Book Review Series: #1 Phishing For Phools: The Economics of Manipulation & Deception

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Reviewed by Shivkrit Rai

In the book Phishing For Phools The Economics of Manipulation & Deception, the authors George A. Akerlof and Robert J. Shiller state the obvious, which often goes unacknowledged by mainstream economists advocating free market. The narrative set by the authors explains how consumers are often phished based on psychological biases created by private agencies. The book kicks off by introducing a few parameters or guidelines based on which the consumers are often phished in the market. It then moves on to give a macro-perspective of phishing based on diverse micro narratives. The authors also delve into the 2008 financial crisis and explain how phishing played a catalyst in the crisis.

 

The authors introduce the readers with the idea of consumer preferences by a thought experiment which imagines the nature of exchange between humans and capuchin monkeys. They have coined this thought experiment as the “monkey on the shoulders taste”, which is one of the reasons why phishing happens.  This forms the basis of the book, which the authors use in explaining what consumers buy and what they really wanted to buy. It explains that free market often gives “freedom to choose and freedom to phish.”

 

One of the first observations made is; that there are multiple consumer equilibria which are the outcome of rational preferences and less-than rational preferences. This occurs due to psychological biases (borrowed from Robert Cialdini) which makes consumers phishable. According to the authors, the consumer’s rational sense of budgeting goes for a toss because of these biases. The earliest example introduced in the book is that of Cinnabon shops/bakeries at shopping centres and airports (p.2). They explain that the placement of these bakeries played a key role in tapping into the informational and psychological weaknesses of consumers (p. 171). Here the company’s motto; “life needs frosting”, the placement of the bakery, and the not-so visible calories information, all play a key role in phishing the consumers.

 

The book lays down strong arguments for the readers to dismiss few principles of basic economics. The authors in the first part of the book elaborate on how temptations and reputation mining plays a key role in phishing. Temptations often result in irrational budgeting where the consumers may go beyond what they wanted to buy. Suze Orman example is a classic one, where she states that “people have emotional hang-ups with regard to money and with regard to spending it” (p. 16). The assumption made in mainstream economics about consumers purchasing a variety/combination of products in a given budget is often wrong. Consumers, when tempted by the variety offered by a grocery store/shopping centre often exceed the budget. It furthers the argument made by the authors that free market often produces wants based on our monkey on the shoulder tastes. It establishes that free markets create demand for products which the sellers want to sell.

 

Phishing doesn’t just end at temptation. What would change the perspective of the reader is the concept of “Reputation Mining”. The argument about reputation as a phishing tool sounds unusual but exemplifies how “phoolish” we as consumers are. The authors explain this with the example of the 2008 financial crisis. They draw analogies of avocado seller and financial institutions selling complex securities/derivatives (p.24). If an avocado seller has a good reputation for selling high quality avocado, the consumers will (blindly) trust him/her and purchase avocados. The fact, that there maybe a few bad avocados in the bunch will be immaterial and the consumer will not make the effort to check. Furthermore, if the seller keeps selling bad avocados, the consumers will keep buying them because of his/her good reputation.

 

Akerlof and Shiller explained that something similar happened in the 2008 crisis. The only difference being that the sellers were financial institutions selling highly volatile securities/derivatives to large number of consumers. These securities were rated highly by the rating agencies who were heavily remunerated for this job. Add that with a demonstration effect of investors for buying such securities, the result was a mass purchase of sub-prime securities. This was a creation of, what the authors refer to as, “information phools”. It was only when there was a financial meltdown, that the consumers realized how they were phished by these institutions in purchasing the securities.

 

Something similar happened with AIG while issuing CDS. They (AIG) happily took risk with low returns. Authors state that “in the euphoric times they viewed the likelihood of default as so low that they saw themselves as getting easy money”. The book is therefore an exceptional highlight of phishing taking place in a low regulation atmosphere.

 

Readers will often realize they are phished. The book discusses how advertising, and credit cards are tools of phishing. The advertisers use the art of storytelling, called the “reason-why advertising”. Akerlof and Shiller explain this by giving the example of Wilson Ear Drum, which was marketed in the form of news stories. The sales of the device suddenly shot up and the result of such a strategy was revival of a languishing company. Another instance of advertisement was where claims were made which are undeniable. This was in the case of selling beer. The advertisement bragged about the unique mode of preparing which was, in fact similar to what the other sellers used, too. But the portrayal in the advertisement created a false perception among the consumers that the beer is prepared in a special manner.

 

Another interesting aspect which has been stated is with respect to credit cards. The authors refer to this as a pill that will induce the customers to purchase more. They attribute this as the reason why shop owners prefer not to give cash discounts anymore and readily pay interchange fees. It is stated that “in giving customers free credit cards, it’s as if the stores are offering free puppies”. The monkey on the shoulder taste is tapped into, and the consumers often purchase products which they never wanted. It is suggested that a significant amount of customers use credit cards and are “left with a debt which comes at a high cost”.

 

An important question which the book raises in the end, is “whether conventional wisdom of free markets give us an instinct for when and how phishing will occur?”. This question is answered in negative. The book establishes that every person has a weak spot which makes them phishable. The book according to me has served a much-needed counter narrative to modern economics because of its failure to deal with deception and trickery. Another view which has been made is that of a phishing equilibrium, which will help better understand the true nature of exchanges taking place in the economy.

 

The book therefore normalises phishing instead of renaming it as externalities while making us understand the fault lines embedded in the system, which manipulate the customers into creating demand. From a legal perspective, it would have been preferable if Akerlof and Shiller would have suggested a few regulatory aspects to reduce (if not avoid) such kind of phishing. Phishing for Phools therefore serves as a true eye-opener for the common phools (consumers).

 

Shivkrit Rai is a fourth year law student at Jindal Global Law School.

Featured Image Source: Noahpinion

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