Wednesday, November 25, 2015

Phishing for Phools and the Creation of Novel Desires

With their recent Phishing for Phools, Akerlof and Shiller have written a remarkable book (for a short summary by Centre member Philip Newall click here). The two Nobel laureates suggest that free markets provide incentives for smart people (the Phisherman) who know about individual biases to make use of these biases to get the most money out of individuals (i.e. out of the Phools).
One practice that the Phishermen use is particularly interesting: Phishermen generate novel needs of Phools. Akerlof and Shiller use this ability to explain what Keynes missed in 1930 when he predicted that in 2030, the workweek will plummet to fifteen hours and people will struggle not with financial problems, but with a surfeit of leisure. Akerlof and Shiller suggest that, due to the creation of novel needs, long working hours and difficulties in making ends meet will continue to be with us even if the standard of living goes up as much as it has done in the last century or so.

In his excellent review, Cass Sunstein criticizes Phishing for Phools for being too general. While behavioural economics has shown that there are many different types of biases that individuals can have, Akerlof and Shiller try to generalise and put them all into one basket. Sunstein suggests that we need to distinguish between different cognitive biases and be more specific in order to test concrete hypotheses rather than assuming that phishing equals phishing.

Readers who like to read more about the specifics of how Phishermen can create novel needs, and/or invent consumption goods that satisfy multiple needs, might be interested in a literature within Evolutionary Economics (although I think this literature is better subsumed under the label Behavioural Macroeconomics).

This literature highlights the importance of needs (such as those for food, shelter, entertainment, and social approval), the differential satiation patterns of these needs (e.g. with a high enough income the need for food will be satisfied, but the need for social approval will keep on motivating consumption at all income levels), and learning dynamics (e.g. different ways of associative or cognitive learning). Phishermen make use of this knowledge and, for example, invent consumer products that satisfy needs that are difficult to be satiated such as the needs for social approval, entertainment, and a positive self-image.

One one of the seminal papers in this literature is from 2001 by Ulrich Witt, who was my PhD supervisor, and below are a few selected papers from this literature. With Phishing for Phools in mind, (re-)reading these papers has convinced me that the long-run changes of consumer behaviour when income rises can be an important part of Behavioural Macroeconomics. Understanding the role played by Phishermen in creating novel needs and focusing on non-satiable needs so that we keep on consuming can have important implications for understanding long-run changes of consumption, long-run changes of happiness, as well the normative questions related to the development of consumption and happiness in the next decades.

Chai, A., & Moneta, A. (2010). Retrospectives Engel curves. The Journal of Economic Perspectives, 24(1), 225-240.
Moneta, A., & Chai, A. (2013). The evolution of Engel curves and its implications for structural change theory. Cambridge Journal of Economics

Witt, U. (2001). Learning to consume–A theory of wants and the growth of demand. Journal of Evolutionary Economics, 11(1), 23-36. 

Witt, U. (2011). Economic behavior - evolutionary versus behavioral perspectives. Biological Theory, 6(4), 388-398.

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