humans are irrational humans are irrational Even though classical economists traditionally assumed that people act rationally, behavioral economists are finding that people rely on gut instinct and irrational stereotypes all the time. (Photo: Arthimedes / Shutterstock)

Why we rely on our gut instincts to make decisions

Michael Lewis' new book focuses on two friends and their groundbreaking work in behavioral economics.

Behavioral economics, the study of human irrationality, is all the rage among economists nowadays. But few people know that Israeli-American psychologists Daniel Kahneman and Amos Tversky got the ball rolling on the study of human irrationality in the 1980s.

Best-selling American author Michael Lewis was so intrigued by the pair that he wrote a book about them, “The Undoing Project: A Friendship That Changed Our Minds,” which is coming out in December.

After Lewis wrote "Moneyball" and "The Big Short," he discovered that Kahneman and Tversky had kicked off the research that influenced his award-winning books, even though Lewis had never heard of them. Their findings seemed to crop up everywhere; they appeared to be the secret backbone of behavioral economics. Kahneman even taught famous Israeli-American economist Dan Ariely, who has since become famous for studying human decision-making.

"Perhaps I was just seeing what my mind expected to see, but it seemed to me that anyone who had become deeply aware that our species often did not make a lot of sense eventually found their way to Kahneman and Tversky," Lewis wrote in Vanity Fair. From breaking New Year's resolutions to being penny wise, pound foolish, people don't always make choices based on logic.

The "anchoring effect" is a good example. According to this psychological phenomenon, people make choices based recent experiences that often have nothing to do with the situation. For instance, researchers had judges roll rigged dice before handing out sentences to imaginary shoplifters. When the dice came up three, judges handed out average sentences of five months. When they rolled nine, the judges handed out eight-month sentences.

Kahneman and Tversky weren't two lofty professors pointing out the mistakes of unintellectual minds. The two made it a rule to only study mental mistakes they themselves made. Irrationality isn't something stupid or uneducated people do; it's something everyone does.

"People thought we were studying stupidity,” Kahneman told Lewis. “But we were not. We were studying ourselves.”

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