Value Investing

“Phishing For Phools”: A Q&A With Robert Shiller

“Phishing For Phools”: A Q&A With George Akerlof And Robert Shiller by Jason Zweig

The free market isn’t merely the best mechanism ever devised to provide people with what they want; it is also the best mechanism ever devised to provide people with what they don’t want. That is the thesis of the new book Phishing for Phools: The Economics of Manipulation and Deception, by Nobel laureates in economics George A. Akerlof and Robert J. Shiller.

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While some of the argument may seem obvious—surely it isn’t a surprise that some people cheat at least some of the time—“Phishing for Phools” contends that free markets can create fertile opportunities to profit from dishonesty.

Mr. Akerlof is a professor of economics at Georgetown University and the husband of Federal Reserve Chairwoman Janet Yellen; Mr. Shiller, a professor of finance at Yale University and author of Irrational Exuberance. The two discussed the book in a recent interview.

Q: Why do businesses “phish” for “phools”?

Robert Shiller: A fundamental concept of psychology is that people often make decisions they’re not happy about. That’s why people go see therapists! If businesses have a chance to profit by tempting us into making decisions that are good for them but bad for us, they will take it. They have just as powerful an incentive to provide us with what we don’t want as to provide us with what we do want.

Q: What is “reputation mining” and how can it lead to deception?

George Akerlof: Let’s say you have this reputation for selling wonderful avocados. Then you have the opportunity to start selling people awful avocados if that’s more profitable. We think that’s how things [happened] in financial markets [before] the 2008 financial crisis.

Robert Shiller: Financial markets are a special case because they present, for most people, a very difficult judgment about the future: What is this market going to do? It invites a kind of exploitation of them by storytellers, people who will play tricks on them to get their money to manage. In many cases, they’re more salespeople than market researchers.

Q: Are there different kinds of phools?

Robert Shiller: An information phool is someone who has been fed a biased set of information so that they then would make erroneous judgments. A psychological phool is someone who is affected by his or her own feelings, emotions and psychological anomalies. Information phools and psychological phools are everywhere, and you might be one of them. We know that we are.

See full article here – video below

Video interview with George Akerlof and Robert Shiller:

 

Robert Shiller