Apparently, a good portion of current economic theories and models are based on an idealized model of the free market, where consumers and companies have access to complete market information and only make rational decisions. As a scientist, I believe that models should describe reality in a simplified manner. Models can contain a fair amount of idealization (physicists have their pockets full of infinite rods and frictionless springs), but they are only useful if they allow predictions that can be verified in empirically. So let’s get back to the free market and look if everybody is rational and informed. Have you ever bought something you immediately regretted buying? Have you ever bought something and then found it cheaper somewhere else literally five minutes later? I did. How shocking!
Sometimes, new paradigms of economic theory seem banal for normal people: we are paying too much for everything, because companies manipulate our information and desires, a process the authors refer to as “phishing”. Airport food is stupidly expensive, because we feel hungry after a long flight (or a long wait for the flight) and have no time to compare all alternatives. The same psychology made some savvy financial players make up and sell a new type of financial instrument with promises of high profit and totally incomprehensible risks. These instruments were called CDOs (collateralized debt obligations) and were pretty popular until ca. 2008, when they suddenly were worthless and the economy started circling the drain. You may have heard of this crisis, it got some news coverage back then. Thankfully, it got sorted out and everything went back to normal soon.
Interestingly, the book contains newer research, showing black people pay more for a car than white people, and women more than men. Unfortunately, most other examples are ancient, detailing the lives of the legendary advertisers of old, of the tobacco industry and earlier financial crises, and no compelling conclusions are drawn. Also, the book falls short of showing solutions. It remains a somewhat repetitive academic overview of some examples of corporate “phishing”, and has not much to offer for most readers.
The books wastes a great premise! Companies apply deceptive methods to make us pay more than we should and sell things nobody should want, leading to personal tragedies and economic crises. And all of this is fully legal, because companies use the rules of the free market against their customers. Akerlof and Shiller could have concentrated on some striking examples, derive the underlying psychological and economical mechanisms, and then give guidance to deal with ”phishing”on a consumer level, maybe even advise some policy changes. Instead, they take their time to diss some of their fellow economists. Phishing for Fools had interesting parts, but fails to deliver on its premise.
I enjoyed it.
- Consumers are not perfectly informed and do not always make decisions based on rational evaluation of their needs
- Companies use these exploitation potentials
Both authors are winners of the economic Nobel prize and representatives of an economic theory allowing for uninformed or irrational consumers.
Econ (September 9th, 2016), german, first edition 2016