phishing and paternalism

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Cass Sunstein's piece on free-market fools discusses the book Phishing for Phools: The Economics of Manipulation and Deception by George Akerlof and Robert Shiller, and notes that "behavioral findings about human fallibility" illuminate a number of psychological failings: overconfidence, unrealistic optimism, poor risk assessment, a short-term bias, and the fact that "most economists have not had much to say about the problem of inequality"

There is a strong argument that within the economics profession, these problems are closely linked, and that they have had unfortunate effects on public policy. Most economists celebrate free markets, invoking the appealing idea of consumer sovereignty. If people are buying potato chips, candy, and beer, or making risky investments, that's their business; they know their own values and tastes. Outsiders, and especially those who work for the government, have no right to intervene.

"By emphasizing human fallibility," he continues, "the group of scholars known as behavioral economists has raised a lot of doubts about this view" that "competitive markets are generally trustworthy:"

Their catalog of errors on the part of consumers and investors can be taken to identify a series of "behavioral market failures," each of them calling for some kind of government response (such as information campaigns to promote healthy eating or graphic warnings to discourage smoking). But George Akerlof and Robert Shiller want to go far beyond behavioral economics, at least in its current form. They offer a much more general, and quite damning, account of why free markets and competition cause serious problems.

"Both Akerlof and Shiller have won the Nobel Prize," he notes before presenting their argument:

Akerlof and Shiller believe that once we understand human psychology, we will be a lot less enthusiastic about free markets and a lot more worried about the harmful effects of competition. In their view, companies exploit human weaknesses not necessarily because they are malicious or venal, but because the market makes them do it. Those who fail to exploit people will lose out to those who do. [...]

Akerlof and Shiller contend that the invisible hand guarantees "rip-offs," which are "fertile ground to find phishing for phools." At the closings of home sales, for example, people face a baffling array of transaction costs. [...]

Akerlof and Shiller make related arguments about the marketing of pharmaceuticals (with reference to the Vioxx scandal), the success of Facebook (which, they argue, is a mixed blessing for young people in particular), the sale of junk bonds, and the democratic process.

"Akerlof and Shiller make a convincing argument," he concludes, "that phishing occurs because of the operation of the invisible hand, not in spite of it:"

If a company can make money by deceiving or manipulating people, someone is going to create such a company, and it will prosper (unless the law regulates it). And if it prospers, companies that do not deceive or manipulate people may well be at a competitive disadvantage. Of course there are a lot of consumers out there, and some of them will avoid phishermen. In fact markets might well be segmented into sophisticates and phools, with the former avoiding, and the latter flocking to, complex (but risky) financial products, expensive closing fees, tobacco, and alcohol.

Free-market fundies will, of course, object to any sort of liberal "paternalism," regardless of the money or lives saved.

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This page contains a single entry by cognitivedissident published on October 7, 2015 9:20 AM.

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