Phishing for Phools: The Economics of Manipulation (Q/A)

By George A. Akerlof

(video George A. Akerlof: on  Phishing for Phools: The Economics of Manipulation and Deception)

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.

George Akerlof:Yeah.

Morris Goldstein: But again, that is about informational phishing, not emotional phishing. So anyway, let’s open it up.

Slavi Iyeto: I am Slavi Iyeto of the Cato Institute. You know, it is easy to say that the markets are imperfect, but the human beings are imperfect.

George Akerlof:Yeah.

Slavi Iyeto: If markets are supposed to deal with human beings as they are, then blaming the imperfects of the humans on the market, I think gets the thing slightly, you know. I mean let’s get to a nonmarket area like politics. In politics, are people phishing for phools, absolutely. Every single politician is phishing for phools. I would look at religion. Every religion in my view is phishing for phools. You are reaching out and getting for all those guys. So you don’t have to be part of the market to be phishing for phools. Phishing for phools is built into all human behavior. If you want to say something significant, you have to show me what it is, which makes this market thing different from phishing for phools in areas like politics, customs, choice of color of your wife. I mean a thousand areas where you find similar kinds of phishing and it has to do with the imperfection of human beings, not the markets.

George Akerlof: Okay, so I disagree with that 100 percent, with your question. There is a view regarding economics and it’s a correct view that markets give us a very good and they give us something that would be called optimality. You say, what Williams said is this view of markets, which is held by most all economists under the appropriate conditions, we say that there is a further theorem in which markets don’t just have their good side, markets also have their bad side. Now,

I agree with you, I think there’s phishing everywhere, so I’ll give you an example. I hope I can do this, fine. So I’ll give you an example where this occurs in religion, you know. Here we are, we’ve got the phish for phools. So, my view is that all of this occurs because we’re human and this is part of what we do and it goes way beyond, and so it goes way beyond.

Now you mentioned politics. Okay, so I think I actually have read, but I may not have done a sufficiently careful job of the Political Science models of voting behavior and so forth. Okay, what they talk about is they talk about informed versus uninformed voters. But if you read the book, I think we actually give a picture of that, which is much closer to reality, so we take the Down’s model. But then we show that in fact, when you take the Down’s model, you get something that actually gives you, I think, something closer to reality. And I think it gives us a better picture of what the politics are.

And then what we say there, and this is what happens in crescendo throughout the whole book into the latter half of the book, is that it all as to do with what are politicians trying to do. They’re trying to tell their story. So Grassley out there with this lawnmower saying, “Grass-ley,Grass-ley, I like to come home to Iowa and mow my lawn just like all of you folks.” They’re telling a story about who he is.

So, you know, I feel a large part of this book is how people are motivated by stories and I think that’s what you were telling me. And we have  these stories; sometimes they’re right and sometimes they’re wrong. And that’swhat being human is all about. So this is talking about how this aspect of our being human affects markets and our view of markets. But, of course, it affects everything else. So I agree with you 100 percent that it effects everything else. I disagree with you 100 percent that applying this to our theory of markets is inappropriate. Okay, so that’s my answer, do you want to say more, orthat’s good, thank you.

Slavi Iyeto:You said for instance that some things should be a no brainer. That there are questions of financial insecurity, financial macro instability, ill health, government.

George Akerlof:Yeah.

Slavi Iyeto:All the Communists and Socialists said capitalism gives you these four bad things, therefore you should go for Communism or you should go for Socialism.

Slavi Iyeto:All the Communists and Socialists said capitalism gives you these four bad things, therefore you should go for Communism or you should go for Socialism.

George Akerlof:Okay, so we left out the chapter on, we had a chapter on Socialism and that may or may not come out in an economics journal. I mean the worse story ever was the story that the Bolsheviks told and it just makes me angry every time I think about it. But, the thing is we weren’t talking about why, we’re not in 1917 and I wasn’t telling you why we shouldn’t have the Russian Revolution.

Hi I’m Colin Hendricks, I’m here with the Peterson Institute. I’m interested in the extent to which there’s a theory of preference formation in the book and I’ll illustrate what I’m confused about with an example. So if we decide that there is a person who lives here in the District in a small apartment, who lives in a very, kind of confined urban area and they decide that they want a full sized pick-up. We don’t know why they want the full sized pick-up, but they go around and they shop Dodge, they shop Chevrolet, GMC, Ford. They get the best price possible for that full sized pick-up. Have they been phished?

George Akerlof:Yeah.

Colin Hendricks:They have?

George Akerlof:No, I’m not telling you whether they have or not. The point is, the wonderful thing about general equilibrium theory, is it holds no matter over all utility functions and overall production functions up to certain specifications. Our theory is we don’t need to tell you for this that exactly what peoples’ specifics—we don’t need to tell you that when they are, but we will know that they can be phished for phools. So if the people have this weakness, then in fact the markets going to be there. So the book begins with a vignette about Molly. Molly is an addicted gambler in Las Vegas. And so there’s a clear example of somebody who’s been phished for phools. And not only has she been phished for phool, the amazing thing about Molly is Molly knows it herself.

She doesn’t go to the gambling casino to win, she goes because she knows she’s addicted and then she’s going to push that red button and she’s going to keep pushing it until she’s out of money and then she has to leave. And this is making her life an utter hell. So the fact is we don’t need—we’re giving examples in the book, examples where it’s unambiguous about being phished for phools, so maybe you’re a couple. I think the way you describe it, I think you think the couple was phished for a phool. Uh, my deal is, “Yeah, probably, but maybe not.”Morris Goldstein: Yes.

Mark Tokaloff:Yes. I thank you for a wonderful presentation.

George Akerlof:Thank you.

Mark Tokoloff:I’m Mark Tokaloff from the Korea Economic Institute. Outside the room there’s a table with a very attractive set of books on it with a very attractive cover written by a justly renowned economist. I’m tempted to part with my money to buy that book, but how can I tell if I’m making a rational choice or if I’m giving in to my book addiction?

George Akerlof:Okay, so yeah, I think this is an answer to your question too. So Molly, when Molly goes to the slots. When she’s off the slots, she knows that this is her problem. She goes to Gambling Anonymous and she takesmedication for it. So, I think, one way to know that you’re being phished for a phool is when you put yourself in your quiet, rational state of mind, you can say to yourself, I shouldn’t have done that.” And you can say, “I was in a bad moment when I did that.” So, that’s a way in which—so I think, all of the major examples in the book, the people would say, “Yeah, I shouldn’t have done that.”

Now the other thing is that there are all kinds of market mechanisms. There’s information phishing of various sorts and we talked about the information phishing with respect to the marketing of Vioxx. And there, of course, the people would automatically say that they’ve been phished for phools. So Vioxx, you had just a huge increase in your chance of having a stroke when you took Vioxx.

Yes.Speaker: About the same time that Patti Page sang about that doggie, there was a book called Hidden Persuaders. I wonder what we’ve learned since then.

George Akerlof:Okay, so yeah, so actually Hidden Persuaders, Bob and I both read it when we were teenagers and Hidden Persuaders, at least by its title, it indicated that it was hidden persuasion. Here, this stuff is all out in the open. Molly knows she’s going and she’s pushing this button. So the thing is, what’s new to this book is bringing it into Economics. So it’s uniting the Economics and the Psychology. But this is an equilibrium.

So, what’s the major message to this book. The major message of the book is that if something like Cinnabon can make a profit on selling you on those Cinnabons that are going to get you to trash your diet, then it’s going to be there. So, this is an economics book. You read the book and each and every chapter has something economics in it. So, it’s very different. Hidden Persuaders is a good book. So, this is what Bob and I both remember about it.

We remember that housewives–that cake mixes required that you add an egg. Do you remember that one? Yeah, okay, so the reason was that the housewives who were then making cakes wanted to feel that they were adding something to the product and so was their product.

Speaker: [Inaudible 01:02:40] at that company.

George Akerlof:Oh yes, I remembered that one, that’s right. But this is actually quite a different book and it’s different for the reasons Danny said. Danny said, “Psychology is about how we’re fallible machines. Ours is about how we’re fallible machines and then there’s an equilibrium.” And so the equilibrium is the cut point. And then that’s, in answer to your question, is the equilibrium and the fact that we get this thing at an equilibrium that is the cut point. And that’s why we have an equilibrium where the financial markets fail.

So another advertisement—I’ll give you another advertisement for the book. I think we give a different view of financial markets. So, there are three chapters on financial markets. I think we give a different view of financial markets than you learn from financial textbooks, and I think, it gives you this picture of the financial market that not only are they the place where you have all this nice, intermediation, which is probably necessary, but it’s also a form of gambling casino and it’s not so easy to find that actually written in books on economics.

Morris Goldstein:Any others?

George Akerlof:Yeah.

Peter Harry Woo:  My name is Peter Harry Woo and I’m the Director of Log Irish Foundation. It was very strange when I got an invitation from Adam Posen to come to this meeting. I think you never know about me, I never heard about you too and I have no connection with an economic issue at all. I was in China 19 years in the labor camps, so I come here mostly talking about human rights issue. So I don’t know why they got me an invitation to come to this meeting.But I want to say in China, many men, three million prisoners and all of them, they’re workers. It’s a huge system, economy systems. And one of the camps, I can give you the size, 162 square kilometers. Two times Washington DC area, big, huge. China have a huge labor camp system. And at the beginning, 1950, 1949, the Soviet expert helped the Chinese to build it. I don’t know that I met…

Morris Goldstein:Excuse me, I don’t want to interrupt you, but do you have a question for Professor Akerlof about the book or about economics or are you?

Peter Harry Woo: I’m sorry, I got an invitation to come to this meeting. That’s why I don’t know why, I feel very strange, I told you that is my situation, why I came over here.

Morris Goldstein:Well I appreciate, I appreciate that, but I think we need to keep the–?Morris Goldstein:Okay.George Akerlof:Okay, so let me give an answer to this, I do have an answer.

Peter Harry Woo: So if you don’t like, next time don’t send me an invitation.

George Akerlof:No I’m happy, I like your question and I’m very happy you’re here. Okay, can you just maybe just finish a little bit so I can know your question?And the question was, aren’t we being – so let me continue. So thank you, thank you. So I think that this book has relevance for China too. So look, I don’t wantto say anything, I think those labor camps are really, really terrible, of course. But then I also think that China has to be very careful about going into a market system. It has to know that there are both good things about the market system and bad things about the market system. And so, you can’t just be too much of a market system fundamentalist. So, I think the major view of this is Bob and I just start the book and we say,

“There are these wonders of the market system, that’s one. But two, at the same time that there’s these wonders of the market system, there are these disadvantages. And I think that in the United States and this is a book mainly about the United States, that we’re looking at the market system with rose colored glasses and I feel that that has impeded having good government and good policies and this is a book which is aimed to showthat yes market system is good. But, we all love our children and our spouses and everything else. But there are times when, you know, when they don’t do everything that we like and so we should say the same thing about our market system. We like our market system. We like our political system. But we should also, if we’re going to have a good political system and a good economic system, we also have to know where they don’t perform and do exactly what we want.So thank you very much for coming and I hope you’ve enjoyed the talk and maybe this is relevant also for China.

Morris Goldstein:Thank you all, thank you all for coming.

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