I’ve just finished Michael Lewis’s The Undoing Project which follows two Israeli psychologists Daniel Kahneman and Amos Tversky whose work around human decision making, judgment, and bias have influenced the field of decision making and behavioral economics. The backstory around how these two great minds developed independently and the story of how they connected to create one of the greatest partnerships in modern academia. They pioneered a lot of the ideas that we now understand to be true in our society. Their work on identifying human bias and heuristics that proved the economic theory wrong about humans being rational actors. Heuristic means a mental rule of thumb you use every day often times unconsciously to make decisions. These biases and heuristics will lead us to contradict ourselves without us realizing it.
The ideas the two psychologists developed together are quite interesting and I recommend reading Thinking, Fast and Slow if you are really interested in the ideas of our unseen biases or illusions to lead us to believe we always make rational decisions. Behavioral economics which is simply the blending of economics with how humans actually make decisions did not exist in its popularity as it does today. You now see the impact their work has had on public policy and how corporations make decisions. The idea that small changes or tweaks are able to illicit vastly different responses from us is truly powerful.
A book called Nudge takes this idea of utilizing our knowledge of behavioral economics to make changes for the good of the people. An example used in by Lewis in The Undoing Project is how many corporations made the shift from having people opt in to contribute a minimal amount to their retirement plant to having to opt out. This small changed increased enrollment rate by 30% points as most folks didn’t think about it or were trapped in inertia. The idea of anchoring – meaning you throw a random number to someone then ask them a question to estimate another number. The individual will always heir toward the number that served as the anchor. An example is I tell you to think of the number 3. Then I ask what is the current population of the endangered Florida Panther? You are now more likely to guess a lower number than you would if I’d have said nothing or if I’d given you the number 25,000 to think of before asking that question. These are the types of findings these two brilliant minds came up with through observing the world around them.
It wasn’t until part of the way through this book I realized I’ve actually read Kahneman’s best selling book Thinking, Fast and Slow which goes into more detail about the research and findings over the course of Kahneman’s career. If you have never read a book on behavioral economics (which may sound boring) I recommend you pick one up because it helps you realize the inconsistencies of your own and others decision making. It forces you to grapple with the fact that we are much more impressionable than we realize and we are able to impress upon others more than we could imagine. That idea is part of the reason I am passionate about the Financial Glass a platform to share ideas freely and without them coming from an untrustworthy source.
The Undoing Project is a way to ease into practical psychology as it is set to share the story of two bright individuals and their story together. There is a good amount of research sprinkled throughout. It reads more as a dramatic storytelling but helps you understand the men who came up with these ideas and why they chose to ask these questions to themselves and the world around decision making, judgment, and cognitive bias.