The undoing project, by Michael Lewis

Review of Michael Lewis’ book The Undoing Project

Another excellent book by Michael Lewis.

Here he departs from his usual subjects: stock market, high finances, statistics and applied math. The beginning of “The undoing project” narrates the way that a person whose main interests are more related to finance, statistics and math end up interested in a pair of psychologist: Daniel Kahneman and Amos Tversky.

Wrong-Way
Wrong-Way

The author arrives to this connection when he went deeper looking for the origins of the behavioral economics. Repeatedly he is sent back to these Israeli professors and to a seminal paper wrote in 1979 (years before the very existence of the term “behavioral economics”): “Prospect Theory: An Analysis of Decision under Risk”.

But the author goes in detail narrating this friendship that overcome wars (Second World War and the different wars after the constitution of the State of Israel) and different countries (as teachers in USA, and going back to Israel).

Both authors infancy was marked by the experience of the Second World War. As adults they were officials in the Israeli army, participating in the wars since the proclamation of the State of Israel.

In this military effort, they started the branch of psychology in the Israeli Army. There they put the roots for the work of profiling soldiers and assign them to the most appropriate position. Their objective was to reduce the failure in the officer courses due to the lack of leadership. They developed a method for the IDF that proved to be so efficient that US military was interested in applying it.

In this story, as it happens, their paper of 1979 pass unnoticed. We have to wait untile the 90’s when it’s rediscovered and starts the consolidation of a new discipline in economy, the behavioral economics.

Misbehaving: The Making of Behavioral Economics

A very interesting audiobook, it’s organized like an intelectual autobiography as Carnap’s or my favorite, Feyerabend’s. This book follows chronologically the advances in the developing of the branch of “Behavioral Economics” by one of the founders of the discipline, Richard Thaler.

The birth of behavioral economics

The book traces the steps of the author from the perplexity in front of a irresoluble problem fron the usual economic point of view, towards taking a different perspective on economics. This new perspective leaves the classical theory and assumes that economics has to talk about real people, not theoretical homo economicus.

The focus of his work is that the homo economicus doesn’t exist and it’s not an adecuate way to analyze the problems that emerge in microeconomy. People don’t work according to logic and don’t follow the most rational way to solve the problem of economics.

The behaviour of the individuals is not ruled by the logical and rational approach that the classical theory of economics used to apply.

Thaler propposed that an interdisciplinal approach would work better and provide more exact, and useful explanations on the real conduct of the individuals.

What I liked most about this book…

It’s quite captivating to see that Richard Thaler recognized the limitation of his knowledge on certain areas and that he either devoted time to introduce himself in the area -psicology- or joined with an expert -for example in the case of his interest in finance-.

Another compelling aspect of this book is to see that he started beign an outsider or a rogue economist, and end up founding a new discipline of economics.