Nobel laureate economist Robert Shiller of Yale University warns that much like a carnival runway, the financial world will never be rid of “fraud and fools” since free markets creative incentives for businesses to "phish,” or sell bad products or peddle misinformation to customers.
“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,” he wrote in a blog for Project Syndicate.
And in a recent interview with The Wall Street Journal
to discuss the new book "Phishing for Phools" — which he co-wrote with George Akerlof, Federal Reserve Chair Janet Yellen's husband and himself a Nobel winner — Shiller admitted that he ate cat food to see if the different flavors marketed to cat owners really tasted any different and to prove the point of their book.
He said he couldn’t detect a difference.
“Most of us have suffered “phishing”: unwanted emails and phone calls designed to defraud us,” he wrote in the blog. “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,” he wrote.
“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,” he wrote.
“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,” he wrote.
“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.”
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