The phlaws in George Akerlof’s and Robert Shiller’s Phishing for Phools are many – phar too many for me to have addressed in the review of this book that I wrote that is forthcoming in Barron’s. One phlaw is Akerlof’s and Shiller’s inadequate appreciation for the role of entrepreneurship.
Akerlof and Shiller would likely dispute the above contention. They would insist that they treat entrepreneurship more fully than does standard microeconomic theory. This insistence would be correct, but that standard (please pardon the double entendre) is too low to be relevant. Genuine entrepreneurship seldom, if ever, appears in formal mainstream economic theory.
Akerlof and Shiller argue that people – as consumers and investors – are plagued by such a plethora of psychological quirks and informational deficiencies that their decision-making very often makes them prone to buy things that they don’t really want to buy and otherwise to act in ways that they don’t really want to act. Arguing correctly that profit opportunities are not long left unexploited by profit-hungry entrepreneurs, Akerlof and Shiller insist that entrepreneurs predictably exploit people’s psychological quirks and informational deficiencies. Entrepreneurs do so by offering goods and services that appeal to those desires that spring chiefly from people’s psychological quirks and informational deficiencies. The result is a “phishing equilibrium” in which all opportunities for entrepreneurial profit are fully exploited.
But Akerlof’s and Shiller’s “phishing equilibrium” is no such thing. The authors fail to apply the logic of entrepreneurship as fully as it should be applied; they apply it only half-way.
If people really are currently being lured by “phishing” entrepreneurs to take many actions that they, the “phished” people, really would prefer not to take, then profit opportunities currently abound for entrepreneurs who can devise product offerings that protect people from being phished. That is, if people really are currently being lured by “phishing” entrepreneurs to take many actions that their, the “phished people’s, ‘true’ selves know to be bad for them, then the current situation is not an equilibrium, for it contains opportunities for profit that entrepreneurs can, and presumably will, exploit. (There are no free-rider or public-goods problems in most of the kinds of cases and examples that Akerlof and Shiller mention as being prone to being caught in phishing equilibria.)
Take their example of Cinnabon which allegedly lures, with the irresistible aroma of hot-baked cinnamon rolls, consumers to buy high-calorie pastries that those consumers really don’t want to buy. If it’s true, in any way that is meaningful, that consumers really would prefer not to buy Cinnabon’s pastries, then some entrepreneurs, who are as alert to this reality as are Akerlof and Shiller, can profit from devising products that protect consumers from succumbing to the siren smell of cinnamon. “Just wear this nose-device whenever you’re walking in or near a shopping mall or airport food court. It’ll block the cinnamon aroma! You’ll slim your waistline as you swell your wallet!” Or, “Sign up now for our Odysseus Plan! While a member, whenever you use a credit or debit card to make a purchase at Cinnabon, you will incur a legal debt to us of $50 for every $5 you spend at Cinnabon. Guaranteed to protect you from your phoolish self and Cinnabon’s phishing!”
My suggested ideas above are, admittedly, not very good. But I’m no entrepreneur. I have every confidence that if the problem allegedly identified by Akerlof and Shiller were real and significant enough to worry about, real entrepreneurs would find ways to profit by protecting people’s real selves from their phoolish selves.
As a rebuttal to my claim in this post it will not do to point to the reality of the continuing success of Cinnabon along with the absence of any such entrepreneurial efforts to help consumers reduce their Cinnabon purchases. The reason is that this reality is consistent also with Cinnabon purchases being perfectly rational transactions conducted by consumers who, aware that Cinnabon’s pastries are loaded with calories, willingly accept the trade-off of enjoying the taste of these pastries at the cost of ingesting lots of calories. (Alternatively, even if such purchases aren’t fully rational, the total cost to consumers of unwittingly succumbing to Cinnabon’s phishing might be so low as to make it not worth while to devote resources to the task of protecting consumers from this phishing – a fact that, were it so, would mean also that it’s highly unlikely that government should take any action to stop Cinnabon from phishing.)
