Phishing for Phools

In 1984 Robert Cialdini published Influence: The Psychology of Persuasion in which he described six compliance techniques--Reciprocity, Commitment, Social Proof, Scarcity, Liking and Authority-- that are widely used to influence behavior. Advertisers use them, government agencies use them, corporations use them.

Last year (2015), thirty-one years later, economists and Nobel laureates George Akerlof and Robert Schiller have to a large extent recast and expanded upon Cialdini’s ideas in their book, Phishing for Phools: The Economics of Manipulation and Deception.

While Cialdini’s formulation focused on how individuals respond to “professional compliance” techniques, Akerlof and Shiller offer a more general account of why free markets “make fools of us” by capitalizing on human weaknesses.

According to Cass Sunstein’s review (New York Review of Books, 10/22/15) Akerlof and Shiller distinguish between phish and phools. Phisherman such as banks, drug companies, real estate agents, automobile salesmen, and cigarette companies take advantage of human failings to do something that is in the phisherman’s interest, but not in the phools.

Human failings are any number of human errors such as overconfidence, loss aversion and short term, rather than long term bias. Sunstein writes:

Informational phools are victimized by factual claims that are intentionally designed to deceive them, …psychological phools [are] led astray either by their emotions…or by cognitive biases…

They also believe that phishing for phools “is the leading cause of the financial crises that lead to the deepest recessions.”

In his review Sunstein’s central message is that give and take of free markets are distorted by phisherman. They lead people to smoke by sowing doubt about current research; they lead people to underestimate the harmful effects of alcohol and overeating; they induce individuals to buy a product they don’t need or is unhealthy.

In these respects, the so-called “invisible hand” can readily go wrong. As a result, some kind of regulation is required to curb the phisherman’s power. It remains unclear what form regulatory interventions might take and how they can ever be implemented, let alone legislated given the current mood of this country.

In Akerlof and Shiller’s view “companies exploit human weaknesses not necessarily because they are malicious or venal, but because the market makes them do it.” Corporations seek to maximize their profits and in most cases will exploit every opportunity to do so.

In short, once we understand the extent to which individuals succumb to phisherman techniques, we will have yet another reason to call free market economics into question.