phishing for phools - world bank...• i can sell you a rotten one. • i will have mined my...
TRANSCRIPT
![Page 1: Phishing for Phools - World Bank...• I can sell you a rotten one. • I will have mined my reputation. • I will also have phished you for a phool. Rating Agencies • Ratings agencies:](https://reader034.vdocuments.mx/reader034/viewer/2022042416/5f31195551854d716a2f69b8/html5/thumbnails/1.jpg)
Phishing for Phools
George A. Akerlof
ABCDE Conference June 15, 2015
![Page 2: Phishing for Phools - World Bank...• I can sell you a rotten one. • I will have mined my reputation. • I will also have phished you for a phool. Rating Agencies • Ratings agencies:](https://reader034.vdocuments.mx/reader034/viewer/2022042416/5f31195551854d716a2f69b8/html5/thumbnails/2.jpg)
Prefatory Notes ▪ Robert Shiller. ▪ Why a popular book? ─Over-acceptance of view that markets are invariably beneficial. ─Holes in acceptable economics.
![Page 3: Phishing for Phools - World Bank...• I can sell you a rotten one. • I will have mined my reputation. • I will also have phished you for a phool. Rating Agencies • Ratings agencies:](https://reader034.vdocuments.mx/reader034/viewer/2022042416/5f31195551854d716a2f69b8/html5/thumbnails/3.jpg)
Danny’s Observation
• Psychology: Humans as fallible machines. • Economics:
Equilibrium. • Supermarket equilibrium: Lines equalized in length.
![Page 4: Phishing for Phools - World Bank...• I can sell you a rotten one. • I will have mined my reputation. • I will also have phished you for a phool. Rating Agencies • Ratings agencies:](https://reader034.vdocuments.mx/reader034/viewer/2022042416/5f31195551854d716a2f69b8/html5/thumbnails/4.jpg)
Proposition • Free markets provide only what we really want:
If human machines are making the right choices.
• Free markets provide wrong choices: If there is a profit to be made.
• If we have some weakness or other, in the
equilibrium, that weakness will be taken up as long as profit can be made.
![Page 5: Phishing for Phools - World Bank...• I can sell you a rotten one. • I will have mined my reputation. • I will also have phished you for a phool. Rating Agencies • Ratings agencies:](https://reader034.vdocuments.mx/reader034/viewer/2022042416/5f31195551854d716a2f69b8/html5/thumbnails/5.jpg)
Example 1: Cinnabon®
• Example 1: Cinnabon® Life Needs Frosting®. Pheromones.
![Page 6: Phishing for Phools - World Bank...• I can sell you a rotten one. • I will have mined my reputation. • I will also have phished you for a phool. Rating Agencies • Ratings agencies:](https://reader034.vdocuments.mx/reader034/viewer/2022042416/5f31195551854d716a2f69b8/html5/thumbnails/6.jpg)
![Page 7: Phishing for Phools - World Bank...• I can sell you a rotten one. • I will have mined my reputation. • I will also have phished you for a phool. Rating Agencies • Ratings agencies:](https://reader034.vdocuments.mx/reader034/viewer/2022042416/5f31195551854d716a2f69b8/html5/thumbnails/7.jpg)
Example Two: Health Clubs
Example 2: Health Clubs Wrong choice of contract.
Hard to cancel.
![Page 8: Phishing for Phools - World Bank...• I can sell you a rotten one. • I will have mined my reputation. • I will also have phished you for a phool. Rating Agencies • Ratings agencies:](https://reader034.vdocuments.mx/reader034/viewer/2022042416/5f31195551854d716a2f69b8/html5/thumbnails/8.jpg)
Example Three: Capuchin Monkeys
• Thought experiment: Opened the monkeys up to trading with humans. • Fruit Roll Up Tacos with
Marshmallow Fluff.
![Page 9: Phishing for Phools - World Bank...• I can sell you a rotten one. • I will have mined my reputation. • I will also have phished you for a phool. Rating Agencies • Ratings agencies:](https://reader034.vdocuments.mx/reader034/viewer/2022042416/5f31195551854d716a2f69b8/html5/thumbnails/9.jpg)
Two types of tastes
• What is good for them. • What they choose. • Monkeys on our shoulders.
![Page 10: Phishing for Phools - World Bank...• I can sell you a rotten one. • I will have mined my reputation. • I will also have phished you for a phool. Rating Agencies • Ratings agencies:](https://reader034.vdocuments.mx/reader034/viewer/2022042416/5f31195551854d716a2f69b8/html5/thumbnails/10.jpg)
General Equilibrium • Pareto optimality. • Freedom to choose and freedom
to phish. • Equilibrium is optimal: In terms of monkey-on-our- shoulder tastes.
![Page 11: Phishing for Phools - World Bank...• I can sell you a rotten one. • I will have mined my reputation. • I will also have phished you for a phool. Rating Agencies • Ratings agencies:](https://reader034.vdocuments.mx/reader034/viewer/2022042416/5f31195551854d716a2f69b8/html5/thumbnails/11.jpg)
Phish and Phool
• Phish: Influence us to do what they want, but that is not good for ourselves. • Phool: Someone who is phished.
![Page 12: Phishing for Phools - World Bank...• I can sell you a rotten one. • I will have mined my reputation. • I will also have phished you for a phool. Rating Agencies • Ratings agencies:](https://reader034.vdocuments.mx/reader034/viewer/2022042416/5f31195551854d716a2f69b8/html5/thumbnails/12.jpg)
Onus on Us
• Four areas of: NOBODY-COULD- POSSIBLY-WANTS.
![Page 13: Phishing for Phools - World Bank...• I can sell you a rotten one. • I will have mined my reputation. • I will also have phished you for a phool. Rating Agencies • Ratings agencies:](https://reader034.vdocuments.mx/reader034/viewer/2022042416/5f31195551854d716a2f69b8/html5/thumbnails/13.jpg)
The Four Areas
• PERSONAL FINANCIAL INSECURITY. • FINANCIAL AND MACROECONOMIC
INSTABILITY. • ILL HEALTH. • BAD GOVERNMENT.
![Page 14: Phishing for Phools - World Bank...• I can sell you a rotten one. • I will have mined my reputation. • I will also have phished you for a phool. Rating Agencies • Ratings agencies:](https://reader034.vdocuments.mx/reader034/viewer/2022042416/5f31195551854d716a2f69b8/html5/thumbnails/14.jpg)
World without Regulation
• History leading up to Meatpacking Inspection Act of 1906 and Pure Food and Drug Act of 1906.
![Page 15: Phishing for Phools - World Bank...• I can sell you a rotten one. • I will have mined my reputation. • I will also have phished you for a phool. Rating Agencies • Ratings agencies:](https://reader034.vdocuments.mx/reader034/viewer/2022042416/5f31195551854d716a2f69b8/html5/thumbnails/15.jpg)
![Page 16: Phishing for Phools - World Bank...• I can sell you a rotten one. • I will have mined my reputation. • I will also have phished you for a phool. Rating Agencies • Ratings agencies:](https://reader034.vdocuments.mx/reader034/viewer/2022042416/5f31195551854d716a2f69b8/html5/thumbnails/16.jpg)
![Page 17: Phishing for Phools - World Bank...• I can sell you a rotten one. • I will have mined my reputation. • I will also have phished you for a phool. Rating Agencies • Ratings agencies:](https://reader034.vdocuments.mx/reader034/viewer/2022042416/5f31195551854d716a2f69b8/html5/thumbnails/17.jpg)
Suze (“Susie”) Orman
![Page 18: Phishing for Phools - World Bank...• I can sell you a rotten one. • I will have mined my reputation. • I will also have phished you for a phool. Rating Agencies • Ratings agencies:](https://reader034.vdocuments.mx/reader034/viewer/2022042416/5f31195551854d716a2f69b8/html5/thumbnails/18.jpg)
Suze Orman • Enthusiastic Audiences. • The 9 Steps to Financial Freedom: Practical
and Spiritual Steps So You Can Stop Worrying.
• Financial advisees: do not follow rational budgeting.
• Test: expenditures do not add up. • Real life: nothing left over for savings.
![Page 19: Phishing for Phools - World Bank...• I can sell you a rotten one. • I will have mined my reputation. • I will also have phished you for a phool. Rating Agencies • Ratings agencies:](https://reader034.vdocuments.mx/reader034/viewer/2022042416/5f31195551854d716a2f69b8/html5/thumbnails/19.jpg)
Statistical Portrait
• Could not raise $2,000. • Low financial assets. • Purchases and payday. • Bankruptcies.
![Page 20: Phishing for Phools - World Bank...• I can sell you a rotten one. • I will have mined my reputation. • I will also have phished you for a phool. Rating Agencies • Ratings agencies:](https://reader034.vdocuments.mx/reader034/viewer/2022042416/5f31195551854d716a2f69b8/html5/thumbnails/20.jpg)
Theoretical Puzzle
• Why are there all those sleepless nights, with worries about unpaid bills?
• Keynes: “Lives of our Grandchildren.”
![Page 21: Phishing for Phools - World Bank...• I can sell you a rotten one. • I will have mined my reputation. • I will also have phished you for a phool. Rating Agencies • Ratings agencies:](https://reader034.vdocuments.mx/reader034/viewer/2022042416/5f31195551854d716a2f69b8/html5/thumbnails/21.jpg)
Answer to Puzzle • Businessmen’s Goals:
–For you to spend your money. • “How much is that doggie in the
window?” • Continual temptation:
–Shop windows. –Supermarket aisles. –Renting/buying a house. –Buying a car.
![Page 22: Phishing for Phools - World Bank...• I can sell you a rotten one. • I will have mined my reputation. • I will also have phished you for a phool. Rating Agencies • Ratings agencies:](https://reader034.vdocuments.mx/reader034/viewer/2022042416/5f31195551854d716a2f69b8/html5/thumbnails/22.jpg)
Endemic Temptation
• Goes beyond credit cards. • The nature of capitalist markets.
![Page 23: Phishing for Phools - World Bank...• I can sell you a rotten one. • I will have mined my reputation. • I will also have phished you for a phool. Rating Agencies • Ratings agencies:](https://reader034.vdocuments.mx/reader034/viewer/2022042416/5f31195551854d716a2f69b8/html5/thumbnails/23.jpg)
The Financial Crisis
• Phishing for phools as succinct explanation for what happened.
![Page 24: Phishing for Phools - World Bank...• I can sell you a rotten one. • I will have mined my reputation. • I will also have phished you for a phool. Rating Agencies • Ratings agencies:](https://reader034.vdocuments.mx/reader034/viewer/2022042416/5f31195551854d716a2f69b8/html5/thumbnails/24.jpg)
Reputation Mine
• Reputation for perfect avocados. • I can sell you a rotten one. • I will have mined my reputation. • I will also have phished you for a
phool.
![Page 25: Phishing for Phools - World Bank...• I can sell you a rotten one. • I will have mined my reputation. • I will also have phished you for a phool. Rating Agencies • Ratings agencies:](https://reader034.vdocuments.mx/reader034/viewer/2022042416/5f31195551854d716a2f69b8/html5/thumbnails/25.jpg)
![Page 26: Phishing for Phools - World Bank...• I can sell you a rotten one. • I will have mined my reputation. • I will also have phished you for a phool. Rating Agencies • Ratings agencies:](https://reader034.vdocuments.mx/reader034/viewer/2022042416/5f31195551854d716a2f69b8/html5/thumbnails/26.jpg)
Rating Agencies
• Ratings agencies: for a century built up reputation.
• Job: to rate prob. of default for bonds. • New task: rate prob. of default for
derivatives. • Possibility: for reputation mine.
![Page 27: Phishing for Phools - World Bank...• I can sell you a rotten one. • I will have mined my reputation. • I will also have phished you for a phool. Rating Agencies • Ratings agencies:](https://reader034.vdocuments.mx/reader034/viewer/2022042416/5f31195551854d716a2f69b8/html5/thumbnails/27.jpg)
By Analogy • Rotten avocados were rated
perfect. • Commanded high prices. • Central-Valley-ful of growers:
profitable business of producing rotten avocados.
![Page 28: Phishing for Phools - World Bank...• I can sell you a rotten one. • I will have mined my reputation. • I will also have phished you for a phool. Rating Agencies • Ratings agencies:](https://reader034.vdocuments.mx/reader034/viewer/2022042416/5f31195551854d716a2f69b8/html5/thumbnails/28.jpg)
Role of Leverage • Commercial banks, hedge funds,
investment banks borrowed short term and invested in the over-rated securities.
• When truth discovered that securities were rotten: –Owed much more than they owned.
![Page 29: Phishing for Phools - World Bank...• I can sell you a rotten one. • I will have mined my reputation. • I will also have phished you for a phool. Rating Agencies • Ratings agencies:](https://reader034.vdocuments.mx/reader034/viewer/2022042416/5f31195551854d716a2f69b8/html5/thumbnails/29.jpg)
The Four Questions
• How had original reputations been established?
• What made it profitable then to mine those reputations?
• Why were the buyers so naïve? • Why was the financial system so
vulnerable?
![Page 30: Phishing for Phools - World Bank...• I can sell you a rotten one. • I will have mined my reputation. • I will also have phished you for a phool. Rating Agencies • Ratings agencies:](https://reader034.vdocuments.mx/reader034/viewer/2022042416/5f31195551854d716a2f69b8/html5/thumbnails/30.jpg)
Later Chapters • Chapter 4. The Role of Advertising. • Chapter 5. Cars, Houses, Credit Cards. • Chapter 6. Lobbying. • Chapter 7. Food and drugs. • Chapter 8. Inventions. • Chapter 9. Tobacco and alcohol. • Chapter 10. Looting of S & L’s. • Chapter 11. Michael Milken and the Junk Bond Market. • Chapter 12. Protections against phishing for phools. • Chapter 13. Conclusion. • Epilogue. Where this fits into economics.
![Page 31: Phishing for Phools - World Bank...• I can sell you a rotten one. • I will have mined my reputation. • I will also have phished you for a phool. Rating Agencies • Ratings agencies:](https://reader034.vdocuments.mx/reader034/viewer/2022042416/5f31195551854d716a2f69b8/html5/thumbnails/31.jpg)
Conclusion
• Telling stories: Basic to how we think. • Mental frames; scripts; narratives. • Influence:
• Grafts onto current stories.
![Page 32: Phishing for Phools - World Bank...• I can sell you a rotten one. • I will have mined my reputation. • I will also have phished you for a phool. Rating Agencies • Ratings agencies:](https://reader034.vdocuments.mx/reader034/viewer/2022042416/5f31195551854d716a2f69b8/html5/thumbnails/32.jpg)
Role in Economics
• Suze Orman example. • Concluding chapter:
A wrong US national story regarding the unambiguous benefits of free markets has led to dysfunctional national policies.
![Page 33: Phishing for Phools - World Bank...• I can sell you a rotten one. • I will have mined my reputation. • I will also have phished you for a phool. Rating Agencies • Ratings agencies:](https://reader034.vdocuments.mx/reader034/viewer/2022042416/5f31195551854d716a2f69b8/html5/thumbnails/33.jpg)