Would you like to be free of financial worries forever? Lose 10 pounds of belly fat in just one week? Bankers hate this one weird trick by a pair of top economists: this 179-page book tells all about it!
Still here? Then, in the parlance of George Akerlof and Robert Shiller, I have phished you for a phool.
The term “phishing” comes from scam emails but Bob and George, as these Nobel laureates in economics style themselves, define it more broadly as businesses “getting people to do things that are in the interests of the phishermen but not in the interest of the target”. It happens whenever there is an opportunity to appeal to the “monkey on our shoulder” — the part of our brains that like nicotine, folksy-but-fake politicians and 15 per cent investment returns.
Phishing for Phools has a host of examples — from used car dealers to credit card usurers, from junk food to junk credits — where the authors feel free markets exploit consumers’ lack of knowledge or self-control and turn them into the “phools” who fall for the sales ploys. This line of argument has a long history. Where Akerlof and Shiller break new ground is the sweeping application of the idea of the “phishing equilibrium” to finance. But for two such insightful economists, the concept is curiously under-developed.
For an example, consider bank overdrafts in the UK. In the authors’ terms, the high interest rates and penalty fees make them a phish, from which nobody benefits. But is this correct? The phishermen, in this case the retail banks, find their phools by offering the British population free bank accounts. The cost of that is paid for by those weak, stupid or unlucky enough to go into debt. Avoid using your overdraft, however, and UK bank accounts are a great deal.
Another case is the recent phenomenon of free-to-play online games. Here all the revenue comes from the 1 or 2 per cent of players addicted enough, or impatient enough, to pay for power-ups and in-game items. The other 98 per cent are pure winners. They get a free game that would not otherwise exist. This is surely a phish, but it does not just benefit the phishermen. The phools are subsidising other customers.
So while a phishing equilibrium may well be unfair, as the money often comes from those who can least afford it, others may benefit. This kind of market structure can therefore be popular — a possibility Akerlof and Shiller do not address in their book.
With their description of “reputation mining” by credit rating agencies, who caught out unwary investors by offering triple-A rated securities that turned out not to be, the authors make a strong case that phishing was part of the financial crisis. But putting it at the heart of the story goes too far: it makes one look for the evil mastermind scamster behind it all, when Lehman Brothers and its ilk were phools as much as phishers. The problem of the rating agencies is that they are still paid by the banks selling bonds and not the investors who rely on the ratings.
Akerlof and Shiller devote two chapters to the 1980s savings and loans crisis, when about 1,000 small US banks went under after interest rates were raised, but not until they had first poured cash into Wall Street trader Michael Milken’s junk bonds. Some junk bond investors were surely phished. The savings and loan operators knew what they were up to, however — that was the scam. Akerlof’s deservedly famous paper with Paul Romer describes the S&L crisis as “looting” not “phishing”. It seems a more apt and interesting word.
The style of Phishing for Phools will be familiar to fans of Shiller’s work: light on jargon and pacy enough not to outstay its welcome. The authors tell some engaging tales, although usually at the remove of a fellow academic’s research. There is not much grime or anguish, dialogue or doubt.
The brilliant, catchy title will sell Phishing for Phools. Indeed, it is almost as if Bob and George want to tempt the monkey on the shoulder of the book-buying public. They give their readers a breezy ride through some modern behavioural economics — and if they leave them hungry for a little more nutrition, well, what clever marketer does not?
The writer is the FT’s Tokyo bureau chief
‘Phishing for Phools: the Economics of Manipulation and Deception’, by George Akerlof and Robert Shiller, Princeton, $24.95/£16.95
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