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Phishing for Phools: The Economics of Manipulation and Deception by George A. Akerlof, Robert J. Shiller
Akerlof and Shiller are both American Nobel Laureates for their work in economics. I mention this first because the book has a breeziness and humour that can overwhelm the profound economic insight it proposes.
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.
Bliss points
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 maximise 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.
Forewarned is forearmed
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 and is the author of Strategy that Works. Views expressed are his own.
