George Akerlof and Robert Shiller – Phishing for Phools

Akerlof and Shiller have written a new book on the economics of manipulation and deception in competitive economies. Their previous co-authored popular book “Animal Spirits” (2009) helped kick-start public awareness of behavioral economics/science. In 2013 Robert Shiller joined his co-author in becoming a recipient of the Nobel prize. As expected, this book very much lives up to its authors’ pedigrees, and its conclusions are both provocative and startlingly obvious in hindsight.

Their main argument is a simple inversion of the traditional explanation given for free markets: “If business people behave in the purely selfish and self-serving way that economic theory assumes, our free-market system tends to spawn manipulation and deception.” p(vii). While traditional economics says that no profit opportunities will be left uncovered in a free-market (there are no $20 bills left on the sidewalk), Akerlof and Shiller say that in a free-market no opportunities for deception or manipulation will be left uncovered. They give as an example the overpriced and unhealthy food sold in airport departure lounges. Interestingly they do not blame the people who exploit behavioral biases, but instead a system that means that this exploitation will inevitably occur sooner or later. In homage to Adam Smith they write:

“Just as much as the baker and the brewer and the butcher will be there if we have the resources to pay what it takes them to supply the bread and the beer and the meat, so too the tricksters will be there to phish us for phools.” p.171.

I think this book could help kick-start the economics of deception in a similar way to how Animal Spirits helped start the behavioral revolution. The economics of deception is a great area to work in, as although there are many examples of deception in modern economies, there aren’t at the moment that many convincing demonstrations that have made their way into the academic literature. For that reason Akerlof and Shiller take a very long-term historical view of the economics of deception, rather than overwhelming the reader with modern examples of deception. (But I think that my work on UK gambling advertising is a good example of their main point.)