Phishing for Phools: Warning, chicanery is widespread

Phishing for Phools: The Economics of Manipulation and Deception by George Akerlof, and Robert Shiller explores how consumers are being ripped off everyday by the world's most powerful companies.

Phishing for Phools: The Economics of Manipulation and Deception by George Akerlof and Robert Shiller

You’re being ripped off. That’s a fact of life in most economies today, where shortfalls of regulation mean that big, powerful companies exploit contractual fine print and your own psychological imperfections to sell you stuff you don’t really want for more than it’s worth. So say two Nobel Prize-winning economists, anyway.

Maybe, as consumers who have visited used car showrooms, Starbucks, and McDonalds, who watched the Great Recession unfold, and who saw institutional perpetrators of various species of fraud receive massive government cheques despite sending the global economy into a rout, this isn’t too much of a surprise.

But what is surprising is that microeconomics doesn't help us to explain why everyday rip-offs are such a pervasive part of life. That's where George Akerlof, who won the Nobel Prize for economics in 2001, and Robert Shiller, who won the same prize in 2013, come in with their new book Phishing for Phools: The Economics of Manipulation and Deception, published by Princeton University Press.

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■ Old masters of the soft sell: exclusive excerpt from Phishing for Phools

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Most of us, most of the time, are fallible, gullible, persuadable, or don’t know enough about what we’re buying. That applies to the big decisions in life – mortgages and surgery – and the small things – what to have for dinner, whether to get an extended warranty on a new kettle. Companies spend a lot of money making up our minds for us. Car salespeople pile optional extras and complex financing on to cars. Pharmaceutical firms focus on drugs that bring good cash flow – whether or not they are the best way to address a condition.

Akerlof and Shiller argue that this kind of deception is not just common – it’s integral to markets. Just as in a monopolistic industry where high profits signal an opportunity to new firms, so too does the presence of many firms that do not exploit a particular human weakness signal an opportunity for profit.

Vampiric banks realise that they can issue mortgages to people who are not creditworthy, then seize the house when their customers fail to make payments. Landlords and estate agents fail to mention the damp in the attic.

“Modern economics inherently fails to grapple with deception and trickery,” the writers say.

q&a questioning the efficiency of markets

Adam Bouyamourn delves deeper into the revelations from Phishing for Phools by George Akerlof and Robert Shiller:

But we knew we were being ripped off already, didn’t we?

You’d be surprised. There’s a gap between the way economics is done – mathematical models plus data analysis – and the everyday experiences of consumers. Most people who go househunting know that it’s not as easy as finding something and saying yes; anyone who watches consumer protection programmes on TV knows that companies are clever at ripping people off. But in formal models, the tradition is to assume that markets are more or less efficient, and that instances where they aren’t are the exceptions, rather than the rule. Markets are usually efficient – but for specific reasons.

How do Akerlof and Shiller challenge this?

They suggest that most markets are not efficient, for reasons that most markets have in common.

Are they communists?

Akerlof and Shiller are at pains to point out that, as professional economists, they are well aware of the advantages of efficiently-functioning markets. Indeed, one wonders whether they are pre-empting charges by right-wing colleagues that they are lending too much support to the enemies of freedom. “We do not argue about the merits of free markets: Our mind’s eye can take a journey across the boundary from China into North Korea, and then again across the boundary into South Korea,” they write. Instead, they contend that the circumstances under which markets really do function efficiently are few and far between.

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