The economics of deception: You have been warned

Phishing for Phools: The Economics of Manipulation nd Deception. By George Akerlof and Robert Shiller. Princeton University Press; 272 pages; $24.95, £16.95.

“COMPETITIVE markets by their very nature spawn deception and trickery.” This is not the hyperbole of a diehard Marxist, but the contention of two Nobel prizewinners in economics in a new book, “Phishing for Phools”. Economic models tend to assume that people are informed about the decisions they make; in the jargon consumers have “perfect information”. This supposedly enables consumers to make markets work to their advantage. But Robert Shiller of Yale University and George Akerlof of Georgetown University argue instead that this assumption is false. There are plenty of market equilibria, the authors find, where one party is being deceived, or “phished”. You may think you are doing well out of markets; you may behave quite rationally; but in fact you are being taken for a “phool”.

Econo-nerds have been waiting eagerly for this book. Messrs Shiller and Akerlof—with nearly 15,000 academic citations between them—have devoted their enormous collective brainpower to these ideas for years. They have been writing the book itself since 2010. You might think that, as a result, it would be dense; in fact the opposite is true. It mostly consists of other peoples’ research, helpfully boiled down into titbits that are perfect material for cocktail-party chatter.

One section of the book discusses how credit cards are used to “phish” the unsuspecting. Why do shops accept cards when it is so costly? One study found that credit-card firms charge convenience shops fees that amount to over twice their profits. But cards also trick people into spending more than they really want to. Richard Feinberg of Purdue University demonstrated this in a psychological experiment. After putting MasterCard symbols nearby, subjects said they would pay significantly more for a basket of goods than the control group—in some cases about 200% more. You, the consumer, may think that credit cards make life more convenient. In fact they “phish” you on a daily basis.

The authors also expose car salesmen. One of their research assistants tracked down a salesman who was willing to reveal his tricks of the trade. When helping customers work out a financing plan, he would trick them by getting them to focus on the monthly payment, not the length of the contract. Half the profits, others conceded, came from 10% of their customers—the most gullible ones.

Although these vignettes are interesting, the book also has flaws. The authors cover a huge number of topics, veering from misleading advertising to fraud in junk-bond markets and rip-off tactics by estate agents. The intention is to show that phishing is pervasive. The effect, though, is that the authors analyse none of the topics satisfactorily. Many of their arguments end up being crushingly familiar. An entire chapter, for example, is spent pointing out that lobbying is a problem in American politics (hardly a novel discovery). In the next chapter the reader is told, again at breakneck speed, that pharmaceutical companies present misleading medical evidence in order to sell more medicines.

The book’s central message is certainly thought-provoking. But there is no systematic analysis of the phenomenon, thereby refuting the claim that this is a study of “the economics of manipulation and deception”. Had the authors focused in greater depth on phishing in a small number of industries, they would have been able to give their theory the attention it deserves. It is important to know why phishing happens in some places, but not others; or what can be done to stop it. Instead readers are merely left with the impression that there are lots of nasty people about—and perhaps that they may themselves have been phished.

Article source: http://www.economist.com/news/books-and-arts/21664934-two-heavyweights-show-how-markets-can-turn-against-unsuspecting-you-have-been-warned?fsrc=rss

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