I’ve learnt one big thing – experts always get it wrong

And the author of The Big Short thinks his new book proves it

WHEN Michael Lewis pieced together his latest book, he came to one glaring realisation: that most expertise is utter hooey.

He found that what many so-called experts predict – from basketball coaches to fund managers – is based on a series of mistaken beliefs that means they are often wrong.

Lewis (pictured), an award-winning author whose books The Big Short and Moneyball have been turned into Hollywood hits, could never have known it but his newest work could not have been better timed.

The reputations of experts, from pollsters to financial analysts, lie in tatters following their assertions during Brexit and the US elections.

Lewis’s book The Undoing Project is about the lives of two brilliant psychologists, the late Amos Tversky and Nobel Prize-winner Daniel Kahneman, who linked-up in war-torn 1960s Israel and have changed the way the world thinks about economics, financial decisions and investment for ever. That the experts got it wrong on Brexit and Donald Trump will have come as no surprise to them.

When Lewis, 56, and I meet in central London he is full of examples of how the idea of expertise is often misplaced.

He describes how basketball coaches pick tall muscular guys because they look the part, and Israeli military recruiters were drawn to people who looked most physically suited, rather than those who are most able. In the same way economists think mistakenly that history will tell them about the future.

There is the same assumption that fund managers, actively running investments by picking stocks, will always out-perform an index fund run by a computer – even though the fund manager’s decisions are often guided by personal prejudice.

Lewis says: ‘You have index-fund creators and intellectuals leading the charge against the idea that there’s such a thing as expertise. The index-fund creators are questioning all expert judgment because experts suffer from the same cognitive biases as everyone else.’

He adds: ‘A misperception of randomness leads people to think that there are exploitable patterns in random sequences. And the financial market is a very good example of that. It is what Tversky called the hot-hand fallacy – that people misunderstand randomness.’

Lewis’s latest book is very different from previous works, which have turned him into the most acclaimed American nonfiction writer of modern times.

BUT over the years he has demonstrated an amazing ability to take the reader inside complicated subjects and make them entertaining. From the financial crisis in The Big Short to highspeed trading in Flash Boys and baseball (of which he is a fan) in Moneyball, he has brought to life complex themes through the eyes and characters of participants.

He went to Princeton and began his career as a corporate lawyer before enrolling at London School of Economics.

He took a job at Salomon Brothers as a bond salesman but left to write Liar’s Poker, about his experiences at the investment bank. Since then Lewis has become a global star – his 2006 work The Blind Side was turned into a film and won Sandra Bullock an Oscar.

Casually dressed in a buttondown pink shirt, he seems surprised when I suggest his drift into the world of psychology and randomness follows on from his previous work. After all, Moneyball dealt with the bonkers way in which Major League Baseball teams spend their money, and The Big Short showed how a group of countercyclical thinkers made fortunes from the financial crisis.

But as Lewis explains, it was through reading a review of Moneyball – which became a movie starring Brad Pitt – that he discovered Tversky and Kahneman. ‘The reviewers read Moneyball and said that I didn’t seem to understand

that all that stuff about the idiocy of baseball scouts was described by Tversky and Kahneman.

‘At that point, I found out who they were. It turned out that Danny Kahneman lives half a mile from me in Berkeley, California.

‘I would visit him, we would go on long walks together.’

The Undoing Project is largely a biographical exercise. Kahneman was a child of the Holocaust who spent four of his childhood years in hiding from the Nazis in France. Tversky is described as the smartest person in the room, a logician with an ability to take ideas to a higher level of abstraction.

The two meet in Israel. When they leave for the United States, the relationship starts to suffer as people try to credit one as better than the other. The last quarter of the book is heartbreaking because of the sad demise of their feelings for each other.

Tversky dies and Kahneman became famous, winning the Nobel Prize for Economics in 2002. His work Thinking, Fast And Slow is held up as one of the pivotal works on behavioural economics. Though many will not have heard of them, the works of these two brilliant men permeate everything – such as in the creation of the Government’s nudge unit, which aims to deliver massive change by small policy shifts. An example was the 5p charge on plastic bags, which this paper championed, and has led to a decline in consumption of billions of bags.

From his research, Lewis understands why the one recognisable trait of the really good trader is that they know when to cut their losses. He says: ‘Even if the trade is down 20pc from when it was bought and I was asked whether I should buy it or not, I wouldn’t buy, I would sell.’

The instinct might be that after such a substantial fall, the stock must start rising soon. But like the football club at the bottom of the Premier League in January, there is no real reason why that should change.

DESPITE his own fame, Lewis is remarkably unstruck by stardom. Everything he says is unscripted. He parts company with the publicist who has arranged our chat and puts no time limit on the conversation.

He even remembers our previous conversation in the bar at the London premiere for The Big Short.

Returning to his latest work, I ask Lewis what he thinks Tversky and Kahneman would make of Trump?

‘They would say that in trying to understand the President, all the experts would have in their heads what has happened before – Hitler, Mussolini, fascism in Europe.

‘But Tversky and Kahneman turned on its head the whole idea that history is going to repeat itself.’

Let’s hope the geniuses who have changed the whole way that people think about economics and investment are proved as correct on this as on much else. The Undoing Project, by Michael Lewis. Published by Allen Lane £25.