a modern academic revolution in thinking about our minds, and it is told by an author who has demonstrated his mastery of making complicated material accessible and, indeed, exciting to a lay audience. Readers of Quantitative Finance will surely be aware of his earlier books, such as The Big Short, which tells the story of the financial crisis with such panache that Hollywood found it plausible to turn it into a movie starring Christian Bale, Ryan Gosling and Brad Pitt.
I leave it to the reader to decide on the most plausible cast for the movie that The Undoing Project might become. The main roles to fill are two of the most famous psychologists of our age, and certainly the ones who have had the most influence on economic theory: Amos Tversky and Daniel Kahneman, both equally brilliant and charismatic, albeit in their very distinctive ways. It is one of the most captivating features of the book that these very contrary, but somehow perfectly complementary, characters come fully alive. Kahneman, of course, is still alive, and I have seen him in many video recordings. Having read the book, I believe to have just as vivid an impression of Tversky, of whom I have never seen a recording. (Of course, how faithful the portrayal of either is I have no way of judging).
To finally sum up the story that, I suppose, is known to most already: Kahneman and Tversky were two psychologists who started their careers in Israel in the 1960s. Already recognized as great talents on their own, when they started to collaborate they were quickly engaged in ground breaking research on human decision-making that brought them world-wide fame, and, in the end, a Nobel prize in economics. At that point, Tversky had already sadly passed away, but he would undoubtedly have shared the prize that was awarded to Kahneman.
What they had found out in numerous clever and surprising experiments is that people behave quite differently from the way that micro-economists’ models had supposed. That these models were not completely accurate was, of course, long understood. However, the assumption was that these deviations were erratic and thus, not the stuff of systematic study. Moreover, in the bigger picture, these random ‘mistakes’ would cancel each other out.
Tversky and Kaheman were able to show that this might not be the right way of thinking about human decisions. They pointed out many ways in which people systematically deviated from the directives of rational choice theory. These phenomena were bundled up into their advancement of expected utility theory, which they cryptically called ‘prospect theory’, and their study of heuristics and biases, which has since become a most fertile research field of its own.
All these developments have been well documented in Kahneman’s best-seller Thinking, Fast and Slow, but they get another added dimension in this book, as it supplies the personal side of them. And that is quite an addition: How the flamboyant, convention-flouting Amos Tversky meets the much more quiet and brooding Daniel Kahneman; how they, to everyone else’s surprise, fall intellectually in love with each other; how they lock themselves up in a private room to continually pour out laughter and scientific gems; how, when some fame comes their way, they leave Israel for the United States; and how their move brakes the magic spell; how, finally, they lose their connection altogether, ultimately ending with Tversky’s illness and death. And finally, of course, how their work gets more and more momentum in the community, how it crosses the boundary between psychology and economics and is crowned with the Nobel prize. All that is told in such an engaging way that it is not easy to put down the book too often. It also adds fascinating depictions of life in Israel, both academic and public, throughout a time of intense upheavals for the state, as well as fascinating portrayals of the scientific landscape and prominent figures in the U.S. and in Europe. Again, for the most part I can’t say how accurate these depictions are; the only person mentioned in the book that I have personally met is Gerd Gigerenzer, and I have to say that he comes off as a bit of a one-dimensional villain in the book, which seems not to be really fair to him.
The book ends with Kahneman getting the call from the Nobel committee, and the scene is another testament to Lewis’s story telling prowess. Even though every reader knows that the call will come, and will have figured out that this will be the climax of the book several pages in advance, the finale is captivating and touching. It is also probably the best place to bring down the story arc, at least I could not think of a better one. However, I must say that it left me disappointed, because it meant that the last 20 years of developments were left out, and these by no means were unexciting. To sketch that missing part of the story: after the Nobel accolades, Kahneman became, predictably enough, a figure widely celebrated by psychologists and economists alike. However, his work with Tversky managed to cross another important boundary, the one between academic theory and political reality. Mostly driven by the success of a book called Nudge, written by their friends and collaborators Richard Thaler and Cass Sunstein, Tversky’s and Kahneman’s ideas are now fuelling policy decisions in governments and non-governmental organizations around the world. These range over many, many areas of application, including the improvement of important financial decisions. One of the manifestations is the Save More Tomorrow retirement plan, co-developed by Richard Thaler and one of the main examples of the book. The plan can be seen as exploiting a host of the cognitive heuristics described by Kahneman and Tversky (such as loss aversion, framing, the status quo bias and others), and it has been shown to significantly increase savings. Whether higher savings rates are what the state should push its citizens towards is, of course, another question indicative of the substantial philosophical quandaries that lie in the practical application of Tversky and Kahneman’s insights.
In short, this last and untold part of the story includes many developments in behavioural finance that the readers of this journal might be especially interested in. I hope that the author is working on a new book covering that material as we speak (he mentions it, and how it is intertwined with his own prior work, in the preface). I would certainly be sure to get it and read it as quickly as I did The Undoing Project.
Notes on contributor
Andreas Kapsner is a postdoctoral fellow. His research interests include cognitive science, behavioral policy, heuristics and biases.
Munich Center for Mathematical Philosophy
© 2017, Andreas Kapsner