Angling for Dollars: A Review of Akerlof and Shiller’s Phishing for Phools

“You mean on top of everything else this ship is rigged?” –Stan Freberg Presents: The United States of America Volume One: The Early Years

By Lambert Strether of Corrente.

I have a pile of books I’ve more or less finished, and since book reviews — along with Christmas Xmas holiday gift-giving ideas — are a sadly neglected aspect of reader service at Naked Capitalism, I’m going to review a few of them in the coming days and weeks. The reviews will be in no particular order, but I’m going to start with George A. Akerlof and Robert J. Shiller’s Phishing for Phools: The Economics of Manipulation and Deception, mostly because the ideas of “phishing” and “phishing equilibrium” have a lot of explanatory power[1], and readers might like to be able to use them right away, perhaps even around the Thanksgiving table, when that pesky relative goes into a “because markets” conversational doom loop. Akerlof and Shiller’s book, and I mean this as a compliment[2], is so darn readable that it’s almost unnecessary to explicate it[3]; so I’m going to quote great slabs on phishing and the phishing equilibrium[4]. Then I’ll offer a few critiques of the sort that any lay reader might make, and conclude.

Phishing

Here’s how Akerlof and Shiller define “phishing” (page xi):

The word phish, according to the Oxford English Dictionary, was coined in 1996 as the Web was getting established. That dictionary defines phish as “To perpetrate a fraud on the Internet in order to glean personal information from individuals, esp. by impersonating a reputable company; to engage in online fraud by deceptively “angling” for personal information. We are creating a new, broader meaning for the word phish here. We take the computer definition as a metaphor. Rather than viewing phishing as illegal, we present a definition for something that is much more general and goes much further back in history. It is about getting people to do things that are in the interest of the phisherman, but not in the interest of the target. It is about angling, about dropping an artificial lure into the water and sitting and waiting as wary fish swim by, make an error, and get caught.

Another example that might occur to NC readers is Obama’s HAMP program; billed as a program to help homeowners (the lure) it was actually designed, in Tim Geithner’s notorious phrase, to “foam the runway” for the big banks, and the homeowners who actually got sucked into it were, in the main, harmed rather than helped. Leading us to what we might call an operational definition of phishing (page xii):

We anticipate that this book will be unpopular (to say the least) with those who think that people all but invariably make the best decisions for themselves.[5] Who are Bob and George, they will ask, to say that individual people are not themselves — always and invariably–the best arbiters of the decisions that affect them? … We do not have to be presumptuous to see that people are making such [phoolish] decisions. We know because we see people making decisions that NO ONE COULD POSSIBLY WANT [all caps in the original].

For example, the cancer from the cancer sticks that R. J. Reynolds, et al., purvey is a decision that “NO ONE COULD POSSIBLY WANT”; the operational definition of a phished-for outcome. But the acolytes of Edward Bernays — and their owners — have done quite well with their artificial lures. (I’ll have more to say about Akerlof’s definition of “phishing” below.)

Phishing Equilibrium

Here’s how Akerlof and Shiller define “phishing equilibrium” (page 1). I said I’d quote great slabs and I meant it:

The fundamental concept of economics is … the notion of market equilibrium. For our explanation, we adapt the example of the checkout lane at the supermarket. When we arrive at the checkout at the supermarket, it usually takes at least a moment to decide which lane to choose. This decision entails some difficulty because the lines are — as an equilibrium — of almost the same length. This equilibrium occurs for the simple and natural reason that the arrivals at the checkout are sequentiallly choosing the shortest line.

The principle of equilibrium, which we see in the checkout lanes, applies to the economy much more generally. As businesspeople choose what line of business to  undertake — as well as where they expand, or contract, their existing business — they (like customers approaching checkout) pick off the best opportunities. This too creates an equilibrium. Any opportunities for unusual profits are quickly taken off the table, leading to a situation where such opportunities are hard to find. This principle, with the concept of equilibrium it entails, lies at the heart of economics.

The principle also applies to phishing for phools. That means that if we have some weakness or other — some way in which we canbe phished for fools for more than the usual profit — in the phishing equilibrium someone will take advantage of it. Among all those business persons figuratively arriving at the checkout counter, looking around, and deciding where to spend their investment dollars, some will look to see if there are unusual profits from phishing us for phools. And if they see such an opportunity for profit, that will (again figuratively) be the “checkout lane” they choose.

And economies will have a “phishing equilibrium,” in which every chance for profit more than the ordinary will be taken up.

I don’t see how there’s any way to read this other than as a foundational assault. And it’s on page 1 (PAGE ONE!!![5]). This really is, at least in academic terms, an assault on the Winter Palace (or, dare we say, an attempted paradigm shift). Here’s an example of the principle of equilibrium expressed in the classic joke:

The young economist looks down and sees a $20 bill on the street and says, “Hey, look a twenty-dollar bill!”

Without even looking, his older and wiser colleague replies, “Nonsense. If there had been a twenty-dollar lying on the street, someone would have already picked it up by now.”

However, if we think in terms of phishing, we might consider that the bill really was there, but was thought to be counterfeit; that is, a phishing failure, rather than a market failure (although, as we all know, the market can never fail; it can only be failed). Here, I wish I could add a clip from the classic Howard Hawks screwball comedy His Girl Friday, where Cary Grant phishes Ralph Bellamy by giving him $450 to give to Rosalind Russel, and then pulls a few strings to have Bellamy arrested and jailed “for passing counterfeit money,” an outcome NO ONE COULD POSSIBLY WANT — except Grant, who is Bellamy’s rival for Rosalind Russel’s affections. Clearly Grant, who for whatever reason has a stack of funny money ready-to-hand[6], has a different model of the world from Bellamy’s — and the two economists’ — a world much more like Akerlof and Shiller’s.

Subversive Ideas

Not content with quite exploding market equilibrium, Akerlof and Shiller also undermine the conventional wisdom in two other ways. The first is by undermining Samuelson’s notion of “revealed preferences.” Pages 170-171:

A common precept of standard economics is that people only make the choices that maximize their welfare. This assumption even has a fancy name: “revealed preferences”: that people reveal what makes them better off by their choices. Such a concept, of course, is exactly at odds with our concept of the difference between what people really want (what is good for them) and what they think they want (their monkey-on-the-shoulder tastes).

Cancer sticks, being addictive, are a classic example of a “monkey-on-the-shoulder” instance of phishing. NO ONE COULD POSSIBLY WANT the cancer. But the monkey wants the fix.

The second is by introducing “a new variable.”  Pages 172-173:

We have obtained this greater generality [as opposed to lists of cognitive flaws beloved by behavioral economists] by ourselves giving a picture to the mental frames that inform people’s decisions. We have called them “the stories people are telling themselves.” This description… enables us to see, entirely naturally, how most phishing for phools occurs. This phish is a way to get someone to make a decision that is to the benefit of the phisher, but not to the benefit of the phool. Since our decisions are usually based on the stories we are telling ourselves about our situation, this gives us a transparent characterization of motivation that allows us to understand how most phishing for fools happens. It also brings into economics a new variable. That variable is the story that people are telling themselves.

The Marlboro man would be one fine example of an instance of this variable; and since thousands died at least partly as a result, this story cannot be said to have no economic impact. People who’ve been doing political blogging for a long time know another, called “the narrative.”

It’s important to recognize how bold this claim is. The first Google hit for “economic variables” is a PowerPoint used at Stanford. Examples of economic variables are real GDP, the unemployment rate, the inflation rate, the interest rate, the level of the stock market, and the exchange rate. So when Akerlof and Shiller say that “the stories we tell ourselves” are an economic variable, they are saying stories are, analytically, on a par with, say, the unemployment rate. (And looking at the prevalance and impact of stories like, say, “Government is like a household, and so we must _____,” it’s hard to argue otherwise.)

Critique of Phishing for Fools

As the Acknowledgments show (page 175 et seq.), Phishing for Fools‘ smooth surface is carefully burnished to resist assault. (One might also wonder if the plethora of examples was designed not only to entice the civilian reader, but to distract the professional one.) And since I don’t even play an economist on TV, I’m hesitant to proffer a critique. That said, here are four points that I think should obvious enough to most readers, so I’ll lay them out here so we can go on to deeper issues.

1. The Definition of Phishing is Weak. Look again at the “definition” under the “Phishing” subhead. You’ll see what I can only call weasel words like “creating” (not “have created”?), “something,” “metaphor,” “about getting,” “about,” “about.” But what I don’t see, can’t find, and a check of the pages indexed under Phishing does not reveal to me is a formal definition. That’s odd, and all the more odd because Shiller (with Akerlof), in a 2013 PowerPoint presentation at Yale pleasingly titled “Neoclassical Finance and Reality,” does give a definition:

• For us, phishing is different: sophisticated, professional behavior of large organizations that is designed to exploit either psychological or informational weaknesses of consumers.

(This is bullet two of the slide. Bullet one is the OED material; bullet three is the angling with lure metaphor.) Phishing for Phools, for whatever reason, elides the institutional focus demanded by “large organizations.” I think that’s unfortunate, since the elision makes it more difficult to connect phishing and phishing equilibria to important work like William R. Black’s notion of accounting control fraud, which fits the above formal definition exactly, but not the definition in the book.

2. A Phishing Typology is Absent. As many of the reviewers complain, Phishing contains many, many examples. My view is that some of the examples are clearly phishing, others are simply sharp practice, and others are examples subsumed under Miss Marple’s all-purpose gerund phrase: “Human nature being what it is.” The boundaries of market behavior to be deemed phishing seem quite fuzzy to me, and the lack of a formal definition doesn’t help. What I think would help — consumers, especially, but also economists and, dare I say it, law enforcement — is a typology: The financial equivalent of design patterns[7]. A Ponzi scheme would be an example of one such pattern. Another example: Three-card monte, the confidence trick. Somewhere (can’t find the page!) Akerlof and Shiller describe the game, but only in terms of the dealer (the phisherman) and the mark (the phool). However, in “real life,” the players are: The dealer, the mark, the shills (confederates of the dealer, who rope in the mark), and a lookout, who (the mark having just been successfully phished) seemingly spots the cop on the beat, whereupon the dealer pockets his cards, folds up the cardboard box on which the cards were dealt, and silently steals away. The cop is, of course, also a player, having been handed a twenty to let the game proceed. Discussing the game, Akerlof and Shiller omit the cop; see above on the lack of institutional focus. And note also that if the cop is omitted, an essential feature of the design pattern is omitted, and a successful account of the game cannot be given.

3. A Commitment to Equilibrium is Unmotivated. Here I will speculate even more freely than usual. Akerlof and Shiller’s metaphor of the “checkout line” is powerful, but what if “the economy” is less like a checkout line than it is like the weather? That is, what if the economy is an ever-changing, never-changing chaotic system whose behaviors converge on strange attractors, and in which multiple equilibria are possible? (There is probably an entire school devoted to  this model, but, like I said, I’m not a professional economist.)

4. Evil is Not Necessarily Evenly Distributed. Akerlof and Shiller acknowledge the reality of goodness in their Afterword:

This book may be about manipulation and deception, but we must acknowledge that there is also a great deal, and we repeat for emphasis, a great deal of goodness in the world. It is full of the heroes that we described in Chapter 11. A large number of such generous heroes underlie this book

(I think Graeber would call this heroism an example of everyday communism[8]). And I agree with them! However, it must also be conceded that the phisherman, if not evil, are at least ungood. But Akerlof and Shiller seem to regard the ungood as randomly distributed throughout “the economy.” But what if — again, speculating very freely — “the economy” were organized rather like a self-cracking tower, in which forms of evil become more and more refined while being processed toward the top, and then extracted? (In the same way, one might imagine, the prolific use of lie detectors at intelligence agencies must select for lying sociopaths and filter them upward, all other things being equal, given that such persons will be disportionately able to pass the tests.) If that’s true, than phishing “rigs” the game in a way for which Akerlof and Shiller cannot give an account (and here again we see how the lack of an institutional focus may trip them up).

Conclusion

On these notes of gross speculation I must close. I think Phishing for Phools both dulce, since it’s a beautifully written, fun, and easy to read, and utile, in that it tends to undermine the basic tenets of economics as currently practiced — a heroic and excellent act.

NOTES

I suppose I should have done a review of the reviews, or even a review of the reviewers, but all that material ended up in these notes.

[1] Alex Tabarrok of the squillionaire-endowed Mercatus Center engages with “phishing equilibrium” by the simple strategy of pretending it’s not there, which makes me think it’s the most powerful idea in the book, while complaining at length of the books “tired” and “very old” examples. Odd, that; I wasn’t aware that fraud, as a concept or as a practice, had a sell-by date. Another example of neoliberal economists enforcing rules on others they grant themselves impunity for, I suppose.

[2] Unlike the Economist, which writes that “[i]t mostly consists of other peoples’ research, helpfully boiled down into titbits that are perfect material for cocktail-party chatter.” Were this true, one might regard it as pretty rich that one of the anonymous clever (wannabe) Brits at the Economist complains about others helpfully boiling material down to tidbits for the chattering classes. These guys thought they had a monopoly?

[3] Even sympathetic reviewers — for example, at the London School of Economics — seem to miss the fact that the book is an assault on many of the foundational assumptions that undergird economics as it is currently taught and practiced:

Akerlof and Shiller give a detailed and highly accessible account of the short-sightedness of the free market equilibrium thesis as a putative Pareto optimal situation maximising the economic welfare of everyone.

That’s not quite it; Akerlof and Shiller are not arguing that the [genuflects] free market equilibrium thesis is “short-sighted”; they’re arguing that it’s wrong, that it’s a bad model, and its badness has real policy implications.

Perhaps the assault is so obvious that, in practice, it’s subtle; or only lay readers of the sacred text can see it, as opposed to the ordained.

[4] The Washington Post reviewer, perhaps unsurprisingly, since WaPo lives in a world where economists exercise real power, recognizes Akerloff and Shiller’s intent:

[They] aren’t just saying that emotions distort economic outcomes or that free markets feature imperfections that devious actors exploit at the expense of consumers. No, they are arguing that such exploitation is inherent to the system, that the equilibrium economists worship — whereby any opportunities for unusual profits are quickly seized and taken off the table — also means that chances to take advantage of our weaknesses, to counter our true preferences, are soon identified and abused.

The mechanism for this abuse is “phishing.”

However, even they miss out on “phishing equilibrium.”

[5] Making it all the more remarkable, or not, that “nudge theory” policy entrepreneur Cass Sunstein ignores it in his review. Having failed to mention “phishing equilibrium” at all, Sunstein concludes:

In his great marginalia to Sir Joshua Reynolds’s Discourses, William Blake wrote, “To Generalize is to be an Idiot. To Particularize is the Alone Distinction of Merit.” Blake exaggerated, of course, and Akerlof and Shiller are the furthest thing from idiots; their extraordinary book tells us something true, and profoundly important, about the operations of the invisible hand. But the largest views can lose focus. If we seek to understand how the invisible hand goes wrong, and whether some kind of intervention is required, there is a lot to be said for specifying mechanisms and testing concrete hypotheses. If we do that, we might go far beyond a mere list, and we will find phishing of many different kinds.

Page one, dude. Page one.

[6] Snappy dialog:

BURNS (to Louis) I need four hundred and fifty dollars in counterfeit money. You know where I can get it?

LOUIS It’s awful funny — I happen to have some on me.

[7] The literature of confidence games affords a virtual argosy of such patterns. In the realm of psyschology, see Eric Berne’s Games People Play.

[8] Graeber’s everyday communism, from “On the Moral Grounds of Economic Relations” (PDF):

Whenever action proceeds “from each according to their abilities, to each according to their needs”—even if it is between two people—we are in the presence of “everyday communism”. Almost everyone behaves this way when collaborating on a common project. If someone fixing a broken water pipe says “hand me the wrench”, their co-worker will not usually say “and what do I get for it?”, even if they are working for Exxon-Mobil, Burger King or Royal Bank of Scotland. The reason is efficiency (ironic, given the conventional wisdom that “communism just doesn’t work”): if you want to get something done, allocating tasks by ability, and giving people what they need to do the job, is the most effective way to go about it.

NOTE

I’m glad that Princeton University Press did the right thing when composing the footnote section; they included running footers like “NOTES TO PAGES xv-1.” Thank you!