Michael Lewis is the New York Times bestselling author of Moneyball, The Big Short, The Blind Side, and more. His most recent release, The Undoing Project, tells the story of the groundbreaking friendship between psychologists Amos Tversky and Daniel Kahneman, whose collaboration led to huge changes in how we think about human behavior. For their work on prospect theory, Kahneman won the 2002 Nobel Prize in Economics, and their theories are outlined in his bestselling 2011 book, Thinking, Fast and Slow. Michael Lewis recently joined Adam Grant, award-winning professor and author of Give and Take and Originals, for a conversation on The Undoing Project. Their conversation was recorded live at the Authors@Wharton speaker series.
This conversation has been edited and condensed. To view the full conversation, click the video below.
Adam: I want to start by talking about The Undoing Project, which really begins with Moneyball. Pick up where that left off and tell us where this book came from.
Michael: I saw a review by a pair of academics, Richard Thaler and Cass Sunstein, who made the point that Moneyball really wasn’t about baseball. It was about how markets misvalued people, so much so that people were able to find new and better ways to value players, find bargains, and operate like a financial trader in the market for players, with better information.
The review said, “He never asks why this happens—why do markets do this?” They do this, in part, because of the cognitive biases of the baseball scouts who are determining the value of the players. These two Israeli psychologists, Danny Kahneman and Amos Tversky, explore these biases. You can get to the root of the story through their work. I was amazed I missed the story—Paul DePodesta was very interested in cognitive biases.
I live in Berkeley and a friend, a psychologist named Dacher Keltner, introduced me to Danny. We became friends and [one day, the conversation] circled around to his relationship with Amos. These guys have spawned these ideas, they created a field of judgment and decision making. But his relationship to Amos was what interested me most, because it had this arc of a love story. They met in a blaze of sparks, fell in love with each other’s minds, spent ten years creating children—[their] ideas—and had this horrible falling out that nobody knew about.
The emotions of the relationship somehow electrify the ideas. What I wanted the reader to come away with was a vivid image of Amos and Danny’s minds. That was the goal: create these characters in such a way that they became characters of the imagination.
Adam: It’s fascinating. You wrote this book because of a bunch of academics. For anyone who thinks that the ivory tower doesn’t matter, academics can cause Michael Lewis to write a book. That’s impact.
Michael: Ideas have incredible power, but this is a peculiar case because they were Israeli academics in that period. [Their] whole relationship took place against the backdrop of the war for the Israeli state. They weren’t allowed to just sit in school. They were shooting and getting shot at every six years, in and out of reserve duty. Had World War II never happened and Danny Kahneman was allowed to live his natural life in France, he would have been this ethereal intellectual who, I’m sure, would not have been engaged with the outside world.
Danny ends up reshaping the Israeli military in a very Moneyball way, training Israeli fighter pilots, figuring out what should be put in the meals ready-to-eat box for the soldiers, running around the battlefield with Amos in a Jeep. Israel forced Danny to be useful. All of a sudden, his psychology class is called applications of psychology, and it’s all about how you solve a practical problem. That informs their work.
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Adam: Talk to us about the collaboration. What did you learn from unpacking that relationship about great dynamic duos?
Michael: I don’t know how much of it is general, but I can tell you what I learned about them. The key to just how instantly integrated they became, as Danny says, “We shared a mind.” They found in each other something they lacked in themselves that they hungered for. Amos Tversky, famously, was the smartest man anybody ever met. Dick Nisbett, psychologist at Michigan, designed this one-line intelligence test.
Adam: The Tversky test.
Michael: The Tversky test. The longer it takes you after you’ve met Amos to figure out that Amos is smarter than you, the stupider you are. Everybody agreed. There are a hundred stories like the following: Amos goes to a party with some of the greatest physicists in the world in Tel Aviv to honor a young physicist, the recipient of a big prize. The young physicist ends up in a corner with Amos. The next day the young physicist calls the hostess of the party and says, “Who was that physicist I was talking to?” And she doesn’t know who he’s talking about. “Oh, you mean Amos Tversky. He’s not a physicist, he’s a psychologist.” Dead silence on the end of the line. “That can’t be true. He was the smartest physicist there.” That kind of thing happens over and over.
Amos, as smart as he is, lacks something. He was a magician. What he wanted to be was a poet. When he was a kid he struck up odd friendships with poetic geniuses. He was drawn to it—he wanted to write it, he did write it, but it wasn’t any good. His imagination was kind of ordinary.
Danny is a poet. He’s got a novelistic imagination, a vivid fantasy life. He realizes when he’s a little boy that he has to be careful what he fantasizes about, because the feeling is so vivid that it’s as if it happened. He cannot allow himself to imagine something that he actually wants, because if he fantasizes himself having it, he loses his motivation to get it, because he’s felt like he’s already had it.
He creates rules for his own imagination. Danny, for complicated reasons, decides that he has to be a scientist at a very early age. Danny’s mind is disorganized like Danny’s office is disorganized. So messy that the secretary ties his scissors to the chair, because he can’t find anything. He’s this welter of insight and doubt. The minute he has a thought, however great it is, you can be sure he’s going to turn on it.
“‘Pessimism is stupid. If you’re a pessimist,’ he tells Danny, ‘You’ll live it twice. You live it when you imagine the bad thing happening, and then you live it when it happens.’”
Amos is the most confident man who ever walked the earth, and a great optimist. He says, “Pessimism is stupid. If you’re a pessimist,” he tells Danny, “You’ll live it twice. You live it when you imagine the bad thing happening, and then you live it when it happens.” Danny is intoxicated by the optimism, the certitude, and the sense that if Amos thinks my idea’s good, it’s good—this is the smartest man on the planet. He creates a safe space for Danny to have his ideas, and Danny gets certainty and confidence from him. Amos gets this rich, incredible trove of ideas that just keep coming.
That’s a little simplistic. Amos was plenty capable of having insights himself, but that was kind of what was going on. What’s curious, and reinforces this theory of the relationship, is that it was only when they were alone together. The relationship worked so long as they were in a room together, not so much if they were trying to teach a class together, or giving a talk together. They changed slightly, in each other’s presence, in ways they really liked. That was critical.
Adam: What effect has this had on you and your work? You learned about all these heuristics and biases. How do you live differently knowing all of this information? I remember you asking Danny once, “You study decision making, you’ve changed the way we see it, how do you make your hardest decisions?” And Danny’s answer is, “On a coin, I assign heads to one option, tails to the other. I flip the coin, then I observe my own emotional reaction. If I don’t like it, I flip it again.” That’s not helpful.
Michael: Not very helpful.
Adam: What have you learned about decision making from doing a deep dive into their work?
Michael: There’s two answers to this question. One is nothing. They both were pretty fatalistic. They draw the analogy to optical illusions, that if you and I are driving down a highway in the desert and we see water on the highway in the distance, even when someone tells us, “That’s just a mirage,” we still see water on the highway. We can know it’s a mirage, but our eyes are still tricked. They thought, “that’s the mind.” It’s very hard to detect and correct your own cognitive biases.
“Amos had a trick I’ve used in ordinary situations where he would say, ‘I try to imagine what I’m going to regret after I’ve done X versus Y, and then I see what I feel worse about.’”
Having said that, Amos would say to people who came to him for advice, “It may be hard to detect your own cognitive biases, but it’s not so hard to detect other people’s.” Be very sensitive to the environment in which you make the decision, and make sure there are checks in that environment.
For example, in the late 80s, Delta Airlines was having problems with its pilots. There was judgmental error in the cockpit, and there were several weird episodes that happened back to back. A plane that was supposed to land in Miami landed in Fort Lauderdale instead. The guy who ran the 6,000 person Delta Airlines pilot training program didn’t know where to turn.
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He spent an afternoon with Amos, and that day changed the way Delta Airlines trained pilots. What Amos said was, “Tell me how the cockpit works.'” The cockpit was an autocratic environment; the captain was this god, and people were discouraged from questioning his judgment. Amos said, “What you’ve got to do is create a more egalitarian environment in the cockpit, so that the co-pilots can be looking for the mistakes that the captain makes.”
[They] completely changed the culture of the cockpit. Delta hasn’t had these problems since. That was quite an affirmation of the ability to take the spirit of their work and apply it.
Amos had a trick I’ve used in ordinary situations where he would say, “I try to imagine what I’m going to regret after I’ve done X versus Y, and then I see what I feel worse about.” When he went on the job market, when they left Israel, within a few hours Stanford offered him a tenured position. Harvard wrote a quick fax, and said, “Come here.” Choosing between Harvard and Stanford, he said, “I thought, what am I going to regret when I’m there?”
He said, “At Harvard I’m going to regret every day the crappy weather, the crappy housing that’s a long way from the school, the commute, and at Stanford I’m going to regret not being able to say, ‘I teach at Harvard.'” He went to Stanford.
Adam: What do you think the whole response to Moneyball is getting wrong? And what would you say to all the people who are trying to adopt it?
“You want to see the cutting edge of the Moneyball argument? It’s with this last election. The backlash it gets Nate Silver for not having predicted Donald Trump was going to win the presidency.”
Michael: The response, at first, was hostile. Now it’s not. The war, at least in baseball, is over. You want to see the cutting edge of the Moneyball argument? It’s with this last election: the backlash it gets Nate Silver for not having predicted Donald Trump was going to win the presidency. I find this moronic, because if you go back and read the FiveThirtyEight blog and the probability estimations, they were given the data they had, which is all you’ve got. The polls. They did a really good job saying what might happen. There’s a chance this guy’s going to win, these are the conditions in which he would win. There was a chance there would be some systematic polling error, and it wouldn’t take that much in a few states to flip it, and everybody should acknowledge this is a closer race.
I got into this with Joe Scarborough on television. He’s like, “It shows all those geeks are stupid.” I’m sorry, but I don’t remember you saying, with great certainty, that Donald Trump’s going to win and why. It’s as if Nate Silver can’t predict exactly the future, then he must be full of it. Everybody who’s just flying by the seat of their pants, they can make it up as they go along and no one holds them to anything they ever say. It’s odd, this double standard.
No matter what you do, you’re going to make type I errors and type II errors. Daryl Morey, the general manager of the Houston Rockets, goes in with the Moneyball mindset, fully embraces the idea that we’re going make our decisions by algorithm, and quickly sees that the outcomes are not always going to be perfect. Because there’s information that’s not in the algorithm you would like to be in the algorithm—like did the player get hit by a bus the day before the draft, or is he using cocaine all of a sudden. The analytics work organically with human judgment. That’s where it gets interesting, because Daryl Morey, who really didn’t know anything about Danny Kahneman and Amos Tversky, realizes that if he’s going to have judgment reintroduced to the process, he’s also reintroducing all the potential problems with the judgment.
“Watch an NBA front office try to make that high price decision of who you’re going to draft—you’re talking millions of dollars at stake. The whole world is conspiring to prey on weaknesses of the mind.”
He has to tell the scouts, “We’re going to have the players in to interview, before we draft them. We’ll have them in to shoot and scrimmage for us, but don’t pay much attention to it.” If the young Steph Curry, coming out of Davidson, comes in and misses six straight three-point shots, don’t decide he’s a crappy three-point shooter. We have a body of evidence that tells us what kind of three-point shooter he is. But it drives the scouts crazy. “If you don’t want me to care so much about it, don’t show it to me. I don’t want to see it.” They wrestle with how to watch themselves, even as they’re trying to get incremental information that might be valuable. It’s really hard.
Watch an NBA front office try to make that high price decision of who you’re going to draft—you’re talking millions of dollars at stake. The whole world is conspiring to prey on weaknesses of the mind. When I was there, ten years ago, a 6’2″ light skinned player from Davidson College who happened to be able to shoot the three ball pretty well would have been laughed at as a top prospect for an NBA team.
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This guy comes in and lights up the league, and all of a sudden there are replicas of Steph Curry. Physical replicas showing up, saying, “I’m the next Steph Curry.” Tyler Harvey, guard at Eastern Washington, looks exactly like him. There’s no way he’s going to be an NBA player, and he fools people into drafting him because he looks like Steph Curry and has kind of the same game. But he’s not Steph Curry.
The opposite was the Jeremy Lin story. As Daryl said, “Nobody drafts Jeremy Lin.” Jeremy Lin, the guard who explodes on the scene at Madison Square Garden, and has established himself as a very, very good NBA player. Nobody wants him out of high school, he doesn’t get a scholarship offer, except to Harvard, which doesn’t count. He’s playing across the street from Stanford, and the Stanford coach has no interest. Coming out of Harvard, nobody wants to draft him. Everybody looked at him and said, “He’s not athletic.” After the draft, analytics gets to basketball. They wire these guys up with electrodes and have them measure the speed of their first step, and how quickly they come off the court.
When they did this with Jeremy Lin, he was off the charts athletic. The fastest first two steps they ever measured. Daryl says, “Why were we all blind to it? It’s because we saw an Asian kid, and no one had seen an Asian kid that size who was athletic.” It wasn’t that they were racist, it was that in their minds they had this stereotype of what an athletic kid looked like, and they hadn’t seen that before, and were blind to it.
This is where the fun is. It’s with guys who understand the value of the analytics, who are wrestling with what’s the value you can get out of it without screwing up your own decision-making process.
Adam: You’re running a team like the Rockets, you’re not just going to shift from one prototype to another, you’re going to have some way of incorporating that analytics and then still using human judgment. What does that look like?
Michael: It looks far more uncertain than the old process. Everybody has a sense of their own fallibility. This is the central message of Danny and Amos. Fallibility is not shameful. We are constructed to make certain kinds of mistakes. The trick is acknowledging that, not hiding it, or regarding it as shameful. When you’re sitting in the draft room of the Houston Rockets, they all have this sense like, “I know this might be wrong. Hear me out.”
When they collectively make a decision, they hope for the best. They’re not looking to point fingers. It’s as much the culture of the company. They’re not going to blame other people if the decision’s wrong if the process was right. You’re always looking to improve the process, but you’re judging yourself on the process, rather than the outcome, because the outcome, you can’t control.
Adam: That’s a nice segue to finance. [To] people who one day will be shaping markets, if you could give one piece of advice based on your experience in Flash Boys, what would you say?
“I know so many people who made a lot of money on Wall Street who are just unhappy sons of bitches. They tried to use the fact they made money to cover up the unhappiness, as a reason for their existence. That’s a horrible way to go through life.”
Michael: It’s really simple. Reintroduce a sense of morality to finance. It sounds naïve, like, “Yeah, right, people on Wall Street are going to actually care about social responsibility?” This has to happen. Part of what went wrong with Wall Street is that the sense of noblesse oblige in an elite that walked on without any particular qualifications got replaced by a pretty brutal meritocracy. So if you got there you thought, “I deserve to be here and I’m going to get what I can get. This is where smart people get paid, and I’m going to get paid. I’m going to game the system. If it’s legal, it’s okay.”
This is awful. Don’t just ask, “Is it legal, or is it illegal?” You’ve got to ask, “Is it right, or is it wrong?” It’s natural, and people do it in other walks of life. It is not impossible that this could happen on Wall Street. You see with IEX, the exchange Brad Katsuyama created—he created an environment that had that purpose: we don’t want to just do well, we want to do good. We want to create a level playing field, to fix problems. We are willing to be long term greedy rather than short term greedy. We’re even sometimes willing not be greedy at all.
It attracted so many interesting, good people. People are hungry for this. They have dozens of applicants for every opening. People want purpose in their life beyond just making money. I know so many people who made a lot of money on Wall Street who are just unhappy sons of bitches. They tried to use the fact they made money to cover up the unhappiness, as a reason for their existence. That’s a horrible way to go through life. I would think, in that environment, you should be working very hard to resist the temptation to make it all about money. If you do that, it may lead you to interesting and innovative places.