On Phishers and Phools – or on the fallacy of free markets

The huge (and growing) gap between rich and poor was the subject of a recent Oxfam report. It points out the staggering fact that the 62 richest people in the world own as much wealth as the poorer half. Put in a different way, 1% of people own more wealth than the other 99% combined. Hard to believe, isn’t it?

The benign view of well functioning markets cannot possibly explain this inequity. Adam Smith's central premise that our pursuit of self-interest in free, competitive markets, advances the interest of society as a whole, seems to be incongruent with what is actually happening in the world.

Nobel Prize-winning economists George Akerlof and Robert Shiller in their book “Phishing for Phools” explain that the pursuit of profit while producing products that may enrich our lives, more often that not involves manipulation and deception. Producers often rely and exploit our psychological weaknesses and ignorance. As a result, we tend to buy too much, buy the wrong things, and overpay, making us “phools”…while the “phishers” laugh all the way to the bank!

Akerlof and Shiller posit that there are two kinds of phools: informational and psychological. Informational phools are victimized by factual claims that are intentionally designed to deceive them. Then there are psychological phools, who get carried away by their emotions (or wishful thinking) or cognitive biases we are all susceptible to (“prices of real estate have gone up for the last twenty years, so they will surely go up for the next ten years as well”).

So, markets are anything but benign, requiring proper oversight and governance. If only people look at the evidence rather than rely on supposed orthodoxy.

“Phishing for Phools: The Economics of Manipulation and Deception” by George A. Akerlof and Robert J. Shiller. 2015. Princeton University Press.