Monday, April 11, 2016

Phishing for Phools

We’ve been taught that the invisible hand of the free market brings unintended social benefits. However, Nobel Prize-winning economists George Akerlof and Robert Shiller explain that we get more than just social benefits in their book Phishing for Phools: The Economics of Manipulation and Deception. Necessary parts of the market equilibrium are “tricks and traps.” The authors explain these ideas in a surprisingly easy read.

“The free market system exploits our weaknesses automatically.” If one seller of unhealthy baked goods wasn’t there to catch us at our weakest moments, another would step into the void. The authors go through many examples of markets where we get “phished for phools” including cars, houses, credit cards, prescription drugs, tobacco, alcohol, and junk bonds. They make a strong case that phishing is a major part of our free markets.

One interesting example of phishing is the way that credit cards affect us. Studies “show that credit cards get you to spend ... quite a bit more” compared to using cash. When retailers and credit card companies battle over the fees retailers have to pay to accept credit cards, these two groups are battling over the spoils of our overspending.

“Free markets make people free to choose. But they also make them free to phish, and free to be phished.” Our “competitive markets by their very nature spawn deception and trickery, as a result of the same profit motives that give us our prosperity.” As a result, “phishing for phools is not some occasional nuisance. It is all over the place.”

The authors argue that “economists’ understanding of markets systematically excludes [trickery and deception].” As a result, “modern economics inherently fails to grapple with deception and trickery.”

I have often argued that we need effective government to police our markets for monopolistic behaviour, misleading advertising, and externalities. I can now add that we need government to help even when we make our own choices with our eyes open. I see no other way to deal with our obesity epidemic. The challenge is to find a way for government to do what is necessary (and no more) for a reasonable cost.

I highly recommend this book to anyone with an interest in economics, even if you find other economics books boring. This book is written to be understood rather than written to impress.

7 comments:

  1. "The challenge is to find a way for government to do what is necessary (and no more) for a reasonable cost."

    I really don't think cost is the primary deterrent here. It seems clear to me that high powered lobbyists will do whatever it takes to maintain the status quo. That to me, is the real challenge.

    I found this book a little dry and hard to get in to. I much preferred Richard Thaler's book, "Misbehaving".

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    1. @Garth: In your first point, I'm not sure we're disagreeing. I think as a country we want government to serve our interests for a reasonable cost. Trying to prevent lobbyists from using money to steer government in bad directions would be a part of that.

      I think Thaler's contribution in "Misbehaving" is different from this book's contribution. There is some overlap, but mostly different.

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  2. "I can now add that we need government to help even when we make our own choices with our eyes open. I see no other way to deal with our obesity epidemic."
    (I'm at work wasting tax payer money so I'll be brief.)

    Completely wrong. The government, via the Canadian Food Guide and deals with special interest groups, is actually furthering the obesity epidemic. Their decades-old agenda is based on faulty and fraudulent "science". Apparently money is more valuable to them than the health of their citizens. This is not the kind of government help I want.

    More to follow...

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    1. @SST: Are you aware that what you wrote did not contradict what I wrote? I said no entity other than government can help here. You say government won't help. If we're both right then nothing will fix the obesity problem. I consider this a definite possibility.

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    2. "I said no entity other than government can help here [obesity epidemic]."

      There may be no "formal" entity, but I'd definitely consider the professional sector of the Internet blogosphere -- which has none of the barriers or limitations which plague the government -- to be a helping entity.

      The government will publish a single view, coloured by the interests of many other entities, both political and corporate; professionals can publish free of all tethers if they so wish. It will never be the government entity which helps the swiftest or the most, that will come from the public itself (but not necessarily the private sector).

      It's like saying no entity other than government can help with the coming retirement epidemic. Hopefully the voluminous population of personal finance blogs has enlightened more than a few.

      Just because the government is the government, doesn't mean it's immune to the economics of manipulation and deception (just to keep things on topic). And I'll just pretend I didn't see the part about credit cards. ;)





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    3. @SST: I'd like to think that researchers and writers will make a difference, but they are up against Big Food. Any trend that gains momentum will be used by Big Food to create new products that appear healthier but aren't. A good example is the trend in making snack foods out of dried vegetables (other than potatoes). They are very unhealthy, but almost everyone I've seen eat them has said they thought they were healthy snacks.

      I find it strange that I'm being cast in the role of defending the government when I'm in favour of eliminating at least the worst 10% of performers working in the public sector. In any case, the only way I see that government would do significantly more to improve people's ability to discern which foods are healthy is if enough of the population demands it and politicians pay heed for reasons of personal gain. I'm not holding my breath.

      I don't understand your remark about credit cards.

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    4. I'm not sure what happened to SST's latest reply, but here it is:

      "Any trend that gains momentum will be used by Big Food..."

      Well, yes...we are Capitalists, after all.

      But this is much more than mere food trends, it's about hard science and either the acceptance or denial/ignorance of facts; the government chooses the latter path (just as the authors claim economists ignore phishing).

      A timely example from CBC concerning the diet-heart hypothesis:
      http://www.cbc.ca/news/health/saturated-fat-diet-heart-hypothesis-1.3532509

      A study done 45 years ago showing that "replacing saturated fats in the diet with unsaturated corn oil fails to reduce the risk of death," was ignored and unpublished because its facts stood against the popular -- but fraudulent -- ideology of the day (and still), Ancel Key's 'Seven Countries Study'. Thus we have decades of global Food Guides guiding generations of citizens to eat in a wrong manner (e.g. carbs) resulting in...an obesity epidemic (and diabetic epidemic, health care epidemic, etc. et al). And when the government tells its people to eat a certain way, corporations are going to manufacture to fulfill those legislations.

      Government's suppression of facts and institution of policy based on fraud is not going to help the public by any means. As above, we are Capitalists, and in the end the public will vote with their wallets, but the public needs correct information on which to base their actions; neither government nor corporation can be relied upon to supply said information. Anti-phishing has to, and does, originate from members of the public. Sure, it's a Sisyphean task to change a half-century of unapposed indoctrination, but what's the other option?

      Which is a nice segue to my last point: I don't like credit cards, the product or the industry, for various in-depth reasons, your comment in the article is somewhere among them. I believe the CC companies have created one of the greatest phishing expeditions of modern time. But again, who wants to believe the facts about "fast food money"? ;)

      I'm in the infancy of developing a Mungeresque mental models approach to thinking about problems, the almost always intelligent exchanges here definitely help me in contemplating the other side(s) of my rants. So if nothing else, thanks for that!

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