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Lewis: 'It's Never as Simple as Just an Algorithm'

Author Michael Lewis links behavioral economics and decision-making psychology as a driver of the financial market structure.

Tom Lauricella, 04/28/2017

This analyst blog is part of our coverage of the 2017 Morningstar Investment Conference. 

In a wide-ranging keynote luncheon chat Thursday at the Morningstar Investment Conference, author Michael Lewis linked together the behavioral economics and decision-making psychology that drives everything from sports to financial market structure. Even his own book deals, he said, offer a lesson on the power of incentives to drive behavior.

From Moneyball to his newest work, The Undoing Project, there are lessons in decision-making relevant to investing.

"Acknowledge the power of data, good predictive analysis, worship it even, but not at the expense of total stupidity," said Lewis. "You've all got to become behavioral scientists, understand the way the mind leads you astray when anecdotal evidence is in the room."

In his discussion with Morningstar director of personal finance Christine Benz, Lewis explained the connection between Moneyball and The Undoing Project, which tells the tale of the friendship and collaboration of two influential psychologists, Daniel Kahneman and Amos Tversky, whose work explored the decision-making process and how the human mind can easily be led to make poor choices.

"Moneyball was a book about how markets didn't value people properly," said Lewis of the 2003 story of the Oakland A's baseball team and its evidence-based approach to building a team.

"The natural question should have been 'why?'" he said. "What's going on inside the human mind that leads perfectly intelligent people who know lots about their subject to make these kinds of mistakes."

The reality, says Lewis, is that "experts make mistakes." That kind of awareness is one of the forces driving investors toward passive investing, he said, noting that Burton Malkiel, in his seminal investing book that helped promote the idea of index investing, A Random Walk Down Wall Street, cited Kahneman and Tversky's work in part to explain why rule-based investing might outperform an individual that has biases.

Tom Lauricella is the editor of Morningstar Direct.

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