Books – The Undoing Project

My beachside reading on the recent winter trip to Australia was the excellent “The Undoing Project” by Michael Lewis.
Obviously when it comes to Michael Lewis expectations are high, both for the quality of the writing and depth of the research behind it. This is no exception. Some of the specific elements are familiar but Lewis does  great job of weaving the intellectual content of the Kahneman/Tversky collaboration into a compelling story about their lives and the contemporary history of the time. Which are plenty interesting in their own right. I’d say the only negative points would be an oddly-placed chapter at the start which rehashes many of the ideas from MoneyBall (it was interesting, just seemed oddly placed relative to the rest of the book) and the slight lack of compete chronological sense of order that comes with the style of hopping around and pursuing digressions. It probably makes the book more readable, to be honest, but I found myself having to go back and review sections to get the full Kahneman/Tversky timeline over the years straight in my mind.
Some of the key behavioural science insights of Kahneman and Tversky that Lewis covers and articulates so well include the following.
Kahneman and Tversky understood that the errors the mind made offered you at least a partial insight into the mechanism behind decision making. A bit like optical illusions offering an insight into the workings of vision.
“Features of similarity” Comparing two objects: the mind tends to make a  list of features, count up and compare the features that two objects have in common, in particular one object with reference to the other. for example Tel Aviv is frequently thought to be like NYC but NYC is not thought to be like Tel Aviv. NYC has more noticeable features than Tel Aviv. An absence of a feature is also a feature. “Similarity increases with the addition of common features, or the absence of distinctive features.
Transitivity in decision making. transitivity violated if someone picks tea over coffee, coffee over hot chocolate and then turns around and picks hot chocolate over tea. The features of similarity model helps explain why people will violate transitivity in this way. The context in which a choice is presented affects the choice. When presented with a choice people aren’t assessing each object on a linear scale and evaluating relative to some representative model of ideality, they are essentially counting up features they notice. but the context in which a choice is presented can have a big effect on the features that are noticeable. for examples two Americans meeting in NY vs meeting in Togo. “The similarity of objects is modified by the way in which they are classified”.
First heuristic – representativeness. When people make judgements they compare whatever they are judging to some model in their minds. How closely do the approaching clouds represent my mental model of a storm? How closely does Jeremy Lin represent my model of an NBA basketball player? It’s why players with Man Boobs don’t get selected in the NBA. It’s not that the rule of thumb is always wrong – in many ways it can work quite well. But when it does go wrong it does so in systematic ways.
Second heuristuc – availability. the more easily you can recall a scenario to mind the more “available” it is, and the more probably we find it to be. For example words starting with K vs words with K as the third letter. Again can often work well. But not in situations where misleading examples come easily to mind.
People predict by making up stories
People predict very little and explain everything
People live under uncertainty whether they like it or not
People believe they can tell the future if they work hard enough
People accept any explanation as long as it fits the facts
The handwriting was on the wall, it was just the ink that was invisible.
Man is a deterministic device thrown into a probabilistic universe
Theory of regret – emotion linked to “coming close and failing”. it skewed decisions where people are faced between a sure thing and a gamble. regret is associated with acts that modify the status quo. The pain is greater when a bad decision led to a modification of the status quo vs one that led to a retention of the status quo. Regret is closely linked to responsibility – the more control you felt you had.
Anticipation of regret is actually as powerful as regret itself. We look at a decision and anticipate the regret we might feel. Often we do not experience actual regret as it is too difficult to be sure of the counterfactual.
This all contravened expected utility theory  (which was a central part of some economic models of how individuals made decisions). Expected utility theory wasn’t just wrong, it couldn’t defend against contradictions. The Allais paradox was a good example that violated utility theory. it basically had two examples framed at different probability levels but with the same utility tradeoff underlying both of them, people chose differently depending on the framing of medium odds vs long odds.
A greater sensitivity to negative outcomes – a heightened sensitivity to pain was helpful for survival. A happy species endowed with infinite appreciation of pleasures and low sensitivity to pain would probably not survive the evolutionary battle.
Prospect theory – people approach risk very differently when it comes to losses rather than gains. risk seeking in the domain of losses and risk averse in the domain of gains. people respond to changes rather than absolute levels. but changes vs some reference point, some representation of the status quo. In experiments this is usually clearly definable, in the real world, not so much.
People also do not respond to probability in a straightforward manner. people will pay dearly for certainty. But they will treat a 90% probability as less likely than that (they do not treat a 90 chance as nine times more likely than a 10 chance). When it comes to small probabilities they do not treat a 4% chance as twice as likely than a 2% chance. if you tell someone one in a billion they treat it more like one in ten thousand – and worry too much about it (and pay more than they ought to rid themselves of that worry).
One consequence of prospect theory is that you should be able to alter the way people approach risk (risk seeking vs risk averse) by presenting problems framed in terms of losses rather than framed in terms of gains.
The endowment effect (Thaler) – people attach a strange amount of extra value to what they own (compared to what they don’t). they fail to make logical trades and switches.
The Undoing Project. The title itself refers to a theory similar to regret: counterfactual emotions, the feelings that spurred peoples’ minds to spin alternative realities. The intensity of emotions of “unrealized reality” were proportional to two things: the desirability of the alternative, and the possibility of the alternative.
Experiences that led to regret and frustration were not always easy to undo. Frustrated people needed to undo some feature of their environment, whereas regretful people needed to undo their own actions. but the basic rules of undoing are the same, they require a more or less plausible path to an alternative state. Imgination wasn’t a flight with limitless possibilities, rather it’s a tool for making sense of a world of unlimited possibilities by limiting them. The imagination obeyed ruled: the rules of undoing. The more items that were required to undo the less likely the mind would undo them. “the more consequences an event has the larger the change that is involved in eliminating the event.” also, an event becomes gradually less changeable the more it recedes in time.

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