Phishing for Phools

There’s a sucker born every minute. Whether circus promoter P.T. Barnum actually uttered those words is a matter of dispute. Yet there is reason to beware.

Phishing for Phools is crammed with examples of beastly things intelligent evil doers do to unsuspecting, lazy, or naïve folks. And it’s these stories from personal finance, medicine, politics, banking, and commerce that make the book an informative read.

Phishing is generally thought of as illegal deception in an effort to commit internet fraud. Akerlof and Shiller take a wider view. Phishing for them is “getting people to do things that are in the interest of the phishermen, but not in the interest of the target.” So using their definition, phishing may or may not be illegal. But it’s something you want to watch out for.

If there is an opportunity to make a buck, someone will do so. This is normal economic behavior. The question is at what cost and to whom. The authors make it clear that they support free-market capitalism, but with reservations. While most people act honorably most of the time, free-market capitalism and democracy—by their nature—are vulnerable to phishing.  Commercial regulation holds extremism in check and should be formulated in service of the public interest.

Ronald Reagan is often quoted from his first inaugural address saying, “…government is not the solution to our problem; government is the problem.” But what gets left out is “in this present crisis.” The missing qualifying words created a “new story.” The authors write that “government as the problem” is a phish. They assert that regulation for the most part works. It’s not without its problems, but nor is democracy itself. Churchill once wrote that democracy is the worst form of government, except for all others that have been tried.

Forewarned may be forearmed, but only up to a point. Financial systems are so complex that no one individual can grasp what’s going on. This is where vulnerabilities reside. Without the time, expertise, and resources to evaluate situations for ourselves, we must rely on the expertise of others. That means the fuzzy concept of institutional trust.

Reputation matters. At one time, regulated financial institutions could be trusted and relied upon to operate within certain guidelines. Yet with deregulation short-term opportunities could now be exploited for great profit at the expense of the public or other parties. Akerlof and Shiller explain what reputation mining is, and how it contributed to the 2008 financial crisis.

The authors rehearse well-covered ground: the division between classical economics, where people are supposed to act rationally in their own best interests, and the newer perspective of behavioral economics, where emotionally-driven decisions are subject to unrecognized biases.

This isn’t a slap on Adam Smith’s “invisible hand” or a refutation of New Age touchy-feeliness. The conclusion is that we humans integrate both of these decision-making styles. Most readers familiar with classical and behavioral economics will have come to that conclusion long before picking up this book.

While the authors say the subject is serious, which it is, their aspiration is to make the book fun. Compared to a run-of-the-mill textbook on the ‘dismal science,’ it is readable. But it’s not a bundle of laughs, nor does it need to be. Graduate students excepted, no reader should be made to work to figure out what the authors are trying to say, and in places, it does require some furrowing of the brow. Yet the book is structurally solid.

Phishing for Phools’ real value is in its well-researched examples. These make it a worthwhile read. Perhaps most pernicious is the story we tell ourselves. We can be easily deceived into focusing on stories that play up rewards while ignoring risks, as happened during the leveraged buyout craze of the 1980s. Taking information at face value should be done with caution. We can have blind faith in authority such as FDA-approved drugs that only later turn out to have disastrous effects. Deception and manipulation are facts of life. Civil society is only as strong as its institutions. Almost 3,000 years ago, Thucydides wrote that the strong do what they can: the weak do what they must.

Without adequate public protections, the strong will always exploit the weak. No one wants to be played for a phool.

Disclaimer: Christopher Richards is a business book ghostwriter and has no association with this book’s authors.