Who's Phooling Whom?
An interesting and entertaining new book by George Akerlof and Robert Shiller looks at the role of trickery in market economies. "Phishing for Phools" explains that sellers are often out to deceive you, and shows that this isn't an occasional glitch in the market system so much as an intrinsic and pervasive trait.
Phishing began as a term for theft over the internet. Akerlof and Shiller want to broaden it to include all manner of commercial fraud and deception. Their book isn't anti-market: They acknowledge "the cornucopia that free markets have delivered." But they also insist that "just as every coin has two sides, so do free markets. The same human ingenuity that produces the cornucopia also goes into the art of the salesman."
"Phishing for Phools" aims to help readers understand their psychological weaknesses, so that the phishermen can be phended off more ephectively.
Shortly before reading it, I read the first annual report from the Social and Behavioral Sciences Team based in the White House. Members of this unit draw on essentially the same worldview and the same psychological literature to give us, they claim, better government. Neither the book nor the report addresses an apparent tension. When sellers manipulate you, that's bad: It's phishing for phools. When the government nudges you, that's good: It's behavioral economics for the benefit of the public.
Some would say there's no tension because there's no parallel. Sellers are out to make money. Their interests are opposed to the interests of their customers. If sellers can get away with deceiving you, they will. Governments, on the other hand, have no profit motive. They're just there to help. The psychological tools may be similar, but they're being used to quite different ends.
Really? I suspect a case of confirmation bias (the tendency to believe things you want to be true).
The goals of any government are disputable and the motives of politicians and their civil servants aren't always pure. Also, if a government decides to come at you with behavioral economics, it might be hard to refuse, because government is a kind of monopoly. Private firms, on the other hand, are in competition with one another. They might not want to serve your interests, but for the most part they have to. If you don't like the way company A nudges its customers, you can take your business to company B.
Behavioral economics now commands enormous attention among governments. Its leading advocates are aware of the dangers. My Bloomberg View colleague Cass Sunstein is a pioneer of the discipline and co-author of "Nudge," a best-selling book on the subject. "A principal advantage of nudges, as opposed to mandates and bans, is that they avoid coercion," he says in a good concise introduction to the method. He goes on: "Even so, they should never take the form of manipulation or trickery."
Problem is, the whole point of nudges is to "steer people in particular directions." You say steer, I say manipulate.
Certainly, it's hard to object to nudges based merely on presenting choices in a simpler and clearer way -- and that's one of the approaches the White House unit has been testing. For instance, according to the report, farmers who were sent a letter telling them how to apply for a government loan were more likely to apply for one. (Who'd have guessed?)
Still, a certain ambivalence is apparent in the nudgers' thinking. Sunstein discusses the merits of "active choosing" by the public, as opposed to default rules intended to promote a certain result. Active choosing sometimes makes sense, he says. "But in many contexts, default rules are indispensable, because it is too burdensome and time-consuming to require people to choose." I can imagine a phishing salesman saying much the same. But don't be concerned: When it comes to public policy, the behavioral-economics team will let you know how much information you can handle.
Advocates of nudging like to point out that almost every choice involves a context (a "choice architecture") which itself constitutes a nudge. In effect, they argue, it's pointless to oppose nudges as such: There's no escaping them. That's true. Nonetheless, the question remains, who is doing the nudging and why?
Last year, Stephen Littlechild, formerly a U.K. monopolies regulator and now a fellow at Cambridge University, produced a spoof paper, "Applying behavioural economics at the Regulatory Conduct Authority." This took a (real) paper from Britain's Financial Conduct Authority on the mistakes and biases to which consumers of financial services are prone, and recast it. Littlechild replaced each instance of baffled, error-prone consumers with a reference to regulators getting things wrong in much the same way.
Biases can cause regulators to misjudge important facts or to be inconsistent, for example changing their choices for the worse when essentially the same decision is presented in a different way. In other words, our normal human thought processes can lead us to make choices that are predictably mistaken.
Regulators left to themselves will often not work to reduce these mistakes, so supervision of regulation may be needed. While it is common sense that people make mistakes, behavioural economics takes us beyond intuition and helps us be precise in detecting, understanding, and remedying problems that arise from regulatory mistakes.
The fashion for behavioral economics is itself a nudge. It inclines public officials to think of citizens not as their employers but as their charges -- lazy, distracted and dumb, needing to be guided to better choices by smart people who always know what they're doing. Littlechild's advice is a good corrective: Officials, heal thyselves.
The White House unit says it has found a nudge to increase the government's use of double-sided printing, significantly reducing paper costs. That, I welcome unreservedly.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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