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.


  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".

    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.

  2. "I have often argued that we need effective government to police our markets for monopolistic behaviour, misleading advertising, and externalities."

    While true, it is worth noting that governments are THE worst offenders in bringing about monopolistic behaviour. All the rules, regulations, taxation and massive self-feeding bureaucracy they tend to set up invariably serve large monopolistic companies and stifle competition.

    "I can now add that we need government to help even when we make our own choices with our eyes open."

    No, no, no. As an adult I want to be able to make my own mistakes. If you need a nanny, please hire one for yourself but not for me.

    1. @BHCh: Monopolistic behaviour arises naturally as companies merge and enter into non-competitive agreements. Government is all we have to counter this effect. It's true that some government regulation ends up thwarting new entrants into a market, but government also stops monopolies from squeezing us to death. Just imagine how bad Bell and Rogers would be if they had no limits placed on them. We need to find ways to create good regulation and get rid of bad regulation. No regulation at all would be a disaster.

      You may want full freedom to make your own mistakes, but do you really want that for everyone else? My taxes help to subsidize the masses. It costs me money when powerful corporations sucker the masses into stupid decisions. On a more personal level, it pains me to see how difficult it is for my sons to navigate the traps set by companies trying to exploit their weaknesses. This reminds me that I was once more naive and vulnerable. In one small example, I have overpaid by a ridiculous amount for funerals because my emotions prevented me from properly defending myself. As with just about everything, we need balance here. We can't protect people from everything. But that doesn't mean we shouldn't protect them from anything. To find the right balance we need to first understand the ways that markets get us to make choices that are against our interests.

  3. Re monopolies - agreed, it is a balance. And right now the balance is that governments have created huge "moats" for the industry. Market leaders stay there for a loooong time because they have the muscle to work through the system and accounts to handle the red tape. Great for investors in these companies but it kills entrepreneurship. Major reason why there has been no growth in the economy overall.

    Re freedom to make mistakes - yes, I want it for everyone. I have lived within a socialist economy whereas governments get to decide on your behalf. You know what? No thank you. Freedom is way more important.

    1. @BHCh: I'm all for making life more difficult for Canada's large businesses. Eliminate bad regulation and keep the good.

      You lived in a place that went way to far in one direction. But it's possible to go too far in the other direction as well. I wouldn't want businesses to have full freedom to tempt me with smokes, booze, drugs, and other vices everywhere I go out my front door. I wouldn't want businesses to have full freedom to trick me with confusing contracts that triple the apparent price of everything I buy. We need to find the right balance.

    2. One problem with "removing freedom to trick" is human biology. People like risk and they like deceiving themselves. Our psychology has been developed over millions of years and can't be changed by an Ottawa bureaucrat.

      Everyone at one point or another jumped on a "too good to be true" type of deal. We are wired to try and nothing can change it. Some learn, other don't - that's life. That's what makes it fun. Otherwise we might as well just have robots instead of people.

      And we all know how wonderfully the regulations work. Hundreds of countries created millions of regulations. US has the most stringent anti-drug laws imaginable. Had the opposite effect. The lesson? Apparently we need more regulations.

  4. @BHCh: It is because we are vulnerable that we need protection from the worst abuses. Government can't eliminate vulnerability, but it can prevent the worst abuses. It is government that stops businesses from putting deadly chemicals in our food.

    There are many bad regulations that should be eliminated. But imagine what our world would be like with no regulation at all. I find the public discussions among politicians about regulation to be very disappointing. It's as thought all regulations are the same and we just need either more or fewer depending on who is talking. What we really need is to get rid of the bad ones and create more good ones.

    Anti-drug laws have been a failure for the masses. But I wouldn't want legal drug sales in front of my house. We need smarter regulations.

    1. " It is government that stops businesses from putting deadly chemicals in our food."

      Not really. Putting deadly chemicals into food is not very conducive to your long-term chances of survival as a business. Killing your client base could be a tad counterproductive. And even if we are talking long-term effects, once this information is out your business is going to be casualty number 1. So, I would argue that no business out there has an objective to put deadly chemicals into your food and is only being stopped by the kind government.

      Now... Government has a role. Stealing is a crime and that's why we have governments. Ensuring accurate information is available is a worthwhile endeavor. Once information is out there, the choice should be ours to make. That's called "freedom", there is nothing more important.

      As for the theory of "good regulations"... Civil service is designed to work for itself. If a bureaucrat has any brains, his real objective is to make his department bigger. Have you seen "Yes, Minister"?

    2. @BHCh: Our food history is filled with discovering and banning carcinogens. And selling cigarettes remains profitable. Relying on the profit motive to avoid serious harm is naive.

      Ensuring accurate information requires regulations. All laws are a form of regulation. The existence of bad regulations does not make them all bad. I'm happy that it's illegal for my neighbour to kill me. I'm starting to think that the entire source of our disagreement may simply be the word "regulation". There are many bad ones and there are ones we need. Distinguishing the good from the bad is critical.

    3. @Michael - I think there are 2 sources of our disagreement:

      1. Where is the "sweet spot"? You believe there is a need to regulate our behaviour more than now. I think we already have way too much of this.

      2. You think a wise government can solve your kids problems. I beg to differ.

    4. And cigarettes are a good example. Smoking has benefits and risks. People always knew of both but not the extent of the risks.

      Wide-spread smoking was defeated by information rather than bans. If you consider scientific articles, newspaper publications and TV ads "regulations", so be it.

    5. @BHCh: It seems after this long exchange we aren't close to scoping out where we disagree. I'm not looking to regulate our behaviour. I want to restrict business from engaging in certain practices that bring us various types of harm. For example, I like forcing businesses to clearly state what is in the food we eat. I'd prefer it if schools didn't offer garbage food to our kids regardless of how it is labeled. This is a far cry from expecting government to solve our problems.

      Widespread smoking was largely defeated by government actions. Taxation, labeling, and indoor smoking bans were critical parts of the effort. Scientific articles were critical in sparking government action, but would have done little on their own.

    6. @Michael:

      There is already clear labeling. Like way too clear. When US imposes requirements to mark meat by country of origin, its nothing but protectionism. Labeling GM not only imposes extra costs but also has a net detriment in terms of health.

      Not only everything you eat is carcinogenic, but your own muscles are radioactive. Every time you hug your wife you are increasing her radiological exposure.

      The best approach is to a) promote accurate information and b) limit false information.

      Unfortunately not only the majority of labelling efforts are counterproductive but the amount of false/non-factual information is increasing.

    7. And availability of junk food at school has no impact on obesity.

    8. @BHCh: Are you seriously characterizing my statements as being synonymous with "everything you eat is carcinogenic"? I see no point in continuing this nonsense.

  5. "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...

    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.

    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. ;)

    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.

    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:

      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 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!