Phishing for phools: The economics of manipulation and deceit is the new book from the economic dream team of George Akerlof and Robert Shiller. Their first joint work, Animal Spirits (2009) helped kickstart the behavioral economics revolution, and in 2013 Robert Shiller joined his co-author George Akerlof as a recipient of the Nobel Prize in Economics. Nudge (2008) by Richard Thaler and Cass Sunstein is probably the most famous mainstream behavioral economics book, and discusses ways that policy-makers can help irrational consumers make better decisions via helpful “nudges.” Phishing for phools shines a light on what should be an obvious corollary to nudge, which has nevertheless received very little attention:

Profit-maximizing businesses may find it in their interests to exploit, rather than to help, irrational consumers.

Akerlof and Shiller’s argument proceeds naturally from mainstream economic theory. If businesses proceed to maximize profits, then no opportunity to profitably manipulate or deceive will be left unturned. An old economics joke is often used to explain this part of mainstream economic theory. An economics student says, “Hey look, there’s a $20 bill on the sidewalk,” and without stopping to look an economics professor says, “That’s impossible! If there had been a $20 bill on the sidewalk, then someone would have picked it up.” Profit maximization implies that no profit opportunity, such as a $20 bill on the sidewalk, will be left unexploited. Mainstream economic theory also says that consumers are purely rational, and therefore that consumers cannot be deceived or manipulated. But a vast body of research in behavioral economics and related disciplines shows that this is not the case.

Where should we expect manipulation and deception to predominate? Both demand and supply factors point towards victimization of the poorest and most vulnerable in society. In Scarcity (2013), Sendhil Mullainathan and Eldar Shafir demonstrate how poverty taxes cognitive bandwidth and can lead to less rational decisions. They show these effects both between- and within-individuals, so poverty affects us all the same – the poor are not fundamentally different than the more fortunate. Poverty provides a perfect “demand” for deception in that the increased mental strain from poverty means that the poor do not have the necessary cognitive resources available to avoid deceptive products or services.

Theoretical work by Heidhues et al. shows that the “supply” of deception emerges naturally in competitive markets for inferior products, those are products that we buy less of as we get richer. In these markets competitive firms can all be better off deceiving consumers rather than telling the truth, since telling the truth means informing the consumer that she is better off not buying the product at all. This result follows from economic theory in the same way that $20 bills are not expected to last long on the sidewalk. Both demand and supply suggest that the poorest will be deceived the most.

Akerlof and Shiller spend part of the book defending against accusations from their economic colleagues that their work isn’t new, and is just a trivial extension of mainstream theory. This may be true, but misses the role that economics has in improving real world outcomes. In some ways this is the role of economics. Normal people are being manipulated and deceived, and if relatively few empirical demonstrations of this fact have made their way into economic journals, this says more about the privileges enjoyed by the few (a group that most economists fit into) than the realities faced by the many.

Gambling might be the purest arena for manipulation and deception. If the house could tell you exactly how and why you are bound to lose in the long-run, then few people would gamble. And if people were as rational as standard economic theory says, people who like gambling would only choose fair gambles (gambles with an “expected value” of at least zero). The large profits from gambling are testament to this lack of pure rationality amongst gamblers.

There’s a lot of gambling advertising in the UK, where I am from. In 2013 5.1% of all TV advertising was for gambling, and there’s a lot more during sporting events such as soccer matches. Bookies (bookmakers) concentrate in less-affluent areas; by law each bookie can only have four high-speed electronic machines, but planning regulations are lax for opening new bookies. Bookies also advertise specific bets in the shop windows and also during televised soccer matches (e.g. “David Beckham to score the first goal - £10 wins £80”).

My research into this advertising over the 2014 soccer World Cup found that these adverts exploit complexity and salience to potentially fool people into unattractive bets. The bets that were statistically fairest were actually advertised the least. Advertised bets were much less fair, but used a combination of complexity and salience to fool people into thinking these bets were attractive (such as advertising the combination of a star player scoring and a good team winning by a specific scoreline). The same patterns held across the entire industry, and although two bookies rarely advertised exactly the same bets, all of their advertisements used these two principles. While the “nudge” movement aims to reduce the cost of our biases and errors, this is a clear example of companies using “dark nudges” to enlarge our biases and make our errors more costly.

A short personal disclaimer is necessary. For years I was an online poker professional. My job was literally waiting for a “fish” (that is what we called the fools) to come along. There was no incentive for the professionals to play without a fish (enforced by a hierarchy amongst professionals). Since this makes me both a deceiver and a manipulator, I will explain my attempts to form a moral high-ground as follows. Yes, my job involved waiting around for recreational players to engage in negative expected value bets against me. But there were also strict rules that I followed to make sure those players could make fair choices of what game to play in (many professionals would frequently change their online poker “screen name” so opponents could no longer identify their habits of play). Gambling advertisements that clearly use psychological tricks to make an unfair gamble seem attractive are, in my opinion, not providing a fair deal to gamblers. Economic theory broadly says that “greed is good” (as encapsulated by Gordon Gekko). But a painter I hired for my house (bought with poker winnings) summed up a deeper economic reality when he said to me:

“Greed is good. But you should never be too greedy.”

That’s why I do the research that I do.

Philip Newall

Philip Newall is a second year PhD student at the University of Stirling’s Behavioural Science Centre, where his work focuses on improving financial decision making. Taking the broadest possible view of financial decision making, his work accepted for publication so far has investigated mutual fund choice and soccer gambling advertising. In both domains he finds that businesses may passively or actively adopt decision frames that impede rational decision making, suggesting that the “nudge” concept should be debated more broadly, with both benevolent and dark nudgers in the marketplace. Prior to his PhD Philip was a professional poker player and is the author of two strategy guides: The Intelligent Poker Player (2011) and Further Limit Hold ‘em: Exploring the Model Poker Game (2013).