Undoing how we make decisions

Best-selling author Michael Lewis’ latest book is called “The Undoing Project – A Friendship that Changed our Minds” which focuses on how we make decisions. Two transplanted Israeli psychologists named Daniel Kahneman and Amos Tversky partnered together for years and were acclaimed for their work in showing we are less rational decision-makers than we think we are, especially where risk is involved.

In short, we include our biases in how we interpret data and probabilities, so we do not all see the issue the same way. But, even more telling is we can be influenced by how the question is posed to us. Their analysis eventually led to a Nobel Prize in Economics, which was awarded to Kahneman after Tversky had passed away. The reason is their work created a new breed of economics called “Behavioral Economics.” But, their work had converts using it in the practice of medicine, setting public policy and even in making NBA draft picks. They ask that people step back and question things. Your bias may lead you to pick the most improbable cause or choice, so if you question yourself and others you may find the best probable path forward.

The other key takeaway is the tremendous partnership these two had over the years. They were very different personalities, yet it was difficult for them to know who had more input into their work. They often flipped a coin to decide whose name should go first in a paper. Their partnership was so constructive, it was difficult on people in the US who tend to believe one of the partners was a greater contributor. Tversky, being more outgoing and confident, was more easily and incorrectly thought of as the lead. Kahneman questioned everything even when he was far more right than wrong, so he came across as less confident. Ironically, it was his questioning things that challenged Tversky to reconsider strong positions. They yin and yanged like an old married couple.

It would be difficult for me to define their work in such a short piece, so let me share some of their examples which may be illustrative. Their most famous piece is called “Prospect Theory: An Analysis of Decision under Risk.” If you were given two options where (1) gave you a 50% chance to win $1,000 and (2) provided a gift of $500, most people would pick (2) as a sure thing. Yet, if the question is reframed and the two options were (3) which gave you 50% chance to lose $1,000 and (4) which provided a sure loss of $500, most everyone would pick (3) the gamble.

As they dived further into questions like this, they discovered that people would regret losing the sure thing as they did not have the money, yet were more risky with money they did not have. When they altered the probability of winning or losing, the same result would occur, even when the odds were much more in your favor to win (or not lose). But, they also learned how the questions were framed made a huge difference.

If an Asian disease was expected to kill 600 people and you could take one of the following actions, which one would you choose where Option (1) would save 200 people and (2) had a 1/3 chance of saving all 600 and a 2/3 chance of saving none? Most people chose Option (1) to save 200 people. Yet, if the question is framed as Option (3) where 400 people would die and (4) where there is a 1/3 chance none would die and 2/3 chance all would die, most people chose Option (4). Yet, it is the same question.

Another key concept they introduced through study is “representativeness.” If you added information to a question, people would believe the greater accuracy meant they should choose that option. This would even be true if the information added was irrelevant or unimportant. In other words, if something is described in more detail than other options, it creates an information bias. They illustrated this to be true with experts in a field, as well as with laypersons.

Lewis uses the example of medical doctor who embraced Kahneman and Tversky’s work named Don Redelmeier. Redelmeier would question quick conclusions by doctors made under stress, where they would use information bias. A good example came when a car accident left a woman with an irregular heartbeat after they treated her. The doctors hung their hat on the fact she had a medical history of excess thyroid hormones and just assumed that was causing the irregularity.

Yet, this was a remote probability. They were led down this path because of the extra piece of information. Redelmeier had them question this remote idea and look further. It turned out the more likely cause was indeed the reason for the irregular heartbeat – a collapsed lung from the accident. Because they had more information on a condition, they stopped looking for other causes that did not obviously surface.

I encourage you to read the book for the two reasons Lewis wrote it. It is more than just the work of Kahneman and Tversky on making decisions. It is also about how two different people can collaborate so successfully and be far more together than they were separately. They valued this partnership and made it work well for them and us.

Note: Lewis also wrote “The Blind Side,” “Moneyball,” “Liar’s Poker” and “The Big Short,” to name a few.

 

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15 thoughts on “Undoing how we make decisions

  1. Dear Keith,
    I love this concept. I will definitely be purchasing the book to read it and then to share it. Both respected what the other contributed towards developing their concept of behavioral economics.

    Thanks and hugs, Gronda

    • Thanks Gronda. Their colleagues wondered why they got along, but it was said you could hear a constant stream of conversation and laughter when they were together. I hope you enjoy it.

  2. Note to Readers: I will attempt to offer a few more vignettes about how representativeness can lead you down the wrong path. If you asked people could you create more words with a seven letter word with “—-ing” or with “—–n-“, more folks would guess with “—-ing” because the three letters make them think of more words. However, the second is the correct answer as it would include all of the former plus additional words. The more information misleads people.

  3. Quite interesting food for thought! I will definitely add this book to my reading list! Thanks for the recommendation … I never really thought there was a logic to how we make decisions … I’m guessing that to an extent it depends on the individual, also.

    • Jill, I hope you enjoy it. What surprised me was how even experts exhibited bias in making decisions. The psychologists found that experts would discount probabilities when they applied to them. Keith

      • I suppose it should surprise me, but it doesn’t. The example of the doctor making decisions based on information bias … I have seen this in my own life, and my daughter, a urological RN, has told me of many, many instances of this in her career. And … I worked in the accounting field as management for many years, and saw similar situations. ‘Experts’ are also humans, and even the best will sometimes fail to look at all angles. Sadly, the ‘best’ are in the minority these days … at least, I believe, in the medical profession. Anyway, I look forward to reading this book!

      • Jill, the validation by your daughter is key. The purpose of the two authors’ work is for people to acknowledge their information biases, so that they can overcome them.

        There is a great story in the book how all the basketball scouts missed Jeremy Lin, an Asian-American basketball player who, when given the chance as an afterthought with the New York Knicks, did quite well. The information bias was how could someone who did not look like a basketball player – short, half-Asian – be a NBA player. It turns out, when studied later, he was very quick with his first step, but all of that was missed because of the bias.

        Keith

      • Fascinating story about Jeremy Lin! And not a long stretch from the assumptions some make about other races also, but I won’t open that door tonight. 🙂

  4. Note to Readers: A quick exercise can reveal how a problem can be presented differently and get very different results. Quickly write down what you think the answer to the following problem is?

    8x7x6x5x4x3x2x1 =

    Now, if i had asked you to quickly write down the answer to the following problem what would it be?

    1x2x3x4x5x6x7x8 =

    While they are the same problem, the median quick answer response to the first equation is 2,250, while the median answer to the second one is only 512. Again, they represent the same problem whose correct answer is 40,320. So, by going highest to lowest got people closer but still way off.

  5. Note to Readers: I like the advice of questioning decisions and taking time to let them simmer a little. To me, this is especially true with life decisions – changing jobs, ending relationship, buying a house, investing, etc. At 58, I know I have made my share of bad decisions, but I like to think I have made some reasonable and even a few good ones as well. Taking that little extra time to sleep on it helps at least being able to live with the consequences.

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