Phishing for Phools

The Economics of Manipulation and Deception

George A. Akerlof, Robert J. Shiller

• Verlag: Princeton University Press
• Jahr: 2015
• ISBN:
  9781400873265
• Thema: Betriebswirtschaft
• Thema: Konsumverhalten

Why the free-market system encourages so much trickery even as it creates so much good Ever since Adam Smith, the central teaching of economics has been that free markets provide us with material well-being, as if by an invisible hand. In Phishing for Phools, Nobel Prize–winning economists George Akerlof and Robert Shiller deliver a fundamental challenge to this insight, arguing that markets harm as well as help us. As long as there is profit to be made, sellers will systematically exploit our psychological weaknesses and our ignorance through manipulation and deception. Rather than being essentially benign and always creating the greater good, markets are inherently filled with tricks and traps and will "phish" us as "phools." Phishing for Phools therefore strikes a radically new direction in economics, based on the intuitive idea that markets both give and take away. Akerlof and Shiller bring this idea to life through dozens of stories that show how phishing affects everyone, in almost every walk of life. We spend our money up to the limit, and then worry about how to pay the next month's bills. The financial system soars, then crashes. We are attracted, more than we know, by advertising. Our political system is distorted by money. We pay too much for gym memberships, cars, houses, and credit cards. Drug companies ingeniously market pharmaceuticals that do us little good, and sometimes are downright dangerous. Phishing for Phools explores the central role of manipulation and deception in fascinating detail in each of these areas and many more. It thereby explains a paradox: why, at a time when we are better off than ever before in history, all too many of us are leading lives of quiet desperation. At the same time, the book tells stories of individuals who have stood against economic trickery—and how it can be reduced through greater knowledge, reform, and regulation.

PART ONE

Unpaid Bills and Financial Crash

ONE

Temptation Strews Our Path

Almost every American recognizes Suze (pronounced “Susie”) Orman. When George asked an economist friend about her, he had the expected reaction. He had watched her TV show for only ten seconds. Our economist friends cannot stand her mommy-knows-best/I-told-you-to-do-that voice. They find her investment advice simplistic. Furthermore, curiously for economists, who tend to care about such things, they find her advice to be too much about money.

But that is the opposite of the reaction we got from one of the wisest people we know, Teodora Villagra, who was a cashier in the International Monetary Fund cafeteria. A refugee from Daniel Ortega’s Nicaragua, she bought her own home on Capitol Hill; her son had just graduated debtless from college, with a degree in electrical engineering; most remarkably, she carried on to-be-continued-next-time conversations with hundreds of daily customers, as she also added up what they owed and counted their change. “Suze Orman is not about the money, she is about the people,” Teodora told us. She had purchased a copy of a Suze Orman financial advice book for herself; what’s more, she had given one to a fellow cashier.

Listening to Teodora and to Suze Orman herself leads us to appreciate what had been previously a puzzle to us: why Orman’s audiences lap up her every word. Fitting together the pieces of this puzzle then in turn elucidates a major economic problem that affects billions, worldwide.

Suze Orman vs. Basic Economics

Orman’s most popular book (more than three million sold) is The 9 Steps to Financial Freedom: Practical and Spiritual Steps So You Can Stop Worrying.¹ Her portrait of consumer spending, and saving, is in stark contradiction to how economists think of it (and how it is described in the economics textbooks). The typical introductory economics textbook has us think of a trip to the supermarket. We have budgeted an amount of money to spend—unimaginatively—on apples and oranges. At different prices, with this budget, we can purchase different combinations of them, and we will buy the combination that makes us happiest. That, we are told, determines how many apples and how many oranges we will buy at each price; these correspondences between the price and the quantity the consumer wants to buy—we are further informed—are their “demand for apples” and their “demand for oranges.”²

This intentionally pallid story is in no way as innocent as it seems. It is not science. But it is powerful rhetoric. The college freshmen, who are the target audience for the textbook, are being given a pronouncement; it will later be implied that not just the purchase of apples and oranges, but all economic decisions are made in this way: the decision maker has a budget (as in the fruits example for apples and oranges); she makes different choices dependent on the prices; and she makes the choice that yields her most preferred outcome. It is powerful rhetoric, because in the context of the fruit section of the supermarket, it is hard to imagine that anyone would behave differently.

The story is convincing for another reason. The freshman reading the textbook is unlikely to put up resistance because she cannot imagine how this parable about apples and oranges will be used with little further question in many different contexts in the remaining pages of the textbook, in her later courses of economics, or—yet further—in her graduate program if she becomes a professional economist. But the textbook rhetoric has gotten her to swallow something whole: this is how people think, quite generally, when they are making decisions. But do they? Almost surely they do in some contexts, such as in the fruit section of Safeway. But the example would have been much less powerful if, instead, it had pictured, for instance, a bride on the pages of Wedding Magazine, where budget and price would seem like secondary concerns, in preparation for the Most Important Day of Her Life. And that takes us back to Suze Orman, and not only to why she has those adoring audiences, but also why those audiences are much more than a whimsical example.

Suze’s Advisees

How could consumers do anything other than what the textbooks describe? Orman tells us that people have emotional hang-ups with regard to money, and with regard to spending it. They are not honest with themselves; and, as a consequence, they do not engage in rational budgeting. How could she know? She is a financial advisor, and she has a test. She asks her new clients to add up their expenditures; and, when they do, those expenditures all but invariably fall short of what a documented accounting, from the records, later turns up.³ Figuratively, relative to that proverbial trip to the supermarket, it’s as if her advisees spend too much in the fruit section; by the time they reach dairy products, there is nothing left over for the eggs and milk. In real life, such budgetary failure translates into having nothing left over for savings, at the end of the month, after payments for current purchases. Yet worse, especially in times of crisis, it means the piggy bank is empty. In modern times, most likely that takes the form of adding to the credit-card bills, with their interest rates even now, in the middle of our long slump, being almost 12 percent.⁴ They were even higher a few years ago.

This failure to deal cognitively and emotionally with money, says Orman, leads to those unpaid bills. It is her mission to keep those bills down, so that her readers and her clients will no longer worry at night. That is the role of mommy, and also why those audiences excuse that mommy-knows-best voice. It is worth noting, more than parenthetically, that worries, as noted in Orman’s subtitle, are central concerns of the financial advice books, but you will have to search hard to find such a word, relating, as it does, people’s finances and their emotions, in any economics textbook.

The Statistical Story

We do not need to take Orman’s word for it; we can put together a statistical story, which indicates that a very significant fraction of consumers are worried about how they are going to make ends meet. A direct observation comes from economists Annamaria Lusardi and Peter Tufano, and sociologist Daniel Schneider. They asked the survey question, “How confident are you that you could come up with $2,000 if an unexpected need arose within the next month?”⁵ Almost 50 percent of their respondents, in the United States, replied either that they could not, or they probably could not come up with the needed $2,000. In a recent conversation, Lusardi emphasized further that the respondents were given a whole month to raise the money; that could be enough time to take out an equity mortgage on the house; get a new credit card; rustle up something from the parents, a brother, sister, friend, or cousin.

Statistics on consumer finances suggest why so many of Lusardi and her colleagues’ respondents find it so difficult to obtain that $2,000. A recent economics article on “hand-to-mouth consumption” shows that in 2010 the median US working-age family held less than one month’s income in cash, or in checking, savings, or money-market accounts; in addition, but not surprisingly, the median direct holdings of stocks or bonds was exactly zero.⁶ A study using British diaries of spending gives another indication that many are just juggling the bills; for monthly earners, expenditures are down a full 18 percent in the last week of the monthly pay period, relative to expenditures in the first week after payday.⁷

We also know that a significant fraction of households do not make it. Some 30 percent of households say they have resorted to super-high-interest “alternative forms of borrowing” at least once over the past five years; those methods include, for example, use of pawn shops, auto-title loans, or short-term payday loans.⁸ In 2009 a full 2.5 percent of householders reported they had gone bankrupt in the past two years (most of which had been pre-Crash).⁹ That 2.5 percent may seem like a small, relatively innocuous number; nevertheless, it suggests that a quite significant fraction of the population will go bankrupt over the course of their lifetimes. No one knows the rate of repeat bankruptcy; but if, for example, those with one bankruptcy have two more over the course of their fifty-odd years of adulthood, then slightly more than 20 percent of the US population will go bankrupt in their adult life.¹⁰

Eviction is another way to not make it. A painstaking review of the court records for the city of Milwaukee by sociologist Matthew Desmond revealed similarly high statistics; the annual eviction rate from 2003 to 2007—a period totally before the financial crash—was 2.7 percent.¹¹ Such numbers for bankruptcy and eviction are just the tip of the iceberg indicating a much larger, statistically hidden condition of free markets. Even in the current United States, where the vast majority of the population has a level of consumption unparalleled in human history, most people worry about how to make the ends meet. Some even go over the edge: into bankruptcy; or eviction.

Another Perspective

Another assay poses for us the Suze Orman puzzle in a different perspective. Most of us think that if our income went up more than fivefold we would be on easy street. Our financial problems would be over. Indeed, that is exactly what John Maynard Keynes, one of the most astute economists of all time, thought would be the case when he looked forward from 1930. In an essay, which was little noticed when published, Keynes projected what life would be like “for our grandchildren,” in 2030: one hundred years thence.¹² In one respect he almost hit a bull’s-eye. He “supposed” that the standard of living would be eight times higher. For the United States, as of 2010, real income per capita was 5.6 times higher.¹³ With another twenty years to go on Keynes’s stopwatch, and with annual growth in per capita income at its historic average between 1.5 percent and 2 percent, his supposition will be remarkably close to target.

But in another respect, Keynes was totally off the mark. As you might expect, Keynes did not say that the grandchildren would be going to bed worried about their next pound or their next shilling. Instead, he said they would be worrying about how to use their surfeit of leisure. The workweek would fall to fifteen hours.¹⁴ Men and women alike, Keynes said, would “experience … a nervous breakdown of the sort which is already common in England and the United States amongst the wives of the well-to-do classes, unfortunate women, many of them, who have been deprived by their wealth of their traditional tasks and occupations—who cannot find it sufficiently amusing, when deprived of the spur of economic necessity, to cook and clean and mend, yet are quite unable to find anything more amusing.”¹⁵ (We add parenthetically that this statement may now seem politically incorrect; but it also presaged the “problem without a name” that is the centerpiece of The Feminine Mystique, which jump-started the women’s movement some thirty years later.) Such abundance of leisure—despite incomes that have so far risen more than fivefold in the United States—has hardly come to pass. On the contrary, the housewife of our experience, exhausted from the first and the second shift, was way outside Keynes’s prediction.¹⁶

Keynes’s prediction may be remarkable for its inaccuracy; but it reflects how almost all economists (but not Suze Orman) think about consumption and leisure. And there is another prediction that also comes from that way of thinking that is equally invalid. People would not just have more leisure; they would be laying away a significant fraction of those earnings into savings so that their bills could be paid easily at the end of the month. But as we have seen, that too has not come to pass.

The Reason

The reason for the exhausted housewife and the lack of savings comes from the central prediction of this book. Free markets do not just produce what we really want; they also produce what we want according to our monkey-on-the-shoulder tastes. Free markets are also about producing those wants, so we will buy what they have to sell. In the United States the goal of almost every business person (with the exception of some who sell stocks and bonds and bank accounts, which we will discuss later) is to get you to spend your money. Free markets produce continual temptation. Life is a proverbial trip to a parking lot in which you are constantly passing spaces left open for the disabled.

Just walk down a city street. The shop windows are literally there to entice you to come in and buy. Back in the old days, when both Bob and George were younger, neighborhood shopping streets would typically have a pet store, with squirming puppies in the window. There was even a well-known song about it, from a young woman who was passing by:

How much is that doggie in the window? (arf, arf)

The one with the waggley tail.

How much is that doggie in the window? (arf, arf)

I do hope that doggie’s for sale.¹⁷

Those puppies were, of course, no coincidence. They were there to entice you to come in and buy. But, more generally, that “doggie in the window” is a metaphor for all of free-market activity. That “waggley tail” is everywhere we go. At the shopping mall; in the supermarket; at the auto dealer; when house-hunting: temptation is laid out for us. Just to give one example, the eggs and the milk are strategically in the back of the supermarket; they are the most common purchase; and, figuratively, you have to go through the whole store to get them, being reminded of the other needs that you might have forgotten.¹⁸ And when you get back to the checkout counter—waiting there—it is no coincidence that the candy and the magazines are there for you (and the kids). In the old days that used to be the home of the cigarettes: a helpful reminder for those who smoked.

This is the phish for candy and cigarettes. There are thousands more phishes in the supermarket, embodied in all the different products on the shelves, each with its own team of marketing experts and advertising campaigns, each the product of experimentation with many other possible marketing forms. And the phishing goes on beyond the supermarket, to almost everything one buys. Elizabeth Warren has emphasized t...