Phished

Got a headache?​ Help is at hand. At your local pharmacy or supermarket or corner shop or garage or indeed pretty much anywhere, you can buy a branded packet of 2-(4-isobutylphenyl)propionic acid, better known as ibuprofen, at a cost of £2 for 12 200mg tablets. (If that pharmacy is a Boots, you’re buying the medicine from the people who created it, since it was Boots’s research arm which came up with ibuprofen in the first place.) Or you could look at the next shelf down, and buy a non-branded pack of the same medicine at 35p for 16 tablets. The contents of the two packets of medicine are identical: they contain only one ingredient, at the same dose. Except the branded version of 2-(4-isobutylphenyl)-propionic acid costs 7.62 times as much.

Conventional economics struggles to deal with phenomena such as this. Why would rational consumers making rational decisions to ‘maximise their utility’ pay seven times more than they need to for anything? You could bodge together an argument that it’s rational by claiming that the branded version of the drug is safer and more trustworthy – but, truthfully, in a regulated developed market, that’s bullshit. Historically, this argument wasn’t bullshit: consumer trust was the original rationale for the development of brands. Something similar still holds in sketchier and developing markets. Here and now, though, it’s bullshit. For non-economists, the explanation is perfectly obvious. Somebody is – perfectly legally – trying to rip us off.

George Akerlof and Robert Shiller’s new book, Phishing for Phools (Princeton, £16.95), is about this subject. It concerns, as its subtitle says, ‘the economics of manipulation and deception’. Akerlof and Shiller aren’t using the word ‘phishing’ in the sense in which it’s usually employed, to denote an internet-specific form of fraud that involves pretending to be someone else in order to gain personal information. Both men are Nobel laureates in economics, in 2001 and 2013 respectively, which no doubt empowers them to use ‘phishing’ to mean whatever the hell they want it to mean. Here, they use ‘phishing’ to mean ‘getting people to do things that are in the interest of the phisherman, but not in the interest of the target’. A phool is someone who has been successfully phished. If you buy the two-quid packet of ibuprofen, that’s you.

This is rich territory in our modern economies, and Akerlof and Shiller have many examples from which to choose. Some are smaller and more personal than others: for one, gym membership. The overwhelming majority of people – 80 per cent, according to an academic study they cite – would do better to pay as they use the gym rather than sign up to a monthly contract. Why don’t people do that? Because they are phished: gyms structure contracts to look appealing, and then make them as hard as possible to unwind. From the 83 gyms in the academic study, only seven would accept cancellation of a monthly contract by phone, and of the 54 who would accept a letter, ‘25 required it to be notarised.’ The average amount lost by monthly members was a non-trivial $600 out of an annual cost of $1400.

Many, many industries phish. In the world of finance, Akerlof and Shiller find so many examples that the reader starts to wonder if it’s the rule rather than the exception. An interesting category of phishing in this world concerns ‘reputation mining’, the process by which a company establishes a reputation for probity, and then uses it to do unscrupulous things. In this context there is an extensive discussion of Goldman Sachs. Akerlof and Shiller also focus on the Savings and Loan scandals of the late 1980s, which involved widespread and systematic fraud as well as phishing. They re-tell the story of the sub-prime loan disaster with heavy emphasis on phishing at all stages of the process. Their examples from the world of lobbying and politics are strong too. The company Ocean Spray was at one point in the 1980s facing legislation forcing it to point out that cranberry juice, its main product, was 75 per cent water. So they simply made sure that ‘a handful of congressmen were given speaking engagements with honoraria of $2000 and $4000; $375,000 of PAC contributions were also distributed. Prohibition against any regulation requiring disclosure of fruit-juice content was, with no fanfare, slipped into an appropriations bill.’ The cost of the lobbying was a few hundred thousand dollars. In 2011, Ocean Spray sold $1.5 billion’s worth of cranberry juice in the US. The consumer is phished, and the political process is phixed.

It’s our vulnerability to storytelling, in Akerlof and Shiller’s analysis, that makes us prone to phishing: ‘our decisions are usually based on the stories we are telling ourselves about our situation.’ Now, this isn’t necessarily news to the non-economist. So an initial response to Phishing for Phools might be that it belongs on the shelf of books which tell economists things that the rest of the world already knows, concerning the very many ways in which people don’t in practice ‘maximise their utility’. This bookshelf might not be our favourite shelf, but it is important in economics, which makes it relevant for the rest of us, since so much of the world of politics and public life is founded on half-baked and half-digested economic maxims. Keynes’s great remark is perma-relevant: ‘Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.’ Yes, so the better economics is at understanding the diversity of real human lives and behaviour, the better for all of us, since this ends up being the stuff that ‘practical men’ see as common sense.

Phishing for Phools is, though, a book of more importance and general interest than that. While the fact that firms try to rip us off is hardly news, I hadn’t thought quite how endemic the issue is until I’d read Akerlof and Shiller. To take an example from contemporary British life: car and house insurers, once upon a time, gave discounts to loyal customers. Today, they do the opposite. The law allows these companies to auto-renew charges for the new year, to prevent customers from going uninsured. So the firms annually increase charges, and thereby profit from loyal customers, relying on consumers’ inertia. Companies aren’t legally required to state last year’s premium when they send the letter quoting the cost of the next year’s insurance, so the premium hike often goes unnoticed.

Seeing last year’s number would be a useful nudge to action; its absence is a powerful aid to inertia, as I discovered a year or so ago, en route to saving several hundred quid a year by the simple expedient of switching car insurer. If you don’t switch annually, you are phished. In the case of house insurance, if you are paying a sum close to but under £1000, you are being phished: companies know that this is the amount which prompts consumers to refuse auto-renewal and shop around, so they move towards that price but hold the line just below it. One last UK example: phone-in quiz lines. Once upon a time, phone-in quizzes were difficult, and structured to reward the rare person who knew the answer to a recondite question. Now companies are allowed to charge callers, so they make the questions as easy as possible, to maximise the number of people who ring in. You hardly ever see a question whose answer isn’t crushingly obvious. Once, hardly anybody knew the answers; now everybody does, and the contests are a phish.

The story of phishing has good guys as well as villains. Akerlof and Shiller have a chapter on ‘The Resistance and Its Heroes’, most of whom are regulators. Regulator-as-hero is not a popular theme at the moment, least of all in the US, but the two economists point out just how important regulation has been to the safety of consumers and the development of markets. This last is something that’s often forgotten in the culture wars around the doctrine of free markets: markets benefit from regulation and standardisation. Akerlof and Shiller cite standard measures for grain, electronics, weights and measures, and food and drug testing, as clear wins for the regulated market. They talk about the Age of Reform, from 1890 to 1940, and the proof it provided that ‘government, used effectively, can be genuinely beneficial.’ This was replaced by what they call the New Story, beginning with Ronald Reagan’s statement in his first Inaugural: ‘In this present crisis, government is not the solution to our problem; government is the problem.’ The New Story is Akerlof and Shiller’s term for the whole anti-government, anti-regulation, neoliberal narrative in American politics and economics. It is, they argue, just another phish, whose characterisation of the economy and of US history is wrong. They don’t quite say that it’s time for a change, though that’s a message many readers will take from their surprisingly entertaining, readable and provocative book. Now go switch your insurer.