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Why Free Markets Make Fools of Us, Cass Sunstein, The New York Review of Books, 22.10.2015

Akerlof and Shiller use the word “phish” to mean a form of angling, by which phishermen (such as banks, drug companies, real estate agents, and cigarette companies) get phools (such as investors, sick people, homeowners, and smokers) to do something that is in the phisherman’s interest, but not in the phools’. There are two kinds of phools: informational and psychological. Informational phools are victimized by factual claims that are intentionally designed to deceive them (“it’s an old house, sure, but it just needs a few easy repairs”). More interesting are psychological phools, led astray either by their emotions (“this investment could make me rich within three months!”) or by cognitive biases (“real estate prices have gone up for the last twenty years, so they’re bound to go up for the next twenty as well”).

Akerlof and Shiller are aware that skeptics will find their depiction of human beings as “phools” to be inaccurate and impossibly condescending. Their response is that people are making a lot of bad decisions, producing outcomes that no one could possibly want. In their view, phishing for phools “is the leading cause of the financial crises that lead to the deepest recessions.” A lot of people run serious health risks from overeating, tobacco, and alcohol, leading to hundreds of thousands of premature deaths annually in the United States alone. Akerlof and Shiller think that it is preposterous to believe that these deaths are a product of rational decisions. Many people face debilitating financial insecurity, largely as a result of their own mistaken decisions, spurred by phishermen. Bad government is itself a product of phishing and phoolishness, for “we are prone to vote for the person who makes us the most comfortable,” even when that person’s decisions are effectively bought by special interests.

In a reversal of Adam Smith, Akerlof and Shiller contend that the invisible hand of the market guarantees phishing. Consider Cinnabon, whose brilliant motto is “Life Needs Frosting,” and which attracts customers with a seductive smell (and which has not made caloric information on its products at all easy to find). Or consider health clubs, a $22 billion industry with over 50 million customers, many of whom choose expensive monthly contracts, even though they would save a lot of money if they paid by the visit. In effect, they are paying not to go to the gym.

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