Phishing for Phools: The Economics of Manipulation and Deception (2015), George Akerlof and Robert Shiller (AS), considering behavioral economics while evaluating free markets. Standard economic models make unrealistic assumptions about how people behave and, in part, this is an attempt to integrate psychology more formally into economic modeling. "The economic system is filled with trickery, and everyone needs to know that" (p. vii).
They start with slot machines, invented in the 1890s as vending machines, but soon included the current incarnation of gambling. The gambling addiction was soon so bad ("addictive by design") states prohibited its use, except Nevada. "Markets will seize the opportunity to take us in on those weaknesses" (p. x). To phish is to perpetrate a fraud on the Internet, which they expand to all economic activity. The phool is successfully phished [demonstrating why academics should stay away from word play]. Two types of phishing are psychological (override common sense using cognitive biases) and informational (mislead and misrepresent reality). A major point is phishing is incentivized in competitive markets. Daniel Pinkham added remedies to Pinkham Pills when aware of new medical worries (e.g., kidney problems). Vioxx, an anti-inflamatory, (1999-2004) caused 26-56,000 cardiovascular deaths plus 94,000 cases of breast cancer (p. xv).
Introduction. "The fundamental concept of economics ... is the notion of market equilibrium" (p. 1). They use Cinnabon as the free market exploiting weaknesses. Adam Smith believed the invisible hand promotes the general good, producing a Pareto optimality (where it is impossible to improve the overall economic welfare)--except for some "externalities." AS point out the freedom to choose also allows the freedom to phish. Robert Cialdini has a list of biases and "we are phishable because we want to reciprocate gifts and favors; because we want to be nice to people we like; because we do not want to disobey authority; because we tend to follow others in deciding how to behave; because we want our decisions to be internally consistent; and because we are averse to taking losses" (p. 7).
Reputation mining: drawing down for profit from reputation for integrity [this seems a particularly useful concept]. Thinking by placing yourself within a story. "A leading strategy of manipulation is to lead phools to graft new stories" (p. 10)--mental frames or scripts.
Chapter 1: Temptation Strews Our Path. Suze Orman: Failure to deal cognitively and emotionally with money leads to unpaid bills. Majority of people have little savings but high level of consumption. Real income is 5.6 times higher than in 1930 (p. 19). Free markets produce wants and we buy what they sell--continual temptation ("the eggs and the milk are strategically in the back of the super-market" (p. 21). Chapter 2: Reputation Mining and Financial Crisis. Relative to financials, rating agencies--overrated MBSs for money, making mediocre products common. Why were investment banks trustworthy into the 1970s? Why was reputation mining so profitable? Why were the buyers so gullible. Investment banks from partnerships to corporations, increasing capital and assets (plus using somebody else's money). Goldman Sachs went short on mortgage backed securities in 2006 because of default risk. [Pretty good summary of the 2008 crisis; one of many sources.
Part II: Phishing in Many Contexts. People think in stories, a major role in manipulation. Rip-offs: housing, cars, and credit cards. The food industry gets people to eat what it has to sell; pharma, swallow the pills it manufacturers. The importance of regulation in response to phishing. Chapter 3: Advertisers Discover How to Zoo in on Our Weak Spots. "Advertising can be viewed as grafting stories of its own onto the mental narratives in our mind" (p. 46). Add statistical methods, Albert Lasker: "reason why advertising," reason why people should be interested in product. Claude Hopkins: all claims are undeniable (e.g., bragging about product, although all competitors do the same things: beer ingredients, "beauty soup"). Use coupons: can tell if adds work; small-scale experiment. David Ogilvy: "we sell--or else; trial and error. "Modern statistical techniques now tell marketers and advertisers--both private and political--where and how to phish" (p. 54). Warren Harding poor speaker; stayed on front porch "return to normalcy." Campaigns: registering their voters, converting swing voters, getting supporters to vote. Minimize "collateral damage" by targeting voters individually: voting records plus commercial sources (e.g., credit information). Target message and know wich message will sell. Journalists as "news fiduciaries."
Chapter 4: Rip-offs Regarding Cars, Houses, and Credit Cards. Systematic differences in prices for cars by race and gender. About half of profits from 10% of customers. Houses: transaction costs lower in other countries. Revenue for credit card companies $150 billion in 2012 (half from overdue interest; a third from interchange fees, and the rest from late fees, etc.
Chapter 5: Phishing in Politics. Money important: voters graft stories from ads into their narrative. Pareto optimal: basic political science says competitive democratic elections generate good outcomes: Anthony Downs and median voter model: "The platforms of both candidates will conform to the preferences of the median voter" (p. 74). Voters are phishable: not fully informed and psychological phools. "Winning electoral strategy: 1. Publicly proclaim policies that will appeal to the typical voter on issues that are salient to her, and where she will be well informed. 2. But on other issues, where the typical voter is ill informed, but where potential campaign donors are well informed, take the stance that appeals to donors. 3. Use the contributions from these 'special-interest groups' for campaigning that increases popularity amond the regular run of voters" (p. 75). Lobbyist helps politicians find money: extract votes from public and money from interests. Citizens United case: lobbying involves transfers of information--but colored with bias. Retiress from 2010: 50% of senators and 42% of representatives became lobbyists. Fraud Enforcement and Recovery Act from 2008 included $165 million to Justice Department to fight white-collar crime, but only $30 million appropriated. Examples of loobying effectiveness: Seawolf subs, tax benefits, Charles Keating, IRS under-budgeted (and others).
Chapter 6: Phood, Pharma, and Phishing. William Swaim with Swaim's Panacea (which included mercury), promising a cure for virtually anything; doctors reported numerous deaths [I have Swaim's proprietary stamps from the 1860s, rare and expensive]. Dept. of Agriculture (Harvey Wiley) wanted food labeling law. Food and drugs were not safe then, and not as safe as they should be now. Vioxx from Merck (starting p. 90), anti-inflammatory drug relieving pain, but hurts stomach lining. Vioxx trails showed more heart attacks and other issues (one problem is trials are short-term and health issues long-term), ignored by Merck and FDA and sales reached $2.5 billion by 2004; estimated result was 100,000 heart attacks. Issues of gaming approval, advertising, doctor incentives, covering up problems. "Regulation has not eliminated phishing, just changed the focus of activity" (p. 94). Part D Medicare, government will not negotiate drug prices.
Chapter 7: Innovation: The Good, the Bad, and the Ugly. Free markets provide choices; new ideas and products increase choice. Robert Solow: economic growth the result of 1) increase in capital and 2) technical change. United Airlines: honors and statuses to herd people into planes. Rankings of colleges, students, journalists and professors. Chapter 8: Tobacco and Alcohol: Four great additions: tobacco, alcohol, drugs and gambling. Cigarette-rolling machines invented in 1880s. Tobacco companies created images; e.g., Marlboro Man; created doubt after evidence of health issues; e.g., cancer was genetic, Clarence Little. Smoking is stupid versus smoking is cool. Alcoholism is fairly rare, but health issues associated with drinking including psychological--lack of ability to relate to others. Issue of taxes on these products.
Chapter 9: Bankruptcy for Profit. S&L crisis 1986-95, looting failing S&Ls because of inflation (Before bankruptcy, owners have same incentives as Genghis Khan for looting); rather than bail out, feds let them stay open by bad laws (let them borrow massive amounts of money, increase amounts to lend to developers (who could also own S&Ls). Texas strategy of developers to collude to trade land back and forth at higher prices. Construction continued even as real estate markets crashed. Mafia involved with money laundering. Chapter 10: Michael Milken Phishes with Junk Bonds as Bait. Milken's junk bonds as apples and prunes versus apples and oranges for fallen angels. Manipulation of new-issue junk bonds. Without transparency, Milken reaps huge middle-man fees. Bonus for 1978 $700 million for group; Milken gave himself $550 million. Michael Jensen argued takeovers would oust entrenched incompetent management; no mention of excellent managers. Distorted ratings, poor accounting of S&Ls; stories of Milken as a genius for discovering new financial tool. 2008 crash started small and slow, like the 1929 crash. Regulators intervened quickly and massively.
Chapter 11: The Resistance and its Heroes. Progress allowed standardization; e.g., Wiley at FDA. Underwriters Laboratories, ensuring safety (and uniformity). Guardians of Society for the Protection of Trade against Swindlers and Sharpers, 1776 turned into Better Business Bureau. Supreme Court established caveat emptor in Laidlaw v Organ as a foundation of commercial law. Absent fraud, too cumbersome to adjudicate what to tell buyers, etc. Regulatory capture, described by Marver Bernstein in 1955; but evidence for it tends to be biased with low standards of causality. FDA gives companies leeway for clinical trials and reporting.
Part III Conclusions. "Free markets produce goods-for-me/goods-for-you's; but they also produce good-for-me/bad-for-you's" (p. 150). Age of reform 1890-1940: agrarian populism, good-government populism, and New Deal experimentalism, counterweight to excesses of free markets. "New story--that government is the problem--is itself a phish for phools" (p. 152). SEC lack of funds: SEC has sued only corporations, not individuals; missed on derivatives and investment banks, Madoff case. Tillman Act of 1907 kept corporations from making direct contributions to political campaigns. Federal Elections Campaign Act Amendments of 1974 established the Federal Election Commission. McCain-Feingold 2002. Citizens United in 2007: New Story thinking, corporations get free speech rights of individuals. "Modern economics inherently fails to grapple with deception and trickery" (p. 164). Shrouded attributes (often assciated with add-on products): printers are cheap; the cost of ink is hard to find. A-S add phishing on to general-equilibrium free market framework. "Revealed preferences" shows choices people make that maximize their welfare, it's what they want (what's good for them) versus what they think they want (note present bias plus special market situation biases). Standard economists can claim dysfunctional decisions are small. Psychologists have lists of dysfunctional motivations; "The phish is a way to get someone to make a decision that is to the benefit of the phisher" (p. 173).