Comments due by Sept 25, 2015
Adam Smith famously wrote of the “invisible hand,” by which individuals’ pursuit of self-interest in free, competitive markets advances the interest of society as a whole. And Smith was right: Free markets have generated unprecedented prosperity for individuals and societies alike. But, because we can be manipulated or deceived or even just passively tempted, free markets also persuade us to buy things that are good neither for us nor for society.
This observation represents an important codicil to Smith’s vision. And it is one that George Akerlof and I explore in our new book, Phishing for Phools: The Economics of Manipulation and Deception.
Most of us have suffered “phishing”: unwanted emails and phone calls designed to defraud us. A “phool” is anyone who does not fully comprehend the ubiquity of phishing. A phool sees isolated examples of phishing, but does not appreciate the extent of professionalism devoted to it, nor how deeply this professionalism affects lives. Sadly, a lot of us have been phools – including Akerlof and me, which is why we wrote this book.
Routine phishing can affect any market, but our most important observations concern financial markets – timely enough, given the massive boom in the equity and real-estate markets since 2009, and the turmoil in global asset markets since last month.
As too many optimists have learned to their detriment, asset prices are highly volatile, and a whole ocean of phishes is involved. Borrowers are lured into unsuitable mortgages; firms are stripped of their assets; accountants mislead investors; financial advisers spin narratives of riches from nowhere; and the media promote extravagant claims.
But the losers in the downturns are not just those who have been duped. A chain of additional losses occurs when the inflated assets have been purchased with borrowed money. In that case, bankruptcies and fear of bankruptcy spawn an epidemic of further bankruptcies, reinforcing fear. Then credit dries up and the economy collapses. This vicious downward spiral for business confidence typically features phishes – for example, the victims of Bernard Madoff’s Ponzi scheme – discovered only after the period of irrational exuberance has ended.
Epidemics, in economics as much as in medicine, call for an immediate and drastic response. The response by the authorities to the Great Crash of 1929 was small and slow, and the world economy entered a “Dark Age” that lasted through the Great Depression of the 1930s and the Second World War. The 2007-2009 financial crisis portended a similar outcome, but this time the world’s governments and central banks intervened promptly, in a coordinated fashion, and with an appropriately high volume of stimulus. The recovery has been weak; but we are nowhere near a new Dark Age.
For that we should be grateful. Yet some now argue that the fiscal and monetary authorities should not have responded so quickly or strongly when the 2007-2009 crisis erupted. They believe that the primary cause of the crisis was what economists call moral hazard: because risk-takers expected that the authorities would intervene to protect them when their bets went awry, they took even greater risks.
By contrast, our view (supported by plenty of data) is that rapidly rising prices usually reflect irrational exuberance, aided and abetted by phishes. The irrationally exuberant were not thinking of the returns they would garner if the authorities intervened to maintain the economy and the flow of credit (or, in extreme cases, moved to bail out their bank or enterprise). Such possibilities were a marginal consideration in the euphoria preceding the 2007-2009 crisis: those selling at inflated prices were making profits; and buyers “knew” they were doing the right thing – even when they weren’t.
The reluctance to acknowledge the need for immediate intervention in a financial crisis is based on a school of economics that fails to account for the irrational exuberance that I have explored elsewhere, and that ignores the aggressive marketing and other realities of digital-age markets examined in Phishing for Phools. But adhering to an approach that overlooks these factors is akin to doing away with fire departments, on the grounds that without them people would be more careful – and so there would then be no fires.
We found out many years ago, to the world’s great regret, what happens when a financial epidemic is allowed to run its course. Our analysis indicates that not only are there endemic and natural forces that make the financial system highly volatile; but also that swift, effective intervention is needed in the face of financial collapse. We need to give free rein to fiscal and monetary authorities to take aggressive steps when financial turmoil turns into financial crisis. One Dark Age is one too many. (Shiller, Project Syndicate Sept 17, 2015)
I must admit that I am not in complete agreement with most economists. That is to say that, I do NOT believe that the governments hand in things always makes them better. While I do thing that when in financial turmoil monetary authorities should take fast action to make sure that it does not turn into a crisis...I also believe that the idea of giving anyone that much power can be scary. When any group is given the power to do things they normally couldn't, how do we know that will give the power back? Or not just run with it and go way farther then we thought they should have. "Absoute power corrupts absolutely" and "monetary" says it all to me, that these people will then be able to do whatever they want with "our" money.
ReplyDelete"the primary cause of the crisis was what economists call moral hazard: because risk-takers expected that the authorities would intervene to protect them when their bets went awry, they took even greater risks."
I can't help but wonder if this statement is true. Because honestly that is exactly something that the "risk takers" would do. and again that is a scary thought. I can't help but be on both sides of the fence. I would hate to have to live in a depression, however I can't help but wonder if we came close because people knew they would get bailed out of it. I know we have to see the good of the many, so it was probably the best thing for the country and the economy. But, sometimes people need to learn their lessons the hard way, unfortunately we would have to learn that lesson with them. But would that keep them from going down the path a second time, or maybe keep others from doing the same things.
Basically what I am saying is: I'm just not sure whether the intervention was too quick or maybe they should have let some people learn from their mistakes?!?!
I found this article very interesting. We live in a globalized economy. There are people with electronics, such as, phones, computers, televisions etc. not worth more than few bucks and dealing with billions. I would question the legality and practicality of your proposal to give “free rein to fiscal and monetary authorities to take aggressive steps when financial turmoil turns into financial crisis." Whatever happens to set off the next financial crisis will end badly. There will never be another boom and the deflation bugging us now will never go away. We spend more effort on loss than less price The invisible hand assumes that there are a huge amount of bad people in the world. It does not show equality or perfection. What it does imply it that is much harder to fool an entire market that is it to pump & for a few people who make decisions in a centrally planned economy or hype the public so few "bright" people make a biased intervention in the best interest of people they've never met but "know" that they're mindless fools. I liked this article because ive heard of the invisible hand but never knew what it actually meant. Also I think they made it easy to analyze more of what is going on and what we should know about the world we live in.
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ReplyDeleteThis article was very informing due to the fact I receive emails like this constantly and never knew this action had a term. It is also very interesting to find out what this simple act of spamming can do to our economy. In my opinion it is a shame that these people that perform phishing scams will result in something as major as The Great Depression. As some economists see how important Adam Smith's ideas were and the law of the invisible hand has done so much for the economy, this article proves to me there were flaws in this theory that have first hand resulted in the opportunity for these phishers to reel in the phools. Adam Smith basically created our economy and I wont argue that but it is upsetting to know thew loopholes in his ideas have made it possible for these Dark Ages in our economy throughout history.
ReplyDeleteI thought this article was extremely informative and it was very easy to understand what they were talking about leading me to have such a strong opinion on the topic.
This article brings up a major point on phishing and how it not only affects one person but also can have a major affect on the overall economy. The article explains how not only one person is affected by it but there is a “chain of losers” who are affected because of ones persons mistake to fall for a scam. The article also went into depth into all the ways that is considering phishing. I found this part rather interesting because when I think of phishing I only think of scam emails you would receive asking for credit card info and in return you would get thousands of dollars. Along with scam emails, taking out unfit loans and bad financial advice are all examples of phishing. The article specified how using borrowed money or loans to buy assets at inflated prices causes a greater fear of bankruptcies and in turn credit to dry up and a collapse in the economy. In the past I had been confused on how one persons mistake in taking out a bad loan or taking bad advice could have such a major affect on economies large and small, but since the article explained how phishing can lead to a greater rate of or fear of bankruptcies, I now can see that in these cases it would lead to a major decrease in spending by a person or persons after phishing has occurred. As a result, the economy would decreases and if the decrease was major enough it would collapse.
ReplyDeleteI found this article quite intriguing. It describes the term phishing in depth and it goes on to explaining how it affected our economy which was quite surprising. It tells us how phishing can not only affect one person, but an entire community, which will in overall affect the economy. The fact that this act of phishing can hurt the economy tremendously puts me in awe because it is just a simple act of scamming one person, or a group of people, into giving them your information and or money. Then these people use that information and or money to purchase inflated assets which will inevitably cause bankruptcy. More information should be taught about this topic so more people don't fall under the category of the "phools."Our society should be more careful about what they give out because now a days most people don't know the world we live in. As said in the invisible hand, it is much harder to scam an entire economy than it is to fool an individual.
ReplyDeleteIn this article Shiller touches on the effects of phishing on the financial market and the roles “phools” play. Today we are particularly susceptible to phishing because of our reliance on technology and how a few simple usernames and passwords that we may be duped into giving away can provide access to large sums of money. This is somewhat done on a much larger scale such as Bernie Madoff’s ponzi scheme in which he baited investors into giving him large amount of money. Schemes such as this lead to a downward spiral in business confidence, which eventually lead into an economic epidemic. I halfheartedly agree with the author when he claims that an economic epidemic requires an immediate and drastic response. Knowing that someone will come in to save their assets will leads to an increase in risky behavior by investors. I agree their should be some sort of response to save the economy from spiraling into another depression, but it should not be an immediate response.
ReplyDeleteRiley Iafrate
After reading this article I found the information to be very informative. As I see phishing in my email daily, I also think we have all been phooled once before. We live in a world that they send us those emails and sometimes we become so naive that we click into it. Or when gas station owners hike up the price just because we still go ahead and purchase it because we have no other choice. This article had many valid points of us in whole as a society and the roles we play as well as the sellers. As the article states that borrowers in this economy are taking out mortgage loans they know are bad is something we deal with everyday that is along with car notes with high interest and many other necessities because sometimes we have no choice. Bianca Springer
ReplyDeleteThis is article was very interesting to me because while reading about "phishing" i realized I see it almost constantly on the internet. Throughout my emails, different web pages etc. It disgusts me that phishing is even a thing, and the fact that I got spam mail from random sources and was not aware of the the long term effects is had on the economy is scary.
ReplyDeleteAfter reading the article it made me wonder how many people that I actually know were phools. I hate to think that soon our whole economy could be effected negatively by phishing. I found it unsettling that people who take out mortgages that aren't seen as "suitable", could not only effect the person taking out the bad load but soon effect the economy as a whole by increased bankruptcy and an economy collapse.
After reading this article I feel that phishing and what goes on behind it should be taught to more teenagers and young adults. I think illustrating the evils of phishing to newer generations will help the economy prosper instead of collapse.
After reading this article, I've concluded that no one can be trusted in the real world. No one is safe from the outside and if they give out the wrong information, it can come back to haunt them. For me, I do not give out my personal identity to just anyone in the world. I do not use social media on a regular basis because there are phishers out there who can hack into my account, therefore invading my privacy or identity. I also use the Internet to make online purchases or make purchases with the bank. However, the Internet is a sea full of trolls and predators who can steal your account information and any other assets you own, even if you give them a trace of your identity such as your name or where you live. That's why I go to relatively secure sites to cover my financial costs.
ReplyDeleteAs far as the financial crises the U.S. has been going throughout its history, a lot of people take their money or goods for granted. There's only so much money someone can earn or find on an annual basis and many of them blow it within that year. Those who plan to make vast purchases (school, houses, cars, etc.) underestimate the amount of money these assets are worth. The majority of them have to negotiate with banks to take out loans and even then people fail to make those loan payments so this also hurts the banks because they're not receiving all of the money they have lent. In general, many people are too hasty with their money and think they have so much of it. And it is very unfortunate for those who have to grow up poor or without all the valuable resources they could've had.
I found the part about "Phishing" very interesting to me because I see it every day on the internet. My email spam folder is filled with the crooks just trying to take everyone's money. You cannot trust these people and the people who do I feel very bad for. I didn't realize how big of an impact this had on our community and our economy as a whole. We need to find ways to help prevent so many people from turning into "phools". We need to do everything we can in preventing these crooks from ruining the economy. I never would of thought that this phishing would help bring down the economy as much as it has. It's mind boggling to me how big of an impact it has had on our economy.
ReplyDeletePhising is a term I have never heard of before this article, butI have experienced it since I first went on the internet. It was interesting to learn that phising is not only advertising scams you see on the web or emails you get that we know as spam. Phising is also when banks give out loans to borrowers who have no hope of paying them back, and ponzi schemes like the infamous Bernie Madoff pulled off until 2008. Because of the natural flow of the market and over statements about the economy and assets are similar to phising, and when these things happen it is important for the government to step up and try to manage the damage has been done. The author of the article thinks we should give, "free reign" to government and monetary officials in times of crisis, which I think is dangerous to allow a group that much power and influence.
ReplyDeleteI am amazed that many people have yet to realize about the ways of Phishing and Phools. Ever since the 2007 crisis and even before, there has been a trend that shows that people abuse the system that Adam Smith created. It is amazing that the people who take huge risks are just going to be saved by the government even though they made costly mistakes. I think that these people who do these things should not be allowed to receive help from the government. I think that they should learn from their mistakes because if they receive help they will most likely do it again since they know they will be helped out. This would result in a endless cycle that will hurt everyone else but the people who would receive the governments help. I also understand how the Phishers work because they are able to make money off of what is going on. On the other hand, the Phools are not thinking because they are just doing whatever and not thinking rationally. These Phools just purchase things that they don't even need and want but yet they still purchase these things. The authors of the article concluded that government intervention was needed to prevent the financial collapse. Back in 2007 the government did need to intervene to prevent another Great Depression. But in a study recently done, the major global governments have added an additional $57 trillion in debt since 2007. So where is today's global financial crisis with the additional $57 TRILLION debt?
ReplyDeleteI would have to agree that government intervention is necessary in certain cases. As the article states, we have all seen what happens when a financial crisis runs its course, we do not want another great depression. We would be in another dark period if it was not for the government intervention in 2007.
ReplyDeletePhishing is one of the many ways companies and people intervene in the free market. They lead us to believe we want or need something that is unattainable. This is a perfect example of the housing market crash
Ashley Russo
Reading this article made me realize things around me that I never realized before. Phishing is literally happening right under our noses and its affecting the economy over the long term. Overall it's helpful phishing is being introduced to us so we are aware of the circumstances of phishing and the economy. So many of my friends and family suffer from phishing, all these emails, calls, and spam are ridiculous. The internet is so convenient and dangerous at the same time. All of our information can be taken and spread in an instant. Also in the case of banks giving out loans, people who ultimately can't repay it will hurt the economy and put us at a risk of another depression.
ReplyDeleteDamian Nguyen
After reading this article I realized how much more common phishing is. Prior, I had thought that phishing was emails pretending to be notable companies in an attempt to either steal your information or steal your money. But it seems it is much more common, people are being tricked into mortgages etc. It can be a misrepresentation of the market and objects values aswell as intimidating corporations. Maybe people were tricked into buying into the housing market when it was at its peak and suffered the largest losses of everyone due to being phools. Often times when I think of a phool I think of someone uneducated about the internet but it seems that even people who understand security are being tricked aswell due to the impressive professionalism of the phishes nowadays.
ReplyDeleteIts very interesting to me that in this article the connection between phishing and market rises and falls was made as it was not something I had previous thought of but makes perfect sense. People buy into something that is bound to fail and inflate the price even more before its eventual downturn. This can cause people/businesses to declare bankruptcy and cause massive problems for the United States and better protection seems to be needed to be put in place.
Christopher Carapola
I discovered the part about "Phishing" exceptionally fascinating to me in light of the fact that I see it consistently on the web. My email spam envelope is loaded with the evildoers simply attempting to take everybody's cash. You can't believe these individuals and the general population who do I feel awful for. I didn't understand how huge of an effect this had on our group and our economy all in all. We have to discover approaches to help keep such a large number of individuals from transforming into "phools". We have to all that we can in keeping these convicts from demolishing the economy. I never would of felt that this phishing would assist carry with bringing down the economy as much as it has. It's psyche boggling to me how enormous of an effect it has had on our economy.
ReplyDeleteAfter reading this article I was amazed to discover that in todays world we cannot really trust anyone any longer. This article talks about the terms of Phishing and goes on in depth of explaining how this is affecting individuals and the economy.
ReplyDeletePhishing really plays a tomendsuly role in today’s world. However I really never thought that this would be that effective to the economy but if we really look at in depth it makes a lot of sense. I had many experiences while I sometimes checked. My email and its interesting to see how spam folder I always s filled with the crooks just trying to take everyone's money. After reading this article I really would wish that many people would hear about this because many of us are not aware of it that much.