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Phishing for Phools – The Economics of Manipulations and Deception Relié – 4 septembre 2015
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Ever since Adam Smith, the central teaching of economics has been that free markets provide us with material well-being, as if by an invisible hand. In Phishing for Phools, Nobel Prize-winning economists George Akerlof and Robert Shiller deliver a fundamental challenge to this insight, arguing that markets harm as well as help us. As long as there is profit to be made, sellers will systematically exploit our psychological weaknesses and our ignorance through manipulation and deception. Rather than being essentially benign and always creating the greater good, markets are inherently filled with tricks and traps and will "phish" us as "phools."
Phishing for Phools therefore strikes a radically new direction in economics, based on the intuitive idea that markets both give and take away. Akerlof and Shiller bring this idea to life through dozens of stories that show how phishing affects everyone, in almost every walk of life. We spend our money up to the limit, and then worry about how to pay the next month's bills. The financial system soars, then crashes. We are attracted, more than we know, by advertising. Our political system is distorted by money. We pay too much for gym memberships, cars, houses, and credit cards. Drug companies ingeniously market pharmaceuticals that do us little good, and sometimes are downright dangerous.
Phishing for Phools explores the central role of manipulation and deception in fascinating detail in each of these areas and many more. It thereby explains a paradox: why, at a time when we are better off than ever before in history, all too many of us are leading lives of quiet desperation. At the same time, the book tells stories of individuals who have stood against economic trickery--and how it can be reduced through greater knowledge, reform, and regulation.
- Nombre de pages de l'édition imprimée288 pages
- LangueAnglais
- ÉditeurPrinceton University Press
- Date de publication4 septembre 2015
- Dimensions16.51 x 1.91 x 24.13 cm
- ISBN-100691168318
- ISBN-13978-0691168319
Description du produit
Revue de presse
Longlisted for the FT & McKinsey Business Book of the Year 2015 --Fact
"As you would expect, it's a very clearly written book with tons of examples. And it makes a simple and powerful point about the fragility of the normative, welfare economics conclusions economists tend to draw." --Diane Coyle, The Enlightened Economist
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- Éditeur : Princeton University Press (4 septembre 2015)
- Langue : Anglais
- Relié : 288 pages
- ISBN-10 : 0691168318
- ISBN-13 : 978-0691168319
- Poids de l'article : 482 g
- Dimensions : 16.51 x 1.91 x 24.13 cm
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Didn't like it.
The authors ask if economists don't underestimate our tendency to chose against our best interest, to make errors. Even behavioral economists, who have built a business around the notion of bias, framing and irrational choice, are criticized here because they still consider errors as rare exceptions (sic). Errors, the authors say, are not a disequilibrium phenomenon: they can exist in equilibrium and lead to profit-seeking by "phishermen" because we make "phools" of ourselves so often.
The book, unfortunately, is itself a big mistake. The authors distinguish what we chose freely from "what we really want, which is really good for us". As a case study they cite cinnamon rolls which lure passers-by into an unhealthy diet. But they forget to mention that cinnamon rolls do taste good! And so the problem is one of an arbitrage between two goods: sweet tasty rolls and a lean body. Or else the sellers of healthy food could be seen as phishermen phishing for phools and feeding them broccoli when they could have had pizza!
The other examples given did not convince me either: financial instability, worries about money and savings, health. All these situations raise interesting questions which are not treated adequately here. In the rest of the literature, they are often distinguished and studied with much more depth.
As for the new concepts and analytical tools in this book, they are nonexistent, despite the authors' claim that they make a significant contribution to economics.
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George Ackerlof is married to --- Janet Yellen. I had not known. I found that fact via Google only after reading the book. It has a lot of explanatory power for the contents of the book.
The book's fundamental premise is that we are all taken for phools some of the time, and we should be wary all of the time. The Milton Friedman school of economics was premised on the idea that everybody knows and acts upon their own best interest, and that the aggregate of everybody acting in their own self-interest leads to an optimal arrangement, a concept that dates back to Adam Smith's "Wealth of Nations".
The modern instantiation of that concept, according to the authors, is modified only by the recognition of externalities and income distribution. But, the authors tell us, the torrent of recent books on financial illogic tells us otherwise. They quote Freakonomics author Steven Levitt, "Thinking Fast and Slow" author Daniel Kahneman, and several others. They do not mention Dan Ariely, Michael Shermer, Robert Trivers and others who write in the same vein. The bottom line, however, is exactly as the authors say. We act according to our wants rather than our needs. We do not recognize our needs, and our wants are often perverse. They name, as especially egregious examples, gambling, tobacco, alcohol and drugs.
Jumping to the conclusion, part three of the book seems more an exhortation, a defense of the status quo than an evenhanded presentation of the facts. They discount the severity of regulatory capture, and trumpet the benefits of government oversight bodies such as the FDA, the securities exchange commission, and the interstate commerce commission. They laud the positive outcomes of Social Security, Medicare, and other transfer programs. There is no discussion whatsoever about the sustainability of these programs, or the phishing aspect of their enactment. In my words, the promise of benefits today to be paid for by taxpayers tomorrow is a very popular political phish. Free lunch; something for nothing. Although how long this phish can go on has to be a topic of pillow talk for Ackerlof and Janet Yellen, no such discussion finds its way into the book.
The authors do not touch on many topics that would complicate their case. Technology is exacerbating income inequality. Smart people are becoming more productive, not so smart people are becoming increasingly superfluous in the American economy. During what they call the Age of Reform, 1890 to 1940, America was still largely governed by the scions of the founding fathers. The common good and the Protestant ethic were seen to coincide. Since that time America has experienced vast immigration by North Asians and Jews, who though very competent and successful maintain identities apart from the founding stock, and by Hispanics, Muslims and others. America's involuntary minorities, American Indians and especially Blacks, have gained political power. The increasing level of mutual mistrust is evident in crime reports in the daily newspapers, throughout the blogosphere, and in every political situation. The authors should recognize that a large amount of phishing involves appealing to tribal instincts. Every author must set boundaries in order to craft a book small enough that people will read it. While the authors did a great job with the topics they chose, I would observe that they could have edited down the good material they present to find room for some more relevant topics.
The book is well written and has an excellent bibliography. It is very centrist, very much an establishment work, as one would expect from the Princeton University Press. For what it is, it deserves five stars. For what it is not, the reader owes it to himself/herself to look to other sources.
That's the end of a short review. Here follows a chapter by chapter analysis.
Part One – Unpaid Bills and Financial Crash
CHAPTER ONE Temptation Strews Our Path.
The economy functions not by satisfying our needs but by satisfying our wants. The mortician does not sell you a reasonable priced funeral, the car dealer does not sell you what you need for basic transportation, the grocery store does not sell you what you need for nourishment. If they did they would starve. No – on the contrary they sell you what you will buy, even if it is not what you need, or detrimental to your self-interest.
CHAPTER TWO Reputation Mining and Financial Crisis
A good reputation is built up over a long period of time. A company can cash in on a good reputation, turning it into money by taking advantage of people who continue to believe in what once was. They cite the rating agencies, Moody's and Standard & Poor's, as examples. I will name my former employer IBM. It had a reputation as an outstanding employer, phishing those of my coworkers who stayed on in the expectation of secure employment and a decent pension. Defaulting on that trust brought the company a lot of profit for many years. I will add a reputation that these authors pointedly omit. The United States' worldwide reputation for sound money ensures that Ukrainian mattresses are stuffed with dollars, not Euros. Our reputation has allowed the US to sell treasury bonds throughout the world. In monetizing the federal debt, selling it to foreigners, we have abused that trust. The phish have gotten wise. As this book comes out, China is dumping treasury bonds faster than the government can print them.
PART TWO Phishing in Many Contexts
CHAPTER THREE Advertisers Discover How to Zoom In on Our Weak Spots.
The best part of the chapter is a history of three early advertisers, Albert Lasker, Claude Hopkins, and David Ogilvy. These geniuses managed to add value to oranges by turning Sunkist into a brand, exalt the process that every brewer used to the benefit of one brewer in particular, and turn an ordinary soap, Palmolive, into something the promised beauty. Advertising is a classic phish. Create a story, such as the Marlboro Man, that the buyer can identify with and they will not research the actual merits of the product.
CHAPTER FOUR Rip-offs Regarding Cars, Houses, and Credit Cards.
This chapter focuses on the big transactions in life. They pit buyers, who confront these situations infrequently, against sellers who do so every day. The buyers get ripped off on origination fees, points, financing terms, unneeded insurance and a million other costly extras. Credit cards charge an unconscionably high interest rate to those who do not scrupulously pay their bills when due.
CHAPTER FIVE Phishing in Politics.
Voters are dumb. We vote emotionally. The authors cite Senator Charles Grassley making a commercial of himself riding on a lawn tractor, portraying himself as a common man. That's what wins votes. A topic they might have explored is how emotional issues such as gun ownership/gun control are so key to getting politicians elected and so irrelevant with regard to what they do once in office.
CHAPTER SIX Phood, Pharma, and Phishing
The story here is Cinnabon, which floods airport lounges with the scent of cinnamon just when the traveler is tired and hungry. The high calorie content and the price are irrelevant. People buy what is not good for either their pocketbook or their waistline, and the company coins money.
CHAPTER SEVEN Innovation: The Good, the Bad, and the Ugly.
Some very interesting research here. Innovation accounts for 7/8 of the improvement in our standard of living, increased capital investment only 1/8. However, not all innovations are good for us. They provide histories of slot machines and Facebook.
CHAPTER EIGHT Tobacco and Alcohol.
The authors have nothing good to say about any of these. They provide a good history of the demonization of tobacco, and a good litany of the unmeasurable damage that alcohol does. In this regard I would be somewhat of a contrarian. Alcohol fills an important social role. I am fond of joking that without it, Germans could not breed. It is certainly an integral part of the culture where I live now in Ukraine. The downside is not to be dismissed, but there is also an upside to be acknowledged. I'll concede that it is harder to find arguments for the upside of tobacco, gambling or drugs.
CHAPTER NINE Bankruptcy for Profit.
This is a chapter on the techniques of corporate looting. It includes a good account of the savings and loan crisis of the 1980s, and something of an insight into how the "Keating five," including Senator McCain, got compromised.
CHAPTER TEN Michael Milken Phishes with Junk Bonds as Bait
This is a balanced chapter about an enigmatic character. Most of what Milken did was legal, and the crime for which he went to jail was a frame job. Nonetheless, his operation immorally took advantage of the gullibility of investors. One of the metaphors used throughout the book is rotten avocados, products presented as one thing but actually representing another. Milken used an obscure book on the profitability of fallen angel junk bonds issued by reputable companies that had fallen on hard times, and twisted the story to support the purchase of newly minted bonds which were junk from the start. It was a very successful financial phish.
CHAPTER ELEVEN The Resistance and Its Heroes.
This chapter leads the reader toward the happy conclusion. It is an endorsement, in general, of the forces that have made the marketplace safer and the economy richer and more productive over the years. These include the muckrakers such as Upton Sinclair and Ida Mae Tarbell, the governmental agencies that were set up starting in the Age of Reform, and nongovernmental groups such as the American Chamber of Commerce, the Better Business Bureau, the industry standards groups that rigorously define methods of classifying wheat by type and grade, and others that band together to ensure the general integrity of business.
PART THREE Conclusion and Afterword. This is the rosy conclusion alluded to above. Fret not, all is well. The government will look out for your best interests. I advise readers to sample pessimistic blogs such as zerohedge, the Unz review and oftwominds for differing points of view, then decide who is phishing whom.
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The authors, both Nobel laureates in economics, argue that the common economic model of a free market with assumed perfect conditions is woefully inadequate for formulating policy in the real world. Although free markets have contributed greatly to prosperity, they have also included many failures such as unfair distribution of income, inadequate social protections, and externalities like pollution that are mitigated by government intervention. Phishing for phools is added to this list of market failures. It is defined as manipulation and deception that are intrinsic to markets and that inexorably arise from the same profit motive that produces prosperity.
In the past four decades, behavioral economics has identified many aspects of human psychology that differ greatly from the rational man of economic models and that are highly vulnerable to phishing. These include many cognitive biases and thinking in terms of narratives onto which marketers can graft other stories. For a much longer time, advertising and marketing in both business and politics have used sophisticated techniques to understand and exploit these same vulnerabilities.
Numerous examples are drawn from all walks of life to show the pervasiveness of phishing for phools. For the financial crisis of 2007, the untoward actions of investment banks, rating agencies, and the trading of derivatives and credit default swaps are discussed. Rip-offs regarding cars, houses, and credit cards are revealed. Phishing in politics is said to undermine democracy, particularly because of the oversize role of money in elections and lobbying. For Pharma and phood, abuses before and after the Food and Drug Act of 1906 are discussed, including the 2006 lobbying victory that barred competitive bidding for Part-D Medicare drug coverage. Bankruptcy for profit by fraudulent bookkeeping in the savings and loan crisis of 1986-95 is described. The rise of Michael Milken’s junk bond industry that enabled the excesses of leveraged buyouts by corporate raiders is reviewed.
The phishing equilibrium is pervasive but not comprehensive. That is because we have individuals who step back from the profit motive and act as leaders of business and government. It is these heroes who make the free-market system work as well as it does, not the unadulterated actions of markets. Some of these individuals work in or have founded organizations that measure and enforce standards, like the Food and Drug Administration, the National Bureau of Standards, and the Better Business Bureau. Other individuals have developed legal protections for consumers or have worked to regulate business and finance in government agencies that may be strikingly underfunded by the enemies of regulation in congress.
The final section of the book discusses the competing stories of the free market. (Remember the importance of narrative in human thinking.) During the Age of Reform from 1890 to 1940, Populism, Progressivism, and the New Deal led to a new, more expansive view of the role of government. The old story is that in the post-World War II years there was a consensus that government met real needs by Social Security, Medicare, securities supervision, deposit insurance, the interstate highway system, aid to the indigent, supervision of food and drugs, environmental protection, auto safety laws, laws against mortgage-gouging, civil rights, and gender equality.
The new story achieved currency in the 1980s when Ronald Regan said, “Government is not the solution to our problem; government is the problem.” This story is derived from an unsophisticated interpretation of standard economics that says free-market economies without government interference yield the best of all possible worlds. Actually, the free market is a double-edged sword that does produce great prosperity but that also produces highly significant harmful effects from which we need protection. The authors provide three examples of important old story protections and new story efforts to end or minimize them by “reform” or defunding.
Social Security: In the old story, for those over 65, Social Security provides more than half of unearned income for the bottom 80% and still provides 31% for the top 20%. Without it, the poverty rate for those over 65 would rise from 9% to 44%. Nevertheless, in the new story, the Bush administration, in 2004, proposed to privatize a significant portion of the program. The plan essentially gave the most vulnerable citizens government loans to be paid back with high interest rates in order to speculate in stocks and bonds. The authors thought that the plan was “to be blunt, daffy.” In addition, the Paul Ryan plan to privatize Medicare that would result in a typical person over 65 paying 68% rather than 25% of health care costs out of pocket.
Securities Regulation: In the old story, securities regulation is one of the most important government functions. In the new story, these functions are to be undone by deregulation and defunding. Both of these likely contributed significantly to the financial crisis of 2007. In 2014, the SEC oversaw close to $50 trillion of assets with a budget of 0.003 cents per dollar of asset. This is 1/400 of mutual funds budget of 1.03 cents per dollar of asset. Quite possibly, this new story defunding of regulators, with workloads and salaries to match, contributed to the eight-year delay between notification of the SEC of suspicions about Madoff’s pyramid scheme and his arrest in 2008.
Citizens United: In the old story, more than a century of campaign law aimed at limiting distortions by moneyed interests in elections. The Tillman Act of 1907 disallowed direct contributions by corporations to political campaigns. New laws in 1974 created the Federal Election Commission and limited campaign contributions and spending. McCain-Feingold of 2002 prohibited PACs, which had arisen to circumvent earlier campaign law, from mentioning candidates in advertising within thirty days of primaries and sixty days of general elections. In the new story, Citizens United, a right wing nonprofit political organization challenged McCain-Feingold in 2007 by paying to release a partisan documentary about Hillary Clinton. With new story thinking, the conservative majority of the Supreme Court denied the distinction between free speech by individuals and free speech by corporations. John Paul Stevens wrote in dissent that this defies common sense. Metaphorically, we must place some limits on those with resources to unleash huge loudspeakers that can drown out the messages of less well-endowed others.
The authors conclude that it is wrong only to picture the healthy (i.e. “efficient”) working of markets because it means that modern economics fails to grapple with deception and trickery that are inherent in competitive markets. Thus phishing for phools is not just an occasional nuisance that should be considered on a case-by-case basis. It is a generality that is an inevitable and inherent part of free markets. Thus phishing for phools should be cast in an Adam Smith-style general equilibrium framework, which is the benchmark for thinking for all economists.
The father of economics, Adam Smith, wrote in his book, The Wealth of Nations, that in free markets, as if “by an invisible hand … [each person] pursuing his own interest” also promotes the best interest of everyone. The baker sells and distributes bread less expensively and conveniently than a householder could do for herself, so more lives are enriched and the baker makes money.
“If business people behave in the purely selfish and self-serving way that economic theory assumes, our free-market system tends to spawn manipulation and deception,” explain the authors. As our computers need protection against malware, so too do all people need the protection of understanding of how easily we are taken for fools (Phools).
In IT parlance, to “phish” is to perpetrate a fraud on the Internet in order to get valuable personal information from a target. The authors use the computer definition as a metaphor: getting people to do things that are in the interest of the phisherman, but not in the interest of the target. The target of the phisherman is the “phool” (fool).
How pervasive is phishing for phools? As the authors show, it affects our financial lives, our health, the governments we choose, and more.
Consider this analogy offered by the authors. Why do we rarely see one check-out queue at the tills in a supermarket significantly longer than another? Simply because shoppers will move to the shortest till queue. In a similar way, all business people are looking for a way to extract profit from whatever opportunity they can, and like the till queues, these advantages disappear quickly.
Free markets have an incentive to produce whatever people want, as long as a profit can be made from it. This is the “economic equilibrium” – you need or want and are prepared to pay, so I produce and make money.
By the same logic, explain the authors, in free markets business people look for advantage which is often found through the practice of deception and manipulation that lead us to buy, or to over-pay for, products and services that we either want or need.
“We wrote this book as admirers of the free-market system, but hoping to help people better find their way in it,” Akerlof and Shiller explain.
Markets will seize any opportunity to take advantage of our weaknesses. The slot machine, invented in the 1890s, is an obvious example. It soon became evident that it was habit-forming (good for phisherman!) and bad for families and society, but they proliferate wherever regulators left a gap. (In Vegas, deaths due to cardiac arrest in the casinos are an especially serious problem.)
A “phool” is someone who is successfully phished because human psychology leads us there - the greed of winning money not earned, rather than common sense – most people lose on slots. We are phools when we make decisions that no one could possibly want.
Large food companies commission scientific laboratories to calculate consumers’ “bliss points” that maximize their craving for sugar, salt, and fat, the authors report. No one could possibly want to be overweight or obese.
Phishing also occurs because we lack the information available to the phisherman. In the absence of information, we rely on those who have the information.
Consider another analogy offered by the authors. If I have a reputation for selling beautiful, ripe avocados, I have an opportunity beyond selling only beautiful and ripe avocados. If I succeed at selling mediocre avocados at the prices normally only paid for perfect, ripe ones, I will have used my reputation at your expense.
Reputation-mining lay behind the financial disaster of 2008 when bankers with reputations for acting in their clients’ best interests, acted only in their own. Rating agencies whose integrity was used by bankers to assure their clients of the quality of an investment, deliberately or in error, gave outlandish ratings that favoured the bankers who paid them.
In the arena of our health, we rely on reputable pharmaceutical companies in the absence of our knowledge of complex medicine. From 1999 to 2004 Vioxx, an anti-inflammatory, was estimated to have caused between 26,000 and 56,000 cardiovascular deaths in the United States. The “failure” by doctors and pharmaceutical companies to notify women of suspicions about hormone replacement therapy, is believed to have caused 94,000 cases of breast cancer.
The authors contribution to economic thinking is not simply that “there is a sucker born every minute and someone to take him every 59 seconds”. Rather, free markets are not a good to be promoted without government supervision and involvement to contain phishing and protect phools.
Cancer doesn’t have a bacteriological or viral origin which requires a drug or a vaccine to kill the foreign invader. Rather, cancer is caused by the same natural forces as our own healthy functioning. Cancer develops as a mutation of its own cells, and like healthy cells, has defences against attack.
Similarly, the power of free markets give the same power to phisherman as it does to more morally-attuned business people. That is why we need good governments to intervene.
Not only is this an astute insight, but this book is full of examples of how we can be phished for phools. Forewarned is forearmed.
Readability Light -+--- Serious
Insights High +---- Low
Practical High ----+ Low
Ian Mann of Gateways consults internationally on leadership and strategy
Their book is an easy read in the sense that they describe themselves as "George" and "Bob", people you might know socially who are also very, very smart, and very perceptive about the way in which consumer spending and political hucksterism really work.
As the song from Jerome Kern's "Showboat" famously begins, "It ain't necessarily so…" What we have is a catalog of market failure made possible by psychological manipulation and deception on an industrial scale, engineered by marketing professionals and industrial psychologists who traffic in consumers' weakness, apathy, ignorance, and stubbornness in their refusal to wise up and see marketers' gamesmanship for what it really is. If this type of salesmanship were an illicit drug, it would be crack cocaine.
There is a laundry list of the myriad ways in which our emotion-driven selves are plumbed by marketers, and ably assisted by their hired guns in the form of research psychologists, whose job it is to promote consumer spending for goods and services that rarely if ever measure up to the hype their promoters give them. Much of what Professors Akerlof and Shiller describe will be well known to most readers, at least in their outlines, but the authors do drill down into the details.
Their underlying premise is simply this: free markets produce a cornucopia of products, goods, services, political messages, and so on, stuff that people want. Consumers are free to choose among that mountain of stuff that producers and marketers want to sell, barter, or simply give away for the sellers' own economic advantage. Effective selling requires sellers to tell us a story, because storytelling and its underlying narrative is the best way to capture our attention and to insinuate the story's message deep within our emotional selves. Even when we know particular stuff is injurious to our health and welfare, we still remember the advertising jingle that makes us want to have it regardless of the consequences.
The cause du jour for some of today's trending economists is that markets are omniscient and self-correcting, and that any attempt by government to correct market failure (a term that economists use to describe markets where buyers and sellers have unequal resources, information, or ability to make responsible choices) is inherently illegitimate. This is essentially 19th-century laissez-faire economics on steroids. Not only does this infect our economic lives, but also our politics, as the authors briefly but quite astutely describe.
They also describe the damaging effects that this 'New Story' has wrought on our economy, noting the billions of dollars that have been lost through an economy that was nearly wrecked by unregulated excess.
For those who have been victimized by this behavior, and that would include most of us, we would do well to reflect on William Shakespeare's magisterial play, Julius Caesar, in which Mark Anthony says to his friend Brutus, "The fault, dear Brutus, is not in our stars, but in ourselves…"
And so it is true here. We want what we want, and we will pay whatever price demanded in order to have it. We allow ourselves to be deceived, because it justifies fulfillment of a transient want, even if it comes at the cost of our long-term security. Akerlof and Shiller do not condemn us for that, but simply say it's a fact of life, and we all can do better in dealing with it now that we are fully aware of what we are up against.
Akerlof and Shiller are especially critical of colleagues in the economics profession, and they wonder why professional economists have allowed themselves to become so willfully blind to what was going on under their noses. It would appear though that behavioral economics, in which human psychology and its foibles do not easily lend themselves to neat mathematical formulae and its descriptive models. It also suggests that some of them are writing to an audience that is predisposed to discount the likelihood of market failure, where the because of ideology, or because it hurts their bottom line. Akerlof and Shiller intend their book to be a healthy corrective to the kind of compromised thinking that self-deception and conflicted interest represent.
By focusing on the mental framework that people use to make their economic decisions and choices, Akerlof and Shiller have done us an immense service by stripping away a lot of the obfuscation and blather that so often accompanies debate on economic matters. They tell us, "… Since our decisions are usually based on the stories we are telling ourselves about our situation, this gives us a transparent characterization of motivation that allows us to understand how most phishing for phools happens."
The fact that we live in a free market economy that gives us a standard of living that, as Akerlof and Shiller say, "would be the envy of all previous generations," should not blind us to the dangers that we face from the manipulations and deceptions that are inherent in having a free economy, and that we need to pay close attention to what we are told, and to exercise a healthy skepticism toward the stories that today's marketers are asking us to accept as our own.
The simple model of the free market is that everyone operates in their own self-interest. The reality is that trickery and deception sometimes persuade us to make decisions contrary to our interest. Phishermen inevitably arise to profitably exploit our cognitive biases and lack of information about certain goods and services. Entrepreneurs pursue profits, and taking advantage of customer’s naiveté is part of the free market’s double-edged sword. The free market creates a strong incentive to make profits, but does not reward those who refrain from manipulative tactics used by their competitors.
We regularly make decisions that aren’t good for us, whether it is saving too little for retirement, foregoing medical checkups, overusing credit cards, and so on. Marketing influences our decisions. Advertising often contains misleading, if not downright false, claims, so long as those claims elicit sales. Advertising is based upon what works, even when the targets are children. “Let the buyer beware” is still alive and well.
Phishing for Phools provides dozens of examples of practices and scams, some legal and some not, that manipulate the unwary into acting contrary to their interests. One example is the slot machine, which was invented in 1893. Exploiting human weakness, the new machines were soon found to be addictive to some of their users. One writer says they were “addictive by design.”
Another example was the savings and loan and junk bond crises of the 1980s. Next came the rise of Enron, which was based upon bogus accounting. Then the Bernie Madoff pyramid scheme. The 2007 bursting of the housing bubble stemmed from undeserved high ratings for mortgage-related securities.
Government regulation is either a needless drag on the economy, or an essential protection of the public interest. Akerlof and Schiller make the case for the latter, and do so by describing how “our free market system tends to spawn manipulation and deception.” They recognize the influence that regulated industries have upon regulators. Big Pharma, for example, spends more on lobbying than any other industry. The authors nonetheless maintain that regulation protects the public interest, even if that protection is inconsistent and less than it should be.
When Reagan declared that government is the problem not the solution, he led an era of deregulation. There has also been diminished funding for regulatory agencies, which limits their effectiveness. Fewer IRS agents means that hundreds of billions of dollars are uncollected each year because there aren’t enough people to collect them. When it comes to financial crimes, the regulators today typically fine the companies rather than prosecute individuals. One reason is that individual prosecution is more expensive. On the other hand, company fines are seen as a cost of doing business, and are a weaker deterrent than the threat of prison.
This book’s main point is that, “Free markets make people free to choose, but they also make them free to phish, and free to be phished.” The market is a double-edged sword. When the public recognizes that reality, there will be more support for government regulators to protect the public from phishing. ###
