Michael Lewis understandably has some strong feelings about Wall Street. But the best-selling author of the books “Liar’s Poker,” “Flash Boys,” “Moneyball” and “The Big Short” also has strong investing advice for uncertain times.
His latest book, “The Undoing Project: A Friendship That Changed Our Minds,” examines the work of Israeli psychologists Daniel Kahneman and Amos Tversky, who researched the reasons people often make fateful errors during the decision-making process, from investing to medical diagnoses.
Lewis joined MarketWatch for a live interview on Facebook this week to answer questions about high-frequency trading, president-elect Donald Trump and why it’s so hard to change our behavior, even when we know how biased we are.
Here are some edited highlights:
On writing ‘The Undoing Project’:
Lewis says the title of his latest book came from examining the objects Tversky (who died in 1996) kept in his office at Stanford University. There was a folder titled “The Undoing Project,” which contained information about the project Tversky and Kahneman were working on; they eventually decided to no longer work together, a separation Lewis described as “basically a breakup of a love affair.”
“The way they were going at it was to explore how people undid tragedies. If you wanted to undo the election of Donald Trump as president of the United States, how do people do it? How do they imagine an alternative reality where Trump didn’t win? You could see right after the election people said, ‘If only [FBI Director James] Comey hadn’t raised the issue of emails again the week before the election ended. If only Hillary [Clinton] hadn’t given the speeches to Goldman Sachs GS, +0.37% ,’” Lewis said. “But if you think about that for a minute, there are a billion ways in which Donald Trump might not end up being president of the United States. If Donald Trump were born a girl, he would not be the president of the United States. That’s what they were fiddling with and didn’t finish.”
On Tversky and Kahneman’s realization that humans have difficulty acting in spite of their cognitive biases, even when they’re aware of them:
One solution to this problem is building systems that allow other people to serve as checks and balances for important actors. (An example: Delta Airlines DAL, +0.48% had a problem with too many pilots landing at the wrong airports. The company asked Tversky for advice, and he suggested they redesign their planes’ cockpits and empower the members of the pilot’s team to offer their opinions more often, in order to cut down on errors.)
“One of the lessons these guys delivered is, the world is a far less certain place than our mind is prepared to be in,” Lewis said. “Reality is, as Amos said, reality is not a point; it’s a cloud of possibilities. At any given time, you’re in a probabilistic situation. But people don’t think that way and they should. They should think probabilistically and statistically about many problems. If you are seeking the advice of some expert, a financial adviser, a doctor, or a political pundit, or someone telling you which sports team to bet on, if that person exhibits total certainty about his predictions, you know you have a problem already.”
Tversky and Kahneman’s work “steers you into the hands of people who are more diffident in their advice, and more hedgy and more unsure,” Lewis said.
That’s why it makes sense to remember Tversky and Kahneman’s research when seeking medical advice, Lewis said.
One of the characters in his book is Don Redelmeier, a physician at the hospital-based Sunnybrook Research Institute in Toronto, whose job it is to serve as a check for other doctors’ diagnoses. Redelmeier saves lives by “filtering” the diagnoses, according to Kahneman and Tversky-style thinking.
“It’s why you get second opinions when the medical advice is really important,” Lewis said. “It’s why if your doctor is totally sure, you probably should see another doctor.”
You can watch the full interview with Lewis here:
On whether such research could be used by bad actors, since it’s so difficult for everyday people to resist their own biases:
“It is true that a lot of what they describe is weaknesses in the human mind can be preyed upon by bad actors,” he said. “And one of the ways to defend yourself against those bad actors is to know what those weaknesses are.”
President-elect Donald Trump has “preyed on” those weaknesses, perhaps unconsciously, Lewis said.
“People get vivid pictures in their minds, and they overweigh them. It causes them to misjudge probabilities,” he said. “You see someone dressed as a Muslim getting on an airplane, and because of the rhetoric in the air, you’re making a judgment about the likelihood that person is trying to blow up a plane that you shouldn’t really be making. It’s actually not a reasonable thing. It’s an irrational thing. He’s very good at preying on that kind of thing.”
On journalists who write about money and finance:
“The coverage tends to be heavily influenced by the people being covered. The people who make the most money in the financial sector are also the ones who are buying the Bloomberg terminals and who are putting ads on CNBC, so on and so forth,” he said. “There’s a natural tendency to want to keep them sweet and not actually do the job of serving as a kind of check on their behavior.”
“The ‘Flash Boys’ story has been amazing to me. … IEX, the people who created this exchange to slow down high-frequency traders so they did not have an unfair advantage against everyone else in the marketplace, has a very clear and coherent explanation, a description of how the markets work, and they can show it to you. It’s been astonishing to me how few journalists want to go and take a call from them, and call a high-frequency trader and get the other side of the story and then feel either too confused to write the story, or it’s a ‘he said, she said.’ It’s sort of like, almost easier to spread a lie in financial journalism than it is to get the truth across. It’s a problem.”
On how the average person should invest — and whether they should even bother to invest if the system is rigged:
The author said the skim being taken out of stock market orders from any individual investor’s point of view is “trivial.”
“So this problem I’m talking about is more of a big system problem. And it shouldn’t stop people from investing in the stock market, putting some of their savings in the stock market,” he said.
“I think the best way is a low-cost index fund. I do not think people really should be making individual stock picks with their savings. I think that’s generally been demonstrated to be not such a good idea. If you want to do it as entertainment like gambling — like you bet on football games — fine, but I think you’re better off in a low-cost index fund, like a Vanguard index fund.”
How Lewis invests his own money:
“I put my own money in either those low-cost index funds, or I invest in Berkshire Hathaway BRK.A, +0.80% , which is its own kind of weird fund. I put some money with Warren Buffett because I’ve always felt that if things get really bad, the market tanks, he’s always in a very good position to take advantage of the situation.”
On president-elect Trump’s future:
“Predicting what Donald Trump will do is a bit like predicting what the stock market will do. There’s a huge random component to his behavior,” Lewis said. “I think he’s making it up as he goes along and doesn’t have any particular compass. The closest thing to a compass is: What’s his immediate narrow self-interest. Beyond that, it’s hard to read him.”
Lewis said he can’t predict what the next big bubble will be. But he has some thoughts about stories to watch:
“If someone put a gun to my head and said you have to go out in the world and write some long-form magazine article, where do you go? I go to Washington and watch the Trump administration. One of the things I might watch is what they do with financial regulation, which is a boring subject, but it’s going to have big effects. And I’d especially look at the Consumer Financial Protection agency and if they roll any of those protections back.”
“I can’t help but notice out of the corner of my eye is what’s going on with Europe. I mean, Italy looks like it might break apart. The European Union is fracturing before our eyes. And nationalism is on the rise, everywhere but where it was on the rise before. It’s everywhere but Germany. Those are the stories I wouldn’t be shocked if I end up writing.”
On the movie adaptations of his books:
“A movie is not really a book, it’s a short story. The amount of compression that’s required is incredible. It’s always going to be a slice of the book. I thought in every case they took the right slice. I was perfectly happy with how they did it.”
In the tradition of his book ‘The New New Thing,’ would Lewis ever write about another figure in the tech industry? If so, who would it be?
“If they let me in, I know it sounds old, but Google GOOGL, +0.29% would still be a great story. What’s actually going on in that place? Again, it’s not something I particularly want to write about. I did that once and don’t really have any ambition to write about the tech world again.”