Two Nobel laureates join forces in Phishing for Phools to put a point on Lady Wisdom’s attractive observation, from Proverbs 26:11 — “As a dog returneth to his vomit, so a fool returneth to his folly.” When it comes to navigating our way around the marketplace, we play the fool with remarkable consistency. We may buy what we need, occasionally, but more likely we buy what the monkey on our back tells us to. Still, the marketplace is democratic and inclusive: as one man may manipulate and deceive his pigeon, so may he be swindled in turn.
And for this George Akerlof and Robert Shiller won the Nobel Prize? No. Akerlof shared his for the analysis of markets affected by asymmetric information, Shiller for the empirical analysis of asset prices. Shiller also wrote Irrational Exuberance, which had its day in the sun back in 2000. What they should have won the prize for was welcoming the rank-and-file to economics — a discipline whose moniker (“the dismal science”) perhaps best reflects how its revelations are liable to make you feel. Phishing for Phools is solidly in that vein: here, economics is accessible if not exactly popular — the authors ask that you pay close attention to understand the processes at work — along the lines of James Surowiecki and Joseph Stiglitz, the latter being the most lucid and big-hearted of the bunch, and in whose good company Akerlof shared his Nobel.
Akerlof and Shiller aren’t exactly a pair of Reds. They believe in the value of the marketplace as a venue for individual action, an incentive to create the things we need, to provide for something more than a rude existence unto “a standard of living that would be the envy of all previous generations.” Then, in their appealingly informal tone: “But let’s not carry the praise of markets too far.” Why not? Because market operators are less than scrupulous and consumers are less than gimlet-eyed. “Insofar as we have any weakness in knowing what we really want,” be the weakness informational lacunae or psychological bewitchment, “and also insofar as such a weakness can be profitably generated and primed” — or, say, manipulated and deceived — “markets will seize the opportunity to take us in” (rip us off) “on those weaknesses. . . . They will phish us for phools.”
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Phishing for Phools examines the market as a place to which, everyday, people bring their weaknesses and get duly phished. “It is about getting people to do things that are in the interest of the phisherman, but not in the interest of the target.” It is about making errors when emotion overrides commonsense, when misinterpretations guide our hand, when we are intentionally misled by the competitively pressurized merchant. Fellow feeling? What fellow feeling? “No one is exempt” from making these errors — not Suze Orman, not Alan Greenspan, maybe not Joseph Stiglitz.
For us to grasp the main insights of behavioral economics, an important word must enter the picture: unregulated. Unregulated markets rarely reward businesspeople who exercise restraint before our weaknesses, who are anything less than keenly aware of those moments when we throw economic caution to the wind. Opportunity is everywhere to go phishing, for the bottom line is that we frequently do not act in our best interests. We listen to the monkey on our back. That monkey is a capuchin, by the way, the subject of an experiment that taught capuchins how to use money in trade. The capuchins, phoolishly, didn’t buy grooming products. They bought Marshmallow Fluff−filled Fruit Roll-Ups. The authors employ a strange conflation of terms: “good for us” with “what we really want”; clearly, those capuchins really wanted that candy (they also learned to “exchange sex for money,” which reinforces the whole marketplace-and-desire slippery slope). What we “really want,” write Akerlof and Shiller reasonably enough, is financial security, good health, and good government. Our monkey friend helps us undermine those wants at nearly every turn in the road.
Free markets are about not just making what the monkey on our back wants — How about one of those opportunistic Cinnabons® at 880 calories per? How ’bout two? — but producing the wants as well. “The salesman does not get paid to be his brother’s keeper.” He gets paid to be the keeper of his brother’s wallet. His book is full of smoke and mirrors: credit cards; the exploitation of race, gender, and age; lying; sowing doubts; mixing rotten apples in the barrel; mining good reputations for nefarious ends; even, for the lowest of the low, subprime mortgages. As Akerlof and Shiller write, if you go to the circus, “the best magic shows are not in the big tent, but rather at the sideshows. Now let’s go to the Credit Default Swap Tent.” Sideshows are meant to shock and appall, and this one doesn’t let us down with its fusion of Through the Looking-Glass with Grand Theft Auto.
But the most blinding smoke and complex mirrors come from advertising — once Akerlof and Shiller have dispensed with swindlers, sharpers, and serious bottom feeders like Michael Milken, Charles Keating, and Bernard Madoff. Advertising grafts its narrative onto the metaphor for how the Phishing for Phools shows our minds working: evolving stories. Akerlof and Shiller present convincing evidence of how tobacco, pharmaceutical, and liquor companies and politicians weasel a chapter of their own into our life stories, abusing the mutual storytelling — with all its signs and wonders — that is elemental to our humanity. Sometimes, and this one’s a real miracle, they go to jail for it.
“It is not the unadulterated actions of markets that bring us the cornucopia we enjoy,” write Akerlof and Shiller, although that “we” has a royal ring to it, “for that same free-market system brings ever more sophisticated manipulations and deceptions.” It is the bridled market that measures and enforces quality standards that keep the system from becoming a colossal Ponzi scheme. The authors salute standardization, grading, and certification, no matter that they too can be corrupted; they sing the praises of the Better Business Bureau, chambers of commerce, consumer unions, the National Association of Realtors, and the Uniform Commercial Code — smell that coffee. The very suggestion that government could be of service, to serve common needs against the externalities and inequalities inherent in the unregulated system, releases some overdue oxygen into economics.
Free a marketplace and it will provide all the tackle needed to phish for phools. The economic model is fundamentally flawed, as are we. Both have consequence for our well-being, assert Akerlof and Shiller. This is not a new economics, they readily admit, but they have added a variable: being aware of the stories we tell ourselves, and what to leave on the cutting-room floor. It is information, and how we turn it into knowledge is our responsibility. Phishing for Phools suggests we bring some moral obligation to buying and selling, just as it suggests that phools get to laugh at their pregnabilities — if they live, that is, long enough to learn.