The Undoing Project: A Friendship That Changed Our Minds

by Michael Lewis

People regretted what they had done, and what they wished they hadn’t done, far more than what they had not done and perhaps should have.

“When one fails to take action that could have avoided a disaster, one does not accept responsibility for the occurrence of the disaster.”

One rule was that the emotion was closely linked to the feeling of “coming close” and failing. The nearer you came to achieving a thing, the greater the regret you experienced if you failed to achieve it.† A second rule: Regret was closely linked to feelings of responsibility. The more control you felt you had over the outcome of a gamble, the greater the regret you experienced if the gamble turned out badly. People anticipated regret in Allais’s problem not from the failure to win a gamble but from the decision to forgo a certain pile of money.

“The absence of definite information concerning the outcomes of actions one has not taken is probably the single most important factor that keeps regret in life within tolerable bounds,” Danny wrote. “We can never be absolutely sure that we would have been happier had we chosen another profession or another spouse. . . . Thus, we are often protected from painful knowledge concerning the quality of our decisions.”

They were “risk averse.” But what was this thing that everyone had been calling “risk aversion?” It amounted to a fee that people paid, willingly, to avoid regret: a regret premium.

The theory’s failure to explain people’s decisions, Danny and Amos wrote, “merely demonstrates what should perhaps be obvious, that non-monetary consequences of decisions cannot be neglected, as they all too often are, in applications of utility theory.” Still, it wasn’t obvious how to weave what amounted to a collection of insights about an emotion into a theory of how people make risky decisions.

In people’s perceptions of money, as surely as in their perception of light and sound and the weather and everything else under the sun, what mattered was not the absolute levels but changes. People making choices, especially choices between gambles for small sums of money, made them in terms of gains and losses; they weren’t thinking about absolute levels.

“It reflects a general property of the human organism as a pleasure machine. For most people, the happiness involved in receiving a desirable object is smaller than the unhappiness involved in losing the same object.”

It wasn’t hard to imagine why this might be—a heightened sensitivity to pain was helpful to survival. “Happy species endowed with infinite appreciation of pleasures and low sensitivity to pain would probably not survive the evolutionary battle,” they wrote.

Amos liked to call good ideas “raisins.” There were three raisins in the new theory. The first was the realization that people responded to changes rather than absolute levels. The second was the discovery that people approached risk very differently when it involved losses than when it involved gains. Exploring people’s responses to specific gambles, they found a third raisin: People did not respond to probability in a straightforward manner. Amos and Danny already knew, from their thinking about regret, that in gambles that offered a certain outcome, people would pay dearly for that certainty. Now they saw that people reacted differently to different degrees of uncertainty. When you gave them one bet with a 90 percent chance of working out and another with a 10 percent chance of working out, they did not behave as if the first was nine times as likely to work out as the second. They made some internal adjustment, and acted as if a 90 percent chance was actually slightly less than a 90 percent chance, and a 10 percent chance was slightly more than a 10 percent chance. They responded to probabilities not just with reason but with emotion.

“When your daughter is late and you worry, it fills your mind even when you know there is very little to fear.” You’d pay more than you should to rid yourself of that worry.

People treated all remote probabilities as if they were possibilities. To create a theory that would predict what people actually did when faced with uncertainty, you had to “weight” the probabilities, in the way that people did, with emotion. Once you did that, you could explain not only why people bought insurance and lottery tickets. You could even explain the Allais paradox.*

But it implied, as utility theory never had, that it was as easy to get people to take risks as it was to get them to avoid them. All you had to do was present them with a choice that involved a loss. In the more than two hundred years since Bernoulli started the discussion, intellectuals had regarded risk-seeking behavior as a curiosity. If risk seeking was woven into human nature, as Danny and Amos’s theory implied that it was, why hadn’t people noticed it before?

The theory obviously turned on the stark difference in people’s feelings when they faced potential losses rather than potential gains. A loss, according to the theory, was when a person wound up worse off than his “reference point.” But what was this reference point? The easy answer was: wherever you started from. Your status quo. A loss was just when you ended up worse than your status quo. But how did you determine any person’s status quo? “In the experiments it’s pretty clear what a loss is,” Arrow said later. “In the real world it’s not so clear.”

The reference point was a state of mind. Even in straight gambles you could shift a person’s reference point and make a loss seem like a gain, and vice versa. In so doing, you could manipulate the choices people made, simply by the way they were described.

“What constitutes a gain or a loss depends on the representation of the problem and on the context in which it arises,”

This one they called “framing.” Simply by changing the description of a situation, and making a gain seem like a loss, you could cause people to completely flip their attitude toward risk, and turn them from risk avoiding to risk seeking.

People did not choose between things. They chose between descriptions of things. Economists, and anyone else who wanted to believe that human beings were rational, could rationalize, or try to rationalize, loss aversion. But how did you rationalize this? Economists assumed that you could simply measure what people wanted from what they chose. But what if what you want changes with the context in which the options are offered to you? “It was a funny point to make because the point within psychology would have been banal,” the psychologist Richard Nisbett later said. “Of course we are affected by how the decision is presented!”

The irrational behavior of the few would not be offset by the rational behavior of the many. People could be systematically wrong, and so markets could be systematically wrong, too.

Shore asked if their work fed into the new and growing field of artificial intelligence. “You know, not really,” said Amos. “We study natural stupidity instead of artificial intelligence.”

Imagination wasn’t a flight with limitless destinations. It was a tool for making sense of a world of infinite possibilities by reducing them. The imagination obeyed rules: the rules of undoing. One rule was that the more items there were to undo in order to create some alternative reality, the less likely the mind was to undo them. People seemed less likely to undo someone being killed by a massive earthquake than they were to undo a person’s being killed by a bolt of lightning, because undoing the earthquake required them to undo all the earthquake had done. “The more consequences an event has, the larger the change that is involved in eliminating that event,” Danny wrote to Amos. Another, related, rule was that “an event becomes gradually less changeable as it recedes into the past.” With the passage of time, the consequences of any event accumulated, and left more to undo. And the more there is to undo, the less likely the mind is to even try. This was perhaps one way time heals wounds, by making them feel less avoidable.

“Something happens when you are with a woman you love,” said Danny. “You know something happened. You know it’s not good. But you go on.” You are in love, and yet you sense a new force pulling you out of it. Your mind has lit upon the possibility of another narrative. You half hope something comes along to stabilize or reenergize the old one. In this case, nothing came along. “I wanted Amos to lean back against what was happening and he was not doing it, nor did he accept that he had to do it,” said Danny.

really were going to be scientists on the Soviet end,” said Wandell. “There weren’t.” The Soviets and the Americans took turns giving presentations. An American would give a learned talk about decision theory. His Soviet counterpart would rise and offer a talk that sounded completely insane—one guy spent his allotted time on his theory about how

Amos knew his own value. He didn’t need to make a point of not caring what people thought of him; he actually just didn’t care all that much. The deal Amos offered the encroaching world was that their interaction was to be on his terms.

Amos seemed able to walk into any problem, however alien to him, and make the people dealing with it feel as if he grasped its essence better than they did.

“Because metaphors are vivid and memorable, and because they are not readily subjected to critical analysis, they can have considerable impact on human judgment even when they are inappropriate, useless, or misleading,” said Amos. “They replace genuine uncertainty about the world with semantic ambiguity. A metaphor is a cover-up.”

But the cockpit culture of a commercial airliner did not encourage people to point out the mental errors of the man in charge.

Their opponents might never admit defeat—intellectuals seldom did—but they might at least decide to change the subject. “Winning by embarrassment,” Amos called it.

And any lawyer could at once make a case seem more persuasive, even as he made the truth of it less likely, by adding “representative” details to his description of people and events.

“When I gave him an idea he would look for what was good in it. For what was right with it. That, for me, was the happiness in the collaboration. He understood me better than I understood myself. He stopped doing that.”

If that involved some misperception on Amos’s part—some exaggeration of the earthly status of Danny’s ideas—well, then, Amos should continue to misperceive. After all, what is a marriage if not an agreement to distort one’s perception of another, in relation to everyone else? “I wanted something from him, not from the world,” said Danny.

Danny, being Danny, looked for the good in Gigerenzer’s writings. He found this harder than usual to do. He’d avoided even visiting Germany until the 1970s. When he finally visited, he traveled the streets entertaining a strange and vivid fantasy that the houses were all empty. But Danny didn’t like being angry at people, and he contrived not to feel anger toward their new German critic.

The mind was more like a coping mechanism than it was a perfectly designed tool. “The brain appears to be programmed, loosely speaking, to provide as much certainty as it can,” he once said, in a talk to a group of Wall Street executives. “It is apparently designed to make the best possible case for a given interpretation rather than to represent all the uncertainty about a given situation.”

Economists were brash and self-assured. Psychologists were nuanced and doubtful. “Psychologists as a rule will only interrupt a presentation for clarification,” says psychologist Dan Gilbert. “Economists will interrupt to show how smart they are.” “In economics it is completely normal to be rude,” says economist George Loewenstein. “We tried to create a psychology and economics seminar at Yale. We had our first meeting. The psychologists came out completely bruised. We never had a second meeting.”

“Toward a Positive Theory of Consumer Choice.”

People didn’t choose between things, they chose between descriptions of things. The fuel labels on new automobiles went from listing only miles per gallon to including the number of gallons a car consumed every hundred miles.

People didn’t simply know what they wanted; they took cues from their environment. They constructed their preferences. And they followed paths of least resistance, even when they paid a heavy price for it. Millions of U.S. corporate and government employees had woken up one day during the 2000s and found they no longer needed to enroll themselves in retirement plans but instead were automatically enrolled. They probably never noticed the change. But that alone caused the participation in retirement plans to rise by roughly 30 percentage points. Such was the power of choice architecture. One tweak to the society’s choice architecture made by Sunstein, once he’d gone to work in the U.S. government, was to smooth the path between homeless children and free school meals. In the school year after he left the White House, about 40 percent more poor kids ate free school lunches than had done so before, back when they or some adult acting on their behalf had to take action and make choices to get them.

A part of good science is to see what everyone else can see but think what no one else has ever said.

“It’s not that people think they are perfect. No, no: They can make mistakes. It’s that they don’t appreciate the extent to which they are fallible.

It is sometimes easier to make the world a better place than to prove you have made the world a better place. Amos had said that, too. “Amos gave everyone permission to accept human error,”

Amos seemed to understand that an early death was the price of being a Spartan.

happiness was so malleable, it made a mockery of economic models that were premised on the idea that people maximized their “utility.” What, exactly, was to be maximized?