One Christmas day, back when I was twenty, my dad gave me a copy of Peter Bernstein’s “Against the Gods – the Remarkable of Risk”. I had just finished my second year of a Maths / Commerce degree, so it wasn’t that surprising a gift, but I still don’t think anyone could have predicted just how much the ideas in the book would influence my life.
I can’t recommend that book highly enough to anyone starting off in the world of statistics or finance: Bernstein captures the origins of probability, statistics, gambling and finance, bringing to life the personalities, the ideas, and the intellectual debates. This isn’t a textbook, but you’ll learn more from it than most textbooks. It still has pride of place on my bookshelves, on a shelf dominated by people first brought into my life by this book: Laplace, Bayes, Keynes, Savage, Kahneman, Tversky, and Thaler.
The years haven’t dimmed my interest in the questions of how people make assess risk, value outcomes and make decisions. Obviously at work, surrounded by traders and risk managers, these questions have always been at the front of our minds. And there were always a few decision geeks like myself, sharing examples of how our thinking could let us down, but the examples seemed quite contrived to outsiders.
But 2016 seems the year that questions of rationality and decision making became widespread, with the general population questioning how so many ‘other’ people can be so ‘dumb’, voting a certain way or thinking that the public would vote a certain way. I am optimistic that 2017 will be a year in which we start to get some more good answers to these questions of how and why people act under uncertainty, and how they should (and for the record I don’t believe the ‘experts’ are always right).
Anyway, Christmas being a time of reminiscence, it is appropriate that I finished another book today, about two of the characters I first discovered 18 years ago in ‘Against the Gods’: Daniel Kahneman and Amos Tversky. These psychologists were among the first to explore how we really make decisions, particularly uncertainty, noting consistent biases that earlier researchers ignored, and in doing so created the foundations of behavioural economics, as well as having significant impact on the fields of medicine, public policy, and the military. Tversky passed away in 1996, while Kahneman is still contributing (and wrote ‘Thinking, Fast and Slow’ in 2011).
Their partnership was the subject of the very recent book, ‘The Undoing Project: A friendship the changed our minds/the world’, by Michael Lewis (the best selling author whose book ‘The Big Short’ was turned into a successful film). As with any book by a popular author about a topic you know well, I had my fears, but I felt I owed Kahneman and Tversky too much respect to ignore whatever insight I might gleam from a book about them.
The technical content was good, well explained. For anyone not familiar with their work, and with even a remote interest in the area, it would be worth reading it for that alone. If you know their work, you aren’t going to get put off by it, but it won’t teach you much you didn’t know.
My favorite example from the book is the ‘Linda’ problem, an example where the audience is told: Linda is 31 years old, single, outspoken and very bright. She majored in philosophy. As a student, she was deeply concerned with issues of discrimination and social justice, and also participated in anti-nuclear demonstrations.
The audience is then asked whether it is more likely that:
- Linda is a bank teller, or
- Linda is a bank and is active in the feminist movement
Despite the latter being a special case of the former, most people respond that the second is more likely, on account of the job description feeling more ‘representative’ of her.
The book described Kahneman explaining to an auditorium of University of British Columbia students: “Do you realize you have violated a fundamental rule of logic?”, to which a young woman shouted from the back of the room, “So what! You just asked for my opinion”.
There were some funny personal anecdotes, like the one of 12 year old Tversky diving off a 10m board before he knew how to swim (he asked an older kid to pull him off the bottom after he landed), or the story of Tversky’s first trip to the US, and his excitement at his first time landing in an aeroplane (despite being an experienced paratrooper in the Israeli Air Force).
On the other hand, I felt conflicted on the more personal content – about Kahneman and Tversky’s personalities, and the tensions inherent in their relationship. Yes, it helped me understand them, and often you have to be a bit messed up to see what everyone else has missed. But it occasionally felt like I had been reading their personal letters, and hearing their innermost anxieties, and it all felt a bit too soon for that.
So, all up, it was a slightly odd mix of a book, good description of their theory, interesting history of what Israel was like in the 1950s and 60s, academic feuds, and personal anxieties (and a weird first chapter that really didn’t belong, unless possibly you were expecting the sequel to Moneyball). But all up, a worthwhile read.