The Undoing Project

Amos Tversky and Danny Kahneman (image from this article in the New Yorker)

The Undoing Project by Michael Lewis is the story of Amos Tversky and Daniel Kahneman, the two Israeli psychologists who created a whole new discipline — behavioural economics — and in doing so, changed the way we think about thinking.

The book starts in a strange place — with a basketball game and links the reason for Lewis writing the book back to a previous best-seller of his — Moneyball. That was all about the use of statistics in baseball by the Oakland A’s coach Billy Bean who beat the system by choosing to look at things that the big teams missed when making his draft picks or transfers from other teams. He looked for value rather than assuming that because somebody was a big hitter they would be the best player. It worked of course and now the rest of sport has cottoned on to it — ‘moneyball’ is the dominant approach in a lot of professional sport. When Lewis was reading the reviews of the book somebody said that the book was great but that it was something that was already known in psychology and economics because of the work of Kahneman and Tversky. Lewis had never heard of them but soon started to find out more.

Tversky died in 1996 well before Lewis started writing the book but Kahneman took part in interviews as did many of their collaborators over the years. The key to the story though is something Lewis never saw, the relationship between the two men and that’s what the book is about. Lewis tries to get to the core of why these two people were able to question so much that had gone unquestioned before. Both admitted that it wasn’t something they would have come up with on their own but they were an unlikely couple save for the fact that they were both Israeli psychologists and bumped into each other at the University of Michigan in the 1960s.

The book does explain most of their work but you can get that from Kahneman’s excellent summary Thinking Fast and Slow. What it tries to dig deeper into the creative partnership and how it worked. Strangely an academic interviewed them both about it in the 1970s as part of a book about creative double-acts. Tversky and Kahneman claimed they didn’t know themselves but admitted there was a hint of competition about it. Ultimately they fell out over the way that the profile and plaudits were shared. Tversky’s outgoing personality meant that he was the most in demand and Kahneman felt slighted by that. In the end it was Tversky’s illness and impending death at the age of 59 that brought them back together.

It is an amazing story but one you wouldn’t think could make a good book (or a movie, although you can bet after Moneyball and The Long Short there will be one), but it does. It’s a wonderful exploration of the relationship between two incredible people and how that relationship changed the world.

Charlie Munger: The Complete Investor

AKA the gateway drug for more expensive Charlie Munger books

I was going to read Poor Charlie’s Almanack last week but balked at the price of nearly £90. According to one reviewer this may make me a poor investment decision-maker but we’ll come back to that later. Instead I read Charlie Munger: The Complete Investor by Tren Griffin on the basis that it was 10% of the price and I reckoned must contain 10% of the wisdom. Surely even Charlie would think that was a bargain?

Value investing has always fascinated me. I’ve read a lot about Ben Graham, Warren Buffett and Berkshire Hathaway but I’d never really read much specifically about Charlie Munger, Buffett’s ‘partner’ and Vice-Chairman of the company. Their straightforward, common sense approach to investment and way of doing business that values honesty, loyalty and growth over the long term has certainly influenced the way I do things.

(As an aside I think they’ve had massive blind spots because they haven’t thought about the future in any great detail — they famously ignore any projections or forecasts. It always amazes me they didn’t spot their investments were in part causing climate change or inequality for example. I think it has something to do with the psychological refusal to make any predictions about the way decisions will play out into the future.)

The way Munger has studied his own decision making is pretty impressive as well as all the time he’s set aside for studying other peoples’. The book is based on extracts from speeches, articles and interviews with Munger and outlines his various mental models and rules for making decisions.

The starting point of his approach is that the shortcut to being smart is often simply not to be stupid. Knowing what you don’t know is sometimes far more useful that being brilliant. This is a big part of what is perhaps the most important first filter for investments at Berkshire Hathaway. When assessing whether you can estimate the intrinsic value of an investment you should be able to very quickly put it in a basket for ‘yes’, ‘no’ or ‘too tough’ and unless you have a special insight, put it in the ‘too tough’ basket and move onto something where that’s inside your ‘circle of competence’.

Fundamentals of Graham investing

Both Buffett and Munger describe themselves as ‘disciples’ of the Ben Graham approach to investing. In this book Munger describes that approach as having four tenets:

Treat shares as proportional ownership of a business (not just pieces of paper or numbers in a spreadsheet) because that’s what they are.
Only buy when you have a significant ‘margin of safety’ on price so you know that you’re getting a good price compared to the price that others might pay.
Mr Market should be your servant not your master. Treat it as having a split personality — something that sometimes offers you lots of money for what you have (a bull market) and occasionally offers you something you want very cheaply (a bear market).
Apply the three rules above with consistency and discipline. This rule is the hardest of the four.

Know your own biases

A lot of the book focuses on Munger’s diagnosis and awareness of common psychological biases, including his own. Munger talked about these in a lecture he gave at Harvard back in 1995 outlining ‘18 causes of human misjudgement’ which you can read about here but the book does an excellent job of setting them out and collecting further Munger quotes from elsewhere.

Moats

Finally, the book has an interesting section on another important element of the Berkshire Hathaway investment strategy — this is the concept of the ‘moat’ that an individual company has to defend it from competition or somebody else try to do the same thing. Moats come in five forms:

Supply side economies of scale — you have access to more of the thing that you’re selling than anyone else.
Demand side economies of scale (Network effects) — your product or service becomes more valuable as more people use it.
Brand — you have developed a story and reputation that means people are willing to pay significantly more for your product than others.
Regulation — you’ve learned to understand regulation so well that it actually serves as a barrier to entry/moat for their competitors.
Patents or protected intellectual property — you’re able to fend off competition because you’ve legally protected your innovation.

Overall, I really enjoyed the book. Munger’s a great person to learn about and I’ve taken the plunge and I ordered a second hand copy of Poor Charlie’s Almanac.

Ask someone else how long the job will take you

One of the best bits of Robin Ince’s Christmas Show at the Bloomsbury Theatre this year was Claudia Hammond’s bit on the latest science about how the brain perceieves time. In short, it does it really badly but there are some hacks you can use.

Apparently up until about the age of 4 we have very little idea about the concept of ‘tomorrow’. This is why when you tell a three year old that they can finish their lego masterpiece tomorrow, they will probably have a strop. Their brain hasn’t yet developed the idea of planning ahead.

And as adults we’re terrible at estimating how long something will take us — generally we massively underestimate the complexity of tasks. The best way around this in a work context is to ask somebody else to estimate how long something will take you — I might start trying this.

I think I also might buy Claudia’s book which is all about time perception and is called Time Warped. Maria Popova has a very nice summary.