Fraud, Fools, and Financial Markets

NEW HAVEN – 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.

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Coming Soon: New Book by Akerlof and Shiller

Ever since Adam Smith, the central teaching of economics has been that free markets provide
us with material well-being, as if by an invisible hand. In Phishing for Phools, Nobel Prize–winning economists George Akerlof and Robert Shiller deliver a fundamental challenge to this insight, arguing that markets harm as well as help us. As long as there is profit to be made, sellers will systematically exploit our psychological weaknesses and our ignorance through manipulation and deception. Rather than being essentially benign and always creating the greater good, markets are inherently filled with tricks and traps and will “phish” us as “phools.”

Phishing for Phools therefore strikes a radically new direction in economics, based on the intuitive idea that markets both give and take away. Akerlof and Shiller bring this idea to life through dozens of stories that show how phishing affects everyone, in almost every walk of life. We spend our money up to the limit, and then worry about how to pay the next month’s bills. The financial system soars, then crashes. We are attracted, more than we know, by advertising. Our political system is distorted by money. We pay too much for gym memberships, cars, houses, and credit cards. Drug companies ingeniously market pharmaceuticals that do us little good, and sometimes are downright dangerous.

Phishing for Phools explores the central role of manipulation and deception in fascinating detail in each of these areas and many more. It thereby explains a paradox: why, at a time when we are better off than ever before in history, all too many of us are leading lives of quiet desperation. At the same time, the book tells stories of individuals who have stood against economic trickery—and how it can be reduced through greater knowledge, reform, and regulation.

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Rising Anxiety That Stocks Are Overpriced

Over the five trading days between Aug. 17 and Aug. 24, the U.S. stock market dropped 10 percent — the official definition of a “correction,” with similar or greater drops in other countries.

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The Housing Market Still Isn’t Rational

Home prices have been climbing. They have risen 27 percent nationally since 2012, even more in places like San Francisco. But why worry? If you accept the efficient markets theory — and believe that real estate is an efficient market — then these prices are based on “new information,” even if you don’t know what that information is.

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The Mirage of the Financial Singularity

NEW HAVEN – In their new book The Incredible Shrinking Alpha, Larry E. Swedroe and Andrew L. Berkin describe an investment environment populated by increasingly sophisticated analysts who rely on big data, powerful computers, and scholarly research. With all this competition, “the hurdles to achieving alpha [returns above a risk-adjusted benchmark – and thus a measure of success in picking individual investments] are getting higher and higher.”

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What to Learn in College to Stay One Step Ahead of Computers

Computers and robots are already replacing many workers. What can young people learn now that won’t be superseded within their lifetimes by these devices and that will secure them good jobs and solid income over the next 20, 30 or 50 years? In the universities, we are struggling to answer that question.

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Inspiring Economic Growth

NEW HAVEN – In his First Inaugural Address, during the depths of the Great Depression, US President Franklin Delano Roosevelt famously told Americans that, “The only thing we have to fear is fear itself.” Invoking the Book of Exodus, he went on to say that, “We are stricken by no plague of locusts.” Nothing tangible was causing the depression; the problem, in March 1933, was in people’s minds.

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