Amos Tversky and Daniel Kahneman can be counted among the world’s more famous psychologists and modern thinkers. Their collaborative friendship started in the 1960s and lasted for more than 40 years. They were both born in Israel but have worked in the United States since the late 1970s. Their joint work has had immense impacts on the fields of psychology, economics, finance and computer science. They started the so-called behavioral economics and behavioral finance movement, which represents a clear departure from classical economics and finance. Kahneman and Tversky managed to demonstrate that economic actors do not always act as rational decision-makers, as had been previously assumed.
Michael Lewis—the author of this book on Kahneman and Tversky—is not a professional academic but a best-selling business author with more than 15 books to his credit, including classics such as Barbarians at the Gates and The Big Short. In this 2016 book, Lewis does an excellent job of tackling a complex topic, thanks not least to his detailed research and extensive interviews with all key persons still alive.
Although the book succinctly presents Kahneman and Tversky’s key contributions, the main focus is on their friendship and how they worked together, shedding light on what it takes to collaborate productively for such a long period of time. As Malcom Gladwell says, “It’s good to be reminded now and again what genius looks like.” However, before delving further into Kahneman and Tversky’s seminal findings, let us briefly review each of their bibliographies.
Daniel Kahneman, who is still alive, is the son of a holocaust survivor. As a thinker, he delves head-on into complex societal problems that involve decision-making in the face of uncertainty, situations in which our personal biases and psychology play larger roles than previously understood. He is now a professor emeritus at Princeton and the author of the modern classic Thinking Fast and Slow, which I will be reviewing in a separate book review here on the Lorange Network. Kahneman won the Nobel Prize in economics in 2002.
Unfortunately, Amos Tversky died before he could receive his Nobel Prize. Professor Tversky had breathtaking creative energy and an intuitive ability to see key issues in new ways. He was the more public and outgoing of the two and spent 19 years as a professor of psychology at Stanford University until his death in 1996.
The most important pillars of their 40 years of collaborations are:
A lot of “creative tension”—very different personalities leading to many arguments—despite their close friendship.
Total honesty and belief in the tenets of their research.
Respect for each other; a realization of how they complemented each other.
An ability to listen and to “give and take.”
Exceptionally hard work, including meeting each other often.
These lessons are important for all of us working in family businesses and in close-knit teams: expect total commitment, but allow for differences.
It is not my intention to summarize and condense all of Kahneman’s and Tversky’s works. However, let me highlight their seminal contributions on so-called heuristics, or biases, that influence our decision-making as business leaders. These heuristics can be termed “availability,” “representativeness,” “anchoring,” and “simulation.”
Availability. The more easily and rapidly a person can articulate in his/her mind the model they think might give a good representation of a phenomenon—for instance, a business situation or market situation—the more probable this person might find the explanation to be. The immediate availability of a representative model is thus key. The easier it is to retrieve such a model from one’s mind, the more likely a person is to think “this is it” even if the explanation might ultimately be wrong or incomplete.
Representativeness. When people make judgements, they do so according to a preconceived model. Since we make hundreds of small and large decisions each day, we need shortcuts to speed up decision-making. However, as with all shortcuts, these open up the possibility for serious error. So, even though people will always judge probabilistic outcomes of events in this way, it is worth slowing down for important decisions, reframing questions and tackling issues from several angles (again, through team discussions when possible).
Anchoring. In a decision-making situation, a person can be influenced by preconditions that may be totally irrelevant for the decision-making task at hand. In negotiating situations, unrealistic numbers can be introduced that very often will influence the following discussion. Typically, the adjustments that follow are not as large as a more objective evaluation would merit because an anchoring effect has taken place. Masterful negotiators have known of this effect all along without theorizing its prevalence.
Simulation. This heuristic was mostly researched by Kahneman, who was fascinated by the way in which people’s minds could “undo” or rewind previous trauma or tragedy. Discovering how things are “undone” after an event has occurred and then replaced by “what if” scenarios sheds light on feelings of regret, loss and disappointment. As with the availability bias, both facts and scenarios are given more weight if they fit into a more readily useable model. Missing the train is the same whether one misses it by two hours or by one minute, but the latter will cause much more regret. Thus, reflecting on this bias can take some weight off one´s shoulders so as to move forward faster as a decision-maker.
In summary, Kahneman and Tversky convincingly explained how human minds err systematically when making decisions involving uncertainty. Furthermore, these findings have revolutionized the fields of economics and finance and influence us positively as businesspeople. A new behavioral approach to key issues has emerged that, if used properly, can clearly improve decision-making!
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