Michael Lewis

Michael Lewis's latest book is The Undoing Project: A Friendship that Changed Our Minds. From the transcript of his interview with Fareed Zakaria:

ZAKARIA: Michael Lewis is one of the most successful book authors, ever since his debut "Liar's Poker." He has written "Moneyball," "The Blind Side" and "The Big Short," all later turned into movies.

"Moneyball" was about the Oakland As baseball team and its real-life quest to pick the best prospective players. The team figured out how to game the system by, as Lewis says, using better data and better analysis of that data to find market inefficiencies.

Now, there was a review of "Moneyball" by the academics Richard Thaler and Cass Sunstein, who pointed out that much of what the As were doing was stripping human bias out of the equation of managing a ball team. That kind of analysis had been pioneered, they pointed out, by a pair of Israeli social scientists, Daniel Kahneman and Amos Tversky, who did groundbreaking work on behavioral economics, as Lewis says, a field that focuses on the biases and irrational behavior of human beings.

Lewis had never heard of Kahneman and Tversky, so he dug into the topic and ended up writing a book about the duo, "The Undoing Project: A Friendship That Changed Our Minds."

Welcome back, Michael.

LEWIS: Thank you, Fareed. Good to see you.

ZAKARIA: So one of the things that we always talk about nowadays is the way in which people act, sort of, irrationally. And "irrationally" sounds bad, but not in a way that can be predicted easily.

So even in this election, people point out that, you know, people who think they're acting in their economic interests don't act in their economic interests. So there are all these irrational or hidden biases we have. To put it very simply, what is it that Kahneman and Tversky have made us understand about this field?

LEWIS: Generally, what their work was about was showing that the mind is, though roughly well-equipped to, kind of, get us through life and the judgments we have to make, it's not wired to make probabilistic judgments. And so when it's faced with, like, probabilistic situations, it doesn't do statistics; it tells stories. And sometimes -- and those stories are skewed in predictable ways, by memory, by the way we think in stereotypes, by -- I mean, there are a whole range of things that are (inaudible) but in ways that are predictable and -- and systemic.

So if people can be systematically irrational, then markets can be systematically irrational, which is why...[read on]

--Marshal Zeringue