By Ashley Mooney
Most people have heard of phishing scams on Internet, in which a person is tricked into giving up their money or identity by a clever ruse.
Temptations like this are found throughout all of capitalist society, says George Akerlof, 2001 Nobel Laureate in Economic Sciences. He discussed ideas from his upcoming book, “Phishing for Phools” wth a Duke audience on April 25 to kick off “Decision Making Across the Disciplines,” a two-day symposium sponsored by the Duke Center for Interdisciplinary Decision Sciences.
Akerloff studies connections between individual’s decision biases and larger economic phenomena.
“Standard economics assumes that the people are smart, they may not know everything but they can be smart,” he said. “But there may be only one way in which you can be smart, but there are many, many ways in which you can be stupid.”
Akerlof, who is also Koshland Professor of Economics at the University of California, Berkeley, developed his idea of phishing for phools from his paper, “The Market for ‘Lemons,’” which secured his Nobel nod.
“A fool with an f is a stupid or silly person, but it’s perfectly possible to make an error when… making a perfectly intelligent decision,” he said. “Somebody who makes a mistake is a phool with a ph.”
Although markets have the ability to maximize wealth, Akerlof said it is a double-edged sword.
“Free markets open us up to be phools. They open us up to those who seek to influence us to do what they want, but it’s not necessarily good for our sake,” he said. “We live in a world where some 5 billion adults can phish us for being a phool. We’ve intentionally opened ourselves up to such exploitation because of obvious advantages, but then we must also think about the other side.”
Markets, Akerlof noted, aim for three weak spots: emotional weaknesses, cognitive weaknesses and ignorance due to blocked channels of information.
When people are aware of phishing, it has relatively little effect. But when one doesn’t know about a phish, it can have a major impact. He proposed that obesity, product misinformation and the recent economic recession were all caused by phishing for phools.
“In the United States, the goal of almost every businessman is to get you to spend your money,” he said. “Life in capitalist economy is a continual temptation.”
Akerlof said according to economics textbooks, people decide on their demand by budgeting spending and then choosing the things that will maximize their happiness. But most people, he added, are not honest with themselves and as a consequence do not engage in rational budgeting.
“A very significant fraction of consumers are worried about how they’re going to make ends meet,” Akerlof said. “Almost 50 percent of people probably could not come up with $2,000 in a month for unforeseen situations.”
The only way to prevent phishing is to know about it, and to make informed decisions with that knowledge.
“Phishing for phools… creates bad equilibrium, especially if we don’t know about phishing for phools, we think that markets are totally benign,” Akerlof said.
UPDATE – June 28, 2013
The Economics Department has posted a YouTube video of Ackerlof’s entire talk.