Michael Lewis, author of Moneyball, revisits market inefficiencies and why they exist in his new book The Undoing Project. Here William Easterly reviews the new book for The Wall Street Journal. Easterly calls the book “a spectacular account of two great men who faced up to uncertainty and the limits of human reason.”
Michael Lewis’s brilliant book celebrates Daniel Kahneman andAmos Tversky, Israeli-American psychologists who are our age’s apostles of doubt about human reason. The timing is fortunate, given that overconfident experts may have caused and then failed to predict such momentous events as Brexit and the election of Donald Trump.
Mr. Kahneman and Tversky (who died in 1996) first started working together in 1969. They were well-matched. The Holocaust survivor Mr. Kahneman chronically doubted even himself. The brash Tversky targeted his doubts toward others, especially (as one acquaintance noted) “people who don’t know the difference between knowing and not knowing.” Testing people with quizzes in their laboratory, they found a host of “cognitive biases” afflicting rational thinking.
One bias they found is that we underestimate uncertainty. In hindsight bias, for example, test subjects misremembered their own predictions as being correct. As Tversky explained, “we find ourselves unable to predict what will happen; yet, after the fact we explain what did happen with a great deal of confidence. . . . It leads us to believe that there is a less uncertain world than there actually is.” Mr. Lewis is outraged by McKinsey & Co. coaching their consultants to radiate certainty while billing clients huge fees to forecast such unknowable variables as the future price of oil. The work of Tversky and Mr. Kahneman convinced Mr. Lewis that, as he puts it when summarizing the view of a jaded former consultant, such “confidence was a sign of fraudulence.”
Read more here.