PHISHING FOR PHOOLS: The Economics of Manipulation and Deception

By George A. Akerlof and Robert J. Shiller

Princeton University Press. 272 pp. $24.95

George A. Akerlof and Robert J. Shiller are economics nobility. Both have won Nobel Prizes, Akerlof for explaining how “asymmetric information” between buyers and sellers distorts market outcomes, Shiller for his research on the volatility of prices for stocks and bonds. Akerlof happens to be married to Federal Reserve boss Janet Yellen. Shiller predicted the recent housing collapse. Among dismal scientists, these guys are as respected and connected as it gets.

But with books, as with stocks, timing is everything. Akerlof and Shiller’s first book together, “Animal Spirits,” in 2009, challenged economic orthodoxy — especially the notion that markets reflect the behavior of rational actors — just as confidence in standard economic models was disintegrating with the Great Recession. They argued that emotions involving confidence, fairness, bad faith, corruption and misunderstandings about money exert a powerful influence on behavior and therefore on unemployment, business cycles, financial markets and real estate prices. To cope with all this, they argued, a broader responsibility for government is needed. “The proper role of the parent is to set the limits so that the child does not overindulge her animal spirits,” the authors wrote.

Six years later, Akerlof and Shiller have written “Phishing for Phools,” another attempt to upend our traditional understanding of how economies work. Free markets do not just deliver choices and prosperity, the authors contend, but create irresistible incentives for businesses to manipulate consumers and prey on our emotions and ignorance. “The economic system is filled with trickery,” they assert, “and everyone needs to know that.”

For long stretches, the second book feels far less revolutionary than the first. Its examples are well-known and overly dissected cases of economic misdeeds. Advertising misleads consumers. Credit card firms and car dealers rip us off. Rating agencies and investment banks gave us the subprime loan debacle. Food and pharmaceutical companies finesse regulations to bring unhealthy products to market. Akerlof and Shiller once again rely on behavioral economics to illustrate their cases, but after more than a decade of “Freakonomics”-style books peddling gee-whiz findings, the authors sound a little like the guys still enamored of the hipster trend long after the hipsters have moved on.

The authors seem sensitive to this perception. “Perhaps there is nothing new here,” they write near the end — a remarkable admission, even if they then attempt to refute it.

Although “Phishing for Phools” reads at times like one more behavioral-economics tract, it is far more than that. Its critique of conventional economics is more powerful and comprehensive — and more paternalistic — than that of “Animal Spirits.” Here, Akerlof and Shiller aren’t just saying that emotions distort economic outcomes or that free markets feature imperfections that devious actors exploit at the expense of consumers. No, they are arguing that such exploitation is inherent to the system, that the equilibrium economists worship — whereby any opportunities for unusual profits are quickly seized and taken off the table — also means that chances to take advantage of our weaknesses, to counter our true preferences, are soon identified and abused.

The mechanism for this abuse is “phishing,” the term for a form of online fraud in which the culprit obtains sensitive personal data from another person by posing as a reputable entity such as a bank, an Internet service provider, a Ni­ger­ian prince. Akerlof and Shiller broaden the definition; for them, phishing occurs throughout the economy and involves “getting people to do things that are in the interest of the phisherman, but not in the interest of the target. . . . There are so many phishers and they are so ingenious in the variety of their lures that, by the laws of probability, we all get caught sooner or later.”

So we are all played for fools, whether psychological ones, with our emotions leading us astray, or informational ones, when we are intentionally misled. (The authors love the “ph-” construction and, annoyingly, add it to relevant words beginning with the “F” sound, giving us “phools,” “phoolish” and “phood.” It’s clever the first time, never again.)

Akerlof and Shiller distinguish between our stated preferences — we want to eat better, save more, stop smoking — and the preferences of, as they put it, the “monkeys on our shoulders” that entice us into poor decisions. “Standard economics has ignored this difference because most economists have thought that, for the most part, people do know what they want,” the authors explain. “But that ignores the field of psychology, which is, largely, about the effects of those monkeys.”

That difference exerts a huge influence on our lives, they contend, and means that total freedom to choose can lead to serious economic trouble. “Free markets do not just produce what we really want; they also produce what we want according to our monkey-on-the-shoulder tastes.” Meaning, they yield a steady supply of phishes to capitalize on our weaknesses.

The authors use this framework to explain all kinds of economic chicanery. Car buyers want to get a good deal, but despite entering a dealership already wary of getting duped, they are primed by advertising to add expensive gizmos that the sellers know the buyers may never even use. Or consider how the convenience of credit cards gets us to spend more than we might want to. Or the way doctors, and then their patients, get phished by pharmaceutical companies that rig articles in academic journals and fund so-called continuing education for medical professionals, all with an eye toward pitching new wonder drugs. Or how credit-rating firms engage in “reputation-mining”: Despite building their business on the basis of proper ratings for financial products, they succumb to incentives to produce the ratings that securities underwriters want — a key part of the financial crisis that exploded in 2008.

“Phishing for phools is not some occasional nuisance,” Akerlof and Shiller write. “It is all over the place. Not only does it affect many decisions; in some cases it has sizable effects on welfare.”

They stress that phishing works because of the stories we tell ourselves and the stories the phishers have long told us. Palmolive soap doesn’t just make you clean, it makes you beautiful; more Facebook “likes” mean our lives must be better; and more recently, certain German diesel cars meet low emissions standards. The influence of stories on economic decisionmaking is pervasive, Akerlof and Shiller write, and “perhaps our book’s most important takeaway.”

A whiff of economist-knows-best permeates “Phishing for Phools,” such as in the authors’ all-caps lament that “we see people making decisions that NO ONE COULD POSSIBLY WANT,” or in the notion that what we say better reflects our underlying preferences than what we do. The book ends with an ode to the regulators and activists who seek to protect us from phishing and from ourselves. They are the true heroes of the economy, Akerlof and Shiller write, “individuals who step back from the profit incentive and who act as business leaders, government leaders, thought leaders, religious leaders. . . . Really, to a remarkable extent it is these heroes who make the free market system work as well as it does.”

Reading that, I initially wondered if Akerlof and Shiller were engaged in a little reputation-mining of their own, trading on their academic prowess to promote their political beliefs. Instead, I can’t help but suspect that the authors are getting phished themselves, just a little. They dismiss any concerns about “regulatory capture,” whereby government agencies sometimes operate in the interests of the industries they oversee, and they note that Akerlof lives in Washington and therefore “knows many regulator heroes who work long hours and weekends to protect our financial and personal safety.” Even if financial regulators eventually cash in and work on Wall Street, the authors write, it’s “not because that is what they were angling for all along, but rather as relief from the twenty-four-hour, seven-day-a-week demands of government service.”

Now there’s a good story.

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