Most of the fraudulent tricks and tricks explored in this book by Nobel Prize winners in economics George Akerlof and Robert Schiller are far from new.
But the reader will find something much more valuable in the book than just horror stories, namely, evidence that both traditional and behavioral economic theories underestimate the impact that manipulators, scammers, rogues, and shameless deceivers have on the free market economy.
This kind of simpletons hunters, or “phishers,” deform market mechanisms and influence decisions made by consumers, voters, patients of medical institutions and investors.
Akerlof and Schiller offer a new economic paradigm, introducing an additional factor into it – deception. A new look at economic reality will help you avoid becoming a victim of another grandiose scam. Despite the fact that the authors are overly pessimistic about the sanity and rationalism of the average citizen.
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Free Market Deceivers
We are misled everywhere, inflated and brazenly deceived. Rogues, they are also “phishers”, use our gullibility to circle around the finger. We buy unnecessary for a variety of psychological and emotional reasons, and sometimes simply because of lack of information. According to traditional economic theory, people act rationally, seeking to derive maximum benefit for themselves.
Nevertheless, each of us has made and will make irrational decisions to the detriment of our health and wallet. Studying facts of this kind, modern economists recently developed a new direction – the behaviorist economy. It combines the logic of traditional economic theory with the study of the influence of cognitive errors and explains why we make this or that choice always and everywhere. Both traditional and behavioral economic schools remain blind to how fraudsters disrupt market mechanisms.
The Summary you might like: Horsemen of the Apocalypse
Most people are easily tempted. Unprincipled sellers take advantage of this, imposing on them a lot of unnecessary or even unhealthy goods. Thus, the Cinnabon franchise chain, specializing in baking cinnamon rolls, conducts serious research, trying to determine where it is best to exhibit its delicious – leading to obesity – products so that as many people as possible want to buy them. The owners of fitness clubs are pushing their customers to purchase annual subscriptions, knowing that most will not go to the gym all year, and in addition making it very difficult to terminate the contract with the club.
“Phishing is becoming a key factor making markets less susceptible to people’s real needs; in the same way, it serves as a factor in undermining democracy. ”
The “phishers” are pushing you to want more and more. Consider the forecast made by the English economist John Maynard Keynes. In 1930, he predicted that in 100 years, people would earn 8 times more and would only work 15 hours a week. Even with inflation, today we are almost six times richer than Keynes’s contemporaries. But admit it, you probably hardly make ends meet?
And all because your “extra” wealth is spent on satisfying all the new needs that the free market constantly creates. The level of consumption of modern man is incomparably higher than the level of consumption of our ancestors, so we have to work hard from morning to night to satisfy our whims.
How Phishing Works
Advertising, including hidden advertising, as well as sellers’ tricks to attract attention to products, are aimed at the irrational part of the human psyche. Initially, advertising is based on the fact that stories invented by advertisers become our personal stories. At the same time, their creators do not care if the advertised goods are useful or harmful. The advertiser has only one choice – either to sell, or to look for another job, just like a lawyer – or to defend the criminal on trial, or to change the profession.
“Phishing is nothing more than a continuation of the normal functioning of the market with competent participants in conditions when some of its participants are too trusting.”
At the beginning of the twentieth century, Albert Lasker and Claude Hopkins, developing an advertising campaign for Palmolive soap, invented and successfully tested a method of evaluating the effectiveness of advertising based on data analysis. They printed advertisements with different texts and attached a free soap bar to each ad. After analyzing the presented coupons, they determined which of the texts was the most effective. Modern advertisers aim at us carefully verified, specially selected words and phrases. In the 1950s, David Ogilvy, founder of Ogilvy and Mather advertising agency, refined the analytical method of Lasker and Hopkins. Working at Gallup, a polling company, Ogilvy had a deep respect for statistics.
“There are many kinds of traps in the economic system, and it’s very useful to know what they are.”
In 2012, the team of Barack Obama, combining Ogilvy’s methods with the analysis of large data sets, managed to solve the problem that plagued the organizers of political campaigns for many decades. The fact is that political events that encouraged voters to vote most often helped not only the organizers but also their rivals. Obama’s political strategists have been able to pinpoint the supporters of the Democratic Party even in areas with populations that mostly support Republicans, and appeal only to “their” voters.
“According to our definition, a simpleton is a person who for some reason swallows a bait.”
Wherever there are loopholes in-laws and where human weaknesses and vices are manifested, “phishers” will benefit and manipulate people. In a situation where many people resort to phishing, conscientious managers of companies with strong moral principles, who categorically refuse to cheat, have to take desperate measures to ensure the competitiveness of their organizations. It is not surprising that literally every industry is shocked by scandals related to unscrupulous methods.
If you come to a car dealership and say that you are ready to hand over your old car to offset a new one, the dealer will try to divert your attention from the overpriced prices for the new car and will mainly talk about how profitably he will buy your old one. In addition, he will do everything to sell you as many additional options as possible, including completely unnecessary ones, and will not say anything about the costs associated with maintaining a new car.
Often, even the most experienced buyers who have bargained for a favorable price cannot refuse to have maintenance from an authorized dealer, for which they continue to pay exorbitant prices, despite the expired warranty. About half of the profits for car dealers come from 10% of buyers – their most gullible part.
US congressional candidates spend millions on their political campaigns. They carefully think through messages for voters, while emphasizing populist tricks that work great for a poorly informed, easily influenced electorate. And they assure their financial sponsors (groups of people with certain interests) that they are firm in their position on issues that are most important for these groups and are poorly understood by the average voter.
Lobbyists (who are far more numerous than elected officials) earn their living by exchanging valuable information with legislators from the upper and lower houses of Congress. Recently, several dozen companies joined together and hired a group of lobbyists who ensured the adoption of law favorable to these companies, which allowed returning profit from abroad at fantastically low tax rates to the country. Companies spent $ 180 million on lobbyists while saving $ 46 billion in taxes – thus, the return on investment exceeded 25,000%!
For decades, until the beginning of the 20th century, quack healers who sold all kinds of “remedies for all diseases” enjoyed unlimited freedom. In order to moderate the growing appetites of these “phishers” and prevent harm from their drugs, in 1906 the Law on the Good Quality of Food and Drugs was adopted. However, state regulation is not able to eliminate all problems with the quality of drugs.
“If … there is a chance to hook us, there is no doubt that the phisher will wait for us sooner or later.”
Pharmaceutical companies are trying to outperform lawmakers. They spend much more on lobbying their interests than manufacturers from other industries. These companies refuse to conduct research that may yield negative results. They select patients for clinical trials, calculating in advance how well they will respond to treatment with a new agent. They prefer “placebo-controlled” tests, so that the new medicine looks favorably compared to placebo. Finally, they conduct clinical trials in countries where the desired results can simply be bought.
“Now we rarely go to the hospital with food poisoning, but cardiovascular diseases and diabetes associated with poor nutrition have spread widely.”
After pharmaceutical manufacturers get approval from the US Food and Drug Administration (FDA) for their new drug, they begin to build support among doctors, first by paying for dubious articles with positive reviews about the drug and then issuing sales representatives praising him in every way. In 2000, the pharmaceutical giant Merck has resorted to all of these tricks, received FDA approval for its Vioxx pain medication and got doctors to start mass prescribing it to patients. The sale of the drug stopped only after more than 26 thousand Americans died from heart failure caused by its use.
“A computer opens up the world for us in many different ways, but we are well aware that we need to take measures against phishing and viruses.”
When research found out how harmful smoking was in the 1950s, tobacco companies began to go out of their way to refute these findings. Even after the U.S. Health Secretary officially announced in 1964 that smoking was harmful to health, the industry hired scientists and doctors who began to criticize the position of government agencies and sow doubts about its validity.
The World of Big Finance
In the late 1980s and early 1990s, the US government raised interest rates in an attempt to curb inflation. Savings and loan associations (S & Ls), which issued low-interest mortgage loans for long periods, immediately found themselves in a difficult situation. Interest rates on funds to finance their operations jumped, exceeding 10%. Instead of allowing S & Ls to declare bankruptcy or redeem them, the state deregulated the industry and changed the rules of doing business so that associations could lend to construction companies.
The situation was aggravated by the decision of lawmakers to remove the restriction on the interest rate (5.5%) paid by associations on deposits. So S & Ls got the opportunity to pay attractive interest on deposits and actively lend to developers, who, in turn, began to pay billions in kickbacks to the owners of associations. The resulting giant financial pyramid collapsed, plunging the entire industry into a crisis that most likely led to the 1990-1991 recession.
“In a figurative sense, we should introduce some restrictions for those who can afford to install powerful speakers that drown out the performance of a not-so-technically-armed candidate.”
Another type of phishing related to the organization’s reputation has played a major role in the 2008 financial crisis. For almost a hundred years of operation, the rating agencies of the United States have gained a solid reputation by conducting independent analysis and impartially rating corporate bonds.
Both investors and issuers of securities relied on their objectivity. But, experiencing the need for revenue growth, these agencies eventually became increasingly dependent on payments from investment firms that used their ratings. Low rating agencies received fewer orders. In the 2000s, buyers focused on securities secured by mortgages.
Buyers were not able to evaluate the quality of mortgages, so they had to rely on credit agencies. Those assigned the highest AAA rating to many issues of such securities, including frank trash. When deciding on a purchase, people are guided by these ratings. Further known.
How to Protect Yourself From Phishing
Carefulness will allow you to protect yourself from “information phishing” exploiting your ignorance about the product, its quality, and similar products of competitors. The necessary information about the product you are about to buy can be obtained from many sources.
“With phishing opportunities, even companies led by people with strong moral principles usually do this in order to survive and win the competition.”
The state protects us from the most arrogant and cynical phishing. Before you vote to reduce government control and liberalize markets, consider a computer example. Most of us need a computer to work. At the same time, we will not be able to avoid cracking passwords, stealing important information and infecting viruses if we do not establish protection. In the same way, the free market offers us endless possibilities, but at the same time makes us vulnerable to many threats.
“Phishing … is legal until it crosses certain boundaries, and to explain their location … they usually hire very good lawyers.”
US leaders have always relied on the free market but believed that the state was obliged to observe it, creating equal conditions for its participants and smoothing inequality. However, since the days of President Ronald Reagan, the state of the regulator began to see the root of all evils. The result was a reduction in the budgets of federal agencies that ensure the safety of citizens. Thus, the reduction of the powers of the Securities and Exchange Commission has become one of the factors that led to the 2008 financial crisis.
“Free markets give people the freedom to choose, while at the same time giving them the right to fall for the bait of the phisher and be free to engage in phishing.”
Other forces oppose phishing. Non-profit organizations such as the Better Business Bureau and print media such as Consumer Reports are fighting phishers, commercial companies. Many products on sale are checked for compliance with national and international standards. Professional communities have learned to effectively control the activities of their members, and lawmakers are developing laws and regulations that protect citizens from malicious intent or negligence of sellers.
Many sites provide information on types of computer or online fraud. But no laws, no bureau for improving business practices, and no developers of standards can protect a person, succumbing to impulsive desire or addicted. Whether you manage to get around all the temptations, traps, lures and tricks of the “phishers” is up to you.
- The free market economy has many traps for gullible people.
- The economic system is undermined by the ubiquitous phishing – deception, fraud, tricks and false promises.
- Advertisers analyze the data and experiment to then strike an exact blow to our weaknesses.
- Sooner or later everyone will become a victim of a fraudster, including you.
- Phishing is widespread in all industries – those companies that avoid it are not able to compete successfully.
- Both traditional and behavioral economies give a distorted picture of reality because they do not take into account the effects of phishing.
- The state plays an important role in protecting the population from the most arrogant “phishers”.
- If you vote for weakening the legislation and even more significant liberalization of the market, do not complain that you are being deceived at every step.
- Information transparency, proper legislative regulation, the activity of consumer protection groups and personal vigilance help us protect ourselves from “phishers”.
- No state will protect a person from “psychological phishing” if he does not protect himself.
Why You Should Read “Phishing for Phools”
- To protect yourself from the intrigues of “phishers” of all stripes.
- To become more intelligent in economics
- To stay away from consumerism traps
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