By George A. Akerlof & Robert J. Shiller
(video George A. Akerlof: on Phishing for Phools: The Economics of Manipulation and Deception)
So, the chapter then gives the historical answer to four questions. One; how did the rating agencies initially establish their reputation? What then changed, making it more profitable to mine t hat reputation than to keep it? Why were the buyers in those rotten asset securities so naïve? And then why was the financial system so vulnerable to the discovery that the assets were rotten?
So now I’ve given you sort of two sort of detailed examples of the type of thing that you’re going to find in each and every chapter of Phishing for Phools.” And so these are the chapters. The chapter on Advertising, Cars, Houses, Credit Cards, on Lobbying, on Food and Drugs, Inventions, Tobacco and Alcohol, there’s much more on the financial system that I think gives a much better picture than you’ll get from the textbooks about how the financial system work.
We talked about protections against Phishing for Phools, why in fact, our lives are actually quite tolerable despite this and then there’s a conclusion and where this fits into economics.
Okay, so now let me make some concluding remarks. So what I’vedescribed here is I’ve described the beginning of the book. In the second half, the book introduces a new concept. It gives a picture, perhaps not totally general regarding why and how we are phished for phools. Again it has to do with being human. Now this is something that for the most part we don’t see in economics and we don’t see in current economic methodology.
Again, this has to do with being human. So we’re constantly telling ourselves a story regarding what we do and who we are. So think about yourselves right now and here in this room. Each and every one of you who are sitting in your seats and me who’s giving this talk, we have a story. We have a story, which is telling us what we’re doing and then we act accordingly and we play our roles, we do our parts. So, telling ourselves a story is basic to how we think and is basic to what we do. Psychologists have different names for these stories. They call them such things as mental frames or scripts or narratives. But then it’s in the nature of the stories that they can have grass or new offshoots. So, that’s the result of all advertising.
So what do advertisers try to do? The role of advertising is to graft the advertiser’s story onto the story the people are already telling themselves. So, that’s the story of the doggie in the window. The girl’s walking down the street and that advertisement, that doggie with its waggly tail attracts the girl’s attention and then she bursts into a new story and she’s going to buy the doggie and give it to her boyfriend. But that’s, in fact, a metaphor for what huge amounts of economic activity is. We always want to–we want to attract people to do what we want them to do and to notice what they do.
Now, such stories play a very important role in people’s motivations and so that concept then pervades the second half of the book, regarding advertising, buying a car, lobbying the phishing by the pharmaceuticals, tobacco and alcohol and financial markets as well.
So let me give you one example of that. So, in the chapter on Tobacco and Alcohol, this message is especially clear. So, everybody here knows about the Surgeon General’s report. I doubt that many of us have actually sat down and read it, although it is actually a very well written document. And we also know something about the subsequent anti-tobacco-ing.
Now that’s been successful for the following reason; what did the Surgeon General’s report do? It propagated a story and that story—and it can be said in three words and that story is smoking is stupid. Now almost everybody that we know believes now that smoking is stupid. Even most smokers; 67 percent of all smokers say they want to quit. So that’s what it did.
Regarding alcohol, whose harms are quite possible also very large, the fact is we don’t know, there is no such story. And there’s virtually no movement even to do research to evaluate those harms. So, there is a dual career for tobacco, which has somewhat been brought under control. It’s still a very serious danger. But we don’t even know how much the harms are that are due to alcohol. All we know is we have occasional anecdotes about that.
And as an indicator of that, the taxes on alcohol are very low. For example, the federal tax on a bottle of wine is 21 cents and the Massachusetts State tax on a can of beer is only one cent. So I hope I’m right about that. I’ve looked it up five times, so I’m probably right.
Okay, so this takes us to a final message of the book about the role in economics. Economics tends to disregard the role of stories. Now we saw that in the Susie Orman example. Standard tests work just as soon as the people maximize their utility subject to their budget constraint. They do that textbook-y thing. But that does not capture what Tim and Sue really are thinking in the supermarket when they’re choosing their apples and oranges, so they’re broke at the end of the month.
So as economists, we have a duty to go out and ask and this is a duty that we haven’t been taking on ourselves. What are people really thinking when they make their decisions. The role of stories which takes center stage in the second half of Phishing for Phools is then its second important message.
And then the concluding chapter then, appropriately I think, is about how a wrong national story in the United States is about the unambiguous benefits of free markets and how that’s led to dysfunctional national policy.
So, the chapter gives three examples of this wrong national policy regarding Social Security, regarding budgets for the SEC, and regarding campaign finance reform. But, of course, the whole book is about, just to repeat, is about how economics is about telling the right story. And those stories are very important and they tend to be a very important thing that’s left out of most of our economic analysis and it’s also left out of the mathematical models that Political Science does tell about politics, alt hough politics is really super about that. So thank you..
Morris Goldstein:Thank you very much. Okay, I put it over here. Thank you. Okay, wow George, that was terrific. We’re now going to open up the discussion to questions. Please identify yourself and try to keep your questions relatively short. To get the ball rolling, let me use the prerogative of the Chair to ask an opening question.
In the book, you talk about resistance to phishing and its heroes and I was hoping that I could get your reaction to two resistance organizations; one from the private sector and one from the public sector.
The first one is firms like Angie’s List, which for a modest fee provide reviews on local service providers. So, if you want to get your driveway paved or you want to get a plumber, you just type in the service that you want and you get the reviews rated by the customers, very detailed. Cost, nature of the job, how promptly they responded, the quality of the work and for the bigger, for some of the firms that are used the most, you might have 25 or 50 reviews and most of them are in the past six months.
So if someone’s trying to phish me, an unscrupulous provider, it’s going to be harder for them to mine their reputation because as soon as they do that, they get negative reviews and other people read about it and they lose their business. So the general question I’m asking about that is, well if there are these things that are going on. In a way, there’s money on the table for someone to do anti-phishing.
Why isn’t it possible then for those businesses, their for-profit businesses, to do that and offset the effects of phishing? The other one I was…George Akerlof:I was going to answer…Morris Goldstein:No, go ahead.George Akerlof:Okay, okay, that’s a very good question. Okay, so I guess there’s a chapter about institutions that have grown up. I like your example of Angie’s List. Do I worry about Angie’s List? Yeah, I sort of do worry about Angie’s List because I use Angie’s List and then I feel sorry for all of those other people who are down the list who are probably quite good. And so, yeah, these things, so there’s all kinds of reputation institutions, which help us like Angie’s List.
Our example was the Better Business Bureau, but I think you’ve actually come up with a better example. A better example, but then there’s a problem. But then there are problems for which an Angie’s List just simply isn’t going to help us and that is if the Angie’s List person comes and they convince you that you really need a repair that you actually didn’t need and you think that you’re perfectly happy.So we talk about people who are emotional phools you don’t get defense from being an emotional phool by Angie’s List, just an informational phool. Morris Goldstein:Okay, the other example is a consumer financial protection agency, which addresses many of the things about credit cards and mortgages that you talk about.