by Gábor István Bíró
In their new book, Phishing for Phools: The Economics of Manipulation and Deception, George Akerlof and Robert Shiller show that in a free market we are not only free to choose, but also free to be phished. If we do something which is not so much in our interest, but in the interest of the phishermen, we’ve just got ourselves phished. From food industry through tobacco and alcohol markets to the financial sector and the political sphere, entrepreneurs, marketing experts, and politicians seek to find and use our weak points, or so the two Nobel-prize laureate economists aim to show. It seems that this phenomenon of ‘phishing for phools’ occurs naturally wherever free markets reign, but is extremely hard to see until we’re on the hook, and sometimes even afterwards. But why is this mechanism so powerful?
Phishing strikes at the very heart of economics, threatening the Homo oeconomicus with no less than decapitation, by calling into question our capacity to rational decision-making. Akerlof and Shiller argue that neither the psychological nor the informational implications of the concept are left untouched. They show that manipulation makes us think we want something which we don’t really need and point out that this seduction to our “monkey-on-the-shoulder tastes”, as they call it, is not as uncommon as we might think. Information-bias could be a form of manipulation at play, but not exclusively. Self-deception is also pushing us towards trusting a certain company, bank, rating agency or politician, and it is also possible that we just don’t have the time and money to get all the information we would need. Two axioms of classical economics, in particular, seem to be flawed: One stating that every decision-maker is aware of all the information she needs to decide, and another stating that making a preference-list, and then sticking to it, is smooth sailing. Trying to figure out what is happening consciously and subconsciously when people make decisions, Akerlof and Shiller seem to have found something which might explain and connect psychological and informational malfunctions in modern economics: storytelling.
People tell themselves stories all the time. Jane is a good girl: she regularly goes to church, always pays her taxes and credit card debt, and never in the past got herself into trouble. She is wonderful, isn’t she? Is Jane someone we would be willing to ask for investment advice? Yes, she is. And that’s where things begin to go wrong. Jane’s overall personality has nothing to do with her knowledge about investments or her financial skills. Similarly, a lawn-mowing politician could be different from the ’ordinary Joe’ he wants to portray himself as in many, perhaps every aspect imaginable – except how he mows the lawn. But we don’t care. We just keep telling these stories to ourselves. Why? Stories provide us with mental frames to make decisions. They convey the impression that life is easy and predictable, even though often it is neither. According to Akerlof and Shiller, economic agents are not just looking for products, they are looking for stories. This tendency can be used by others to sell them just the stories they asked for, and not the products they were initially looking for. According to Akerlof and Shiller, if there’s an opportunity to phish, someone will be there to phish us and take us for phools. There are no unused phishing spots in the economy. This means that a new kind of equilibrium emerges with phishing for phools as a general phenomenon – a new equilibrium which brings a new task to economists and public officials: namely, to look for how informational and psychological weaknesses are created and exploited in modern economy.
Akerlof and Shiller note that their findings might either be seen, from a traditional point of view, as thorough analyses of economic malfunctions or as fallacies of modern economics that should urge us to revisit the theoretical principles. One thing seems certain: these phenomena need to be addressed if economic theory is to preserve its plausibility. There may be several ways to do so. Behavioural economics offers a way to separate what the agents think and what the agents do. Akerlof and Shiller followed this track themselves, but now go a little further with their idea of storytelling. Though no other alternatives are explicitly discussed in the book, it seems appropriate to mention a few here: evolutionary economics may be able to handle these phenomena more properly with the micro-meso-macro approach of Dopfer, Foster and Potts and the interdependent CBST (cognitive, behavioural, social and technological) rules and might even offer an answer to how and why such mechanisms and practices emerged in the economy. Economic anthropology also offers useful insights into why seemingly unexpected and irrational transactions happen in the economy, while being much less attached to pre-existing theoretical schemes.
In their astonishingly well-written and witty book, Akerlof and Shiller offer insight and diversion for a wide array of people. Economists will find new research topics to study, non-economists will find a new way of looking at their daily interactions in the economy. Both will have fun doing so, since Phishing for Phools, ranging over such diverse topics as the economics of slot machines, health clubs, lobbying, junk bonds and finanical crises, provides a plethora of exciting case-studies and contemporary examples.
George A. Akerlof & Robert J. Shiller: Phishing for Phools: The Economics of Manipulation and Deception
Princeton University Press, Princeton 2015
Hardcover, 288 pages, US$24.95
Gábor István Bíró is a PhD student at the Doctoral School of History and Philosophy of Science, Budapest University of Technology and Economics.