Robert J. Shiller: “Phishing for Phools” | Talks at Google
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Robert J. Shiller: “Phishing for Phools” | Talks at Google


MALE SPEAKER: Good afternoon. Welcome to Talks at Google
in Cambridge, Massachusetts. Today it’s my great pleasure
to introduce Robert Shiller. Dr. Shiller is Sterling
Professor of Economics at Yale and winner of the 2013
Nobel Prize in economics. He’s the author of the New York
Times best seller “Irrational Exuberance,” and with George
Akerlof, also a Nobel winner, he’s coauthored a previous
book in addition to today’s. Dr. Shiller joins
us today to discuss the provocatively titled
“Phishing for Fools: The Economics of
Manipulation and Deception.” As he says in the
book, “Competitive markets by their very nature
spawn deception and trickery as a result of the same
profit motives that give us our prosperity.” I’ll let him take it from there. Please join me in
welcoming Bob Shiller. [APPLAUSE] ROBERT SHILLER: Thank you. Jonathan told me
that you recently had Dick Thaler in the same series. That’s interesting to me. Dick is an old
colleague of mine. We’ve been running a
behavioral economics workshop at the NBER, which is right
near here, for 25 years. And he wrote a book called
“Nudge” with Cass Sunstein about government policy. And the book I’m
going to talk about could be considered
the anti “Nudge.” It’s kind of the opposite. The presumption was that nudges
are used for good purposes, and maybe they are. Do you know what a nudge is? This is a new– I’m drifting
from my prepared talk. We’re all critical
of economists. There aren’t any economist
here, probably, right? So economists have
adopted a canonical model of an economy consisting of self
interested, utility maximizing individuals who take
prices as a given and maximize their
utility individually. And that leaves to
some kind of optimality ultimately in the
equilibrium that follows. So both Thaler and I are
critical of that model that underlies economics. And our criticism
has something to do with the field of psychology,
of neuroscience, sociology, which have a different approach
to studying human nature. I feel a little uncomfortable
talking at Google. I don’t think I prepared
adequately for you. That’s because a lot of what
we talk about is marketing, and we have an
uncomfortable relationship to marketing as you’ll see. Not necessarily negative,
but just uncomfortable. And I don’t know what
Google, isn’t Google, there’s different
ways of looking at it. By the way, you’re Google
not Alphabet, right? AUDIENCE: There’s
some Alphabet here. ROBERT SHILLER:
I’m all confused. I’m talking to an
organization in transition. I don’t know how to. But I was thinking, I think of
you as a search engine company, but that’s very narrow. But I think maybe it’s better
to think of you as a marketing company. Is that a good? You’re a big data company,
and we have mixed feelings about all of these things. [LAUGHTER] So I thought I should start
by saying that I’ve already thought of Google as an
ethical company in this space. So just did a test this morning. I went on to
news.google.com, and I just looked at what came up. And there was, the way
my computer does it, I saw a big news story
about Hurricane Patrick, which is the biggest
hurricane ever that’s about to hit Mexico. That was the Google story. And then to compare that
I went, can I say it here? Bing. [LAUGHTER] Now their screen, the
lead story in their screen was lone gunman kills one person
at Tennessee State University after a dice game. OK. Now that’s sort of all
right as news, but I think, that’s what we’re going to
call phishing in my mind. We use the word
phishing in our title, you see it there, as a
metaphor for a broader range of deception. So think about Bing putting
that story on as the lead story. Is that really high
minded news reporting? Well, to me it seems
not, especially since there’s now
a new website, I forget the name, that
lists every mass shooting. And it turns out if they
define a mass shooting as, this didn’t qualify but,
four people killed at least. And there’s one every
day in the United States. So it’s like why,
is this really news? And then at the bottom
left of the Bing screen, there was a news
story, and the title was “Drunken man breaks in by
mistake to a neighbor’s house and crawls into bed
with two young girls.” Now that is definitely
not a news story for me in the sense that
it’s wasting my time. So I’ve had this good
feeling about Google, largely from that, well, in many things. So what this book is about
is about what’s really, it’s a certain kind of general
problem with free market, unregulated economies. And by the way, the
co-author, George Akerlof is as you mentioned is my
coauthor on another book, he to me is a very
independent thinking person. I wanted to write a book with
him not quite knowing where it would go, because I
like working with people who think differently. And both he and I
have always felt somewhat critical about what
goes on in our profession. The point is to bring that out. Now, the problem–
or also, what is a fool, that’s our coined word. That’s someone who may
be very intelligent, but doesn’t appreciate how much
manipulation and deception is being foisted on him. So the idea of our
book is that we would talk about many
different kinds of manipulation and deception. Talk about it from
a behavioral, from a psychological standpoint. And another thing about our book
is that we’re different from, there’s a long history of books
on this topic as you may know. We wanted to take it from a
more economic perspective. With both George Akerlof and
I, when we were teenagers, we didn’t know each other then,
we read Vance Packard’s book “The Hidden Persuaders.” Do you know this book? It was a bestseller
in the 1950s. It detailed how advertisers
use psychology to trick you. And you are already aware that
they do that sometimes, but you read Vance Packard’s book,
and it comes across looking much more frequent. The problem with
Vance Packard’s book, though, is that it doesn’t
have any economics in it, and it seems to
portray the marketers as an evil conspiracy. And we didn’t feel that that
was the right way to look at it. So our book is about what we
call a “phishing equilibrium.” It’s not that people
are evil, it’s that we have a market
system that allows, that almost forces
people to play the tricks that we don’t like, and it’s
called competitive pressures. So the theory of
competitive equilibrium is sometimes connected to
Darwin’s theory of evolution, constant pressure on
businesses to make profits, and that means
then that they will be very efficient, because
they will be struggling hard to succeed. But the problem
is that they might have to be dishonest
within subtle, it has to be within
the law, of course. But this more subtle
form of dishonesty underlies problems that
we see in free markets. We’re going to come
around at the end to a plea for civil
society, or an argument that civil society
is what really matters in a successful
free market economy. By the way, I should
add since I’m here, I believe in free
markets, and in fact, I have something of an
entrepreneurial history. I started with Case
and Weiss, a company called Case, Shiller,
Weiss in 1991 that produced home price
indices and valuations. We were ahead of Zillow. We had an online in the mid
1990s home valuation service. And the outcome wasn’t
as successful as Zillow, but we sold our company in 2002. And now Core Logic is
continuing our index production. And we’ve established a futures
market for single family homes based on our indexes,
and that’s still going, not hugely successful,
but Standard and Poor’s publishes our indexes. So that was our
successful venture. Then we had an unsuccessful one
that I won’t tell you about. But it may not be
unsuccessful, because I think that what we
tried, which was to create markets
for real estate and oil and other maybe GDP
is still being talked about. I think the story
is not over yet. So I’m really pro free markets
and pro entrepreneurship. This is just a, what
I’m talking about, what we’re talking about in this
book is just a dent into that. And it’s don’t go too
far with the belief in that just self interest will
promote good economic outcomes. So I think that one thing that
economists don’t recognize is how the world is
driven by social movements and thought leaders. And they tend to,
one of the problems is that, there’s many
problems that are, but in terms of our
thinking as academics, there’s a tendency to be
affected by prevailing theory. Something that Daniel Kahneman
calls theory induced blindness. A theory becomes established
as part of a movement, and then it gets tremendous
prestige for a while, and then it becomes overrated. And I think what
George and I want to argue against in our
book is the overratedness of the free market
capitalism idea. So let me step back
and think about, I don’t know if any of you had
graduate training in economics. Probably some of you have
had undergraduate training. There is one of
the core elements that you will be taught
in a economic theory course will be something
called the fundamental theorem of welfare economics. Do you know this? At least one of you doesn’t. Whether you’ve heard of the
exact theorem is irrelevant. I think you’ve heard of the
general sense of conclusion from it. The fundamental theorem
of welfare economics, which you can find in
micro theory textbooks, is a mathematical
theorem that describes a competitive equilibrium. You assume that each individual
is completely selfish, only interested in
himself or herself, and this person
maximizes utilities subject to a budget constraint. They’re also producers that
produce the commodities, and they maximize their profits
subject to a budget constraint. But there is no social
feeling whatsoever. Everyone does it for
personal reward only. The outcome, the theorem says,
is in a competitive equilibrium if there are no externalities,
that the allocation of goods and services will
be Pareto optimal. You ever heard of this term? Some of you have. Vilfredo Pareto was
an economic theorist who flourished around 1900. And he actually anticipated
the fundamental theorem of welfare economics, but
didn’t prove it adequately. The Pareto optimality
means there is no way to make everyone better off. You can redistribute income, you
can take from one to another, and that will make one better
off and the other worse off, but there is no
way in equilibrium to make everyone better off. Moreover, this became accepted
by economics departments who then thought, well,
redistribution is not our department. Should we take from the rich and
give to the poor, for example. That’s philosophy
department stuff. Economists redefine
themselves in the 20th century as technicians. Right, they say, should
we take from the rich and give to the poor. That’s not science,
that’s philosophy. That’s ethics or morals. We are called in to talk about
is the economy functioning well, and that functioning
means Pareto efficiency. So I think that the economics
departments of the world became less philosophical, less
moral in their orientation, less interested in
how people behave. They had this
mathematical framework, which had nothing about
people except that there are relentlessly selfish. They then dragged out of
Adam Smith, who in 1776 wrote the classic of all time
in economics, the book, “The Wealth of Nations.” And there is a
quote they pull out one place in this book
where Adam Smith seems to think that completely selfish
behavior within the limits of a market economy that upholds
property rights is optimal. He said something
like, I’m trying to remember the
exact quote, but he said, “It’s not to the
beneficence of the providers of food that I get my dinner. The Baker, the brewer,
and the butcher provide my dinner, because of
my paying them for what they do, not out of any concern for me.” And then Adam Smith went
on to say, you know, I get more from
those selfish people than I get from all the social
reformers of the world who don’t seem to make
any difference. That’s all talk. That was a very loose
quote of Adam Smith. But you know what? These are extreme views. And even Adam Smith
didn’t believe that, because if you look in
other parts of his work, he wrote another book in 1759
called “The Theory of Moral Sentiments.” And in that book, he said
that people are not selfish. They have some aspects
of selfishness, but they’re inherently
social creatures. Very interesting book,
his 1759 book, by the way. Vilfredo Pareto who
named Pareto optimality, himself didn’t believe it. In fact, he dropped
out of economics, and he spent the last
30 years of his life as a sociologist trying
to understand society. I think that there is something
wrong with this theory. In 1918– you see I have a
long time frame of history. I read these old ideas, and I
find it’s useful to do that. Go back 100 or 200
years, they have ideas that we’ve forgotten. Professor Irving Fisher
at Yale University said that this whole
thing about utility that economists talk
about, it’s not right. People don’t maximize
their utility. The word utility goes back to
the philosopher Jeremy Bentham who said all philosophy
should be oriented toward, all morality should be
oriented toward utility. But utility, he said, meant
something like the human well being, human fulfilment. Irving Fisher said, that’s
not what people maximize. They maximize, he said we
need another word for it. And he couldn’t figure out
a really good word for, it’s not in a language,
so he coined one. And he said it’s wantability. What you maximize
is not your utility, it’s what you want at the moment
that you make the purchase. That term, by the way
I love Google Trends, Google Ngrams has changed
my life, because I always look up any idea. So I looked up wantability
on Google Ngrams, and I find his word did
not exist before 1918. It exploded into usage
for the next 20 years, and then has exponentially
decayed since then. Now if you teach micro
theory in a university, it’s kind of a
difficult assignment, because it’s supposed to be some
classical theory that everyone should know. And it’s a little bit
depressing to have to teach this old stuff. So nobody’s really interested,
oh, I’m exaggerating. But you’ll teach the fundamental
theorem of welfare economics with reverence and never come
back to distortions in it. Now here what
we’re talking about is a phishing equilibrium. I think the simplest example,
because you’ve likely already heard of it, but
it’s a very minor example, but I’ll start with this, is
the candy bars at the checkout counter. Have you ever noticed
at a grocery store when you go to the
checkout, you’re standing in line
waiting to, now it might be a
computerized checkout, but it would be still
standing in line for a while, they have candy
bars right there. So why is this? Well, about 30 years ago some
social reformers and thought leaders decided to
make a case about this. You know why they
put them there. It’s because you don’t go to
the grocery store intending to buy candy bars, and
in fact, you probably have an idea that I’m
not going to buy that. But now they put them right in
front of you at the worst time, right at the end of
your shopping trip when you’re standing
there in line. Moreover, many people go to
the store with young children. Now you’ve been shopping for 45
minutes, they’re getting tired, and now you’re putting
them in the experience of standing in line. It’s a most unpleasant ending. So they know that
you’re vulnerable, and they put it there. Several decades ago
a number of stores announced that they
would not do that, because there seemed to be a
public reaction against it. However, if you
look now at stores, it’s all happening, it’s all
back, the candy bars are back. And my colleague
George points out that the children’s candy
is put at children’s eye level in the store. So this is just
illustrating what I mean by a phishing equilibrium. Imagine that you took a job
as a manager of a supermarket. Do you think you would do this? I’ve pointed out that
you are in a sense exploiting your customers by
putting candy bars right there. It’s almost evil, but it’s not. The outrage has passed,
it had its moment, and now it’s now it’s faded. And so, would you do it? Well, the grocery
store business happens to be a highly competitive. It’s not a mostly
innovative business. There’s a lot of competitors. There’s no organizational
slack, which gives you freedom. If you became a manager
of a grocery store, you would probably become
very quickly conscious that other grocery stores go
out of business all the time. Your profit margin
is something like 2%. You can’t monkey around
too much without risking the whole enterprise. So you probably would
do it, too, right? The other thing is
that managers learn that the best way to
manage if in doubt, imitate what other people are doing. You assume that
they’ve experimented. It’s costly for
me to experiment. Apparently, everyone puts
candy bars at the checkout, so I will do that too. Now I’ve picked a very
minor example about this. What we did in our book is
also somewhat similar to what Vance Packard and
others have done is just give a lot of examples. Our examples come from all
different times in history. Some of them– let me just
give you a couple of examples. One of them is, there’s a
book by Natasha Schull called “Addiction by Design,” and
it’s about slot machines. It’s really about
machine gambling. She points out that gambling
has changed in recent decades, and it’s become more
machine oriented. That is slot machines are rising
as a share of total profits for gambling enterprises. And why is that? Well, she presents
an analysis saying that people are more
vulnerable toward addiction when they are under the
control of a machine. So gambling is less and less. I’m going to have some friends
over, and we’ll play cards, we’ll play a little poker, which
would be a social environment. When they first discovered
slot machines in the 1890s, slot machines were found to be
addictive to a small percent of the population. They seemed to
just keep doing it. Have you ever noticed
these people in a casino? I think it has something
to do with a brain bug. Another book, I like
books, so I’m mentioning, there is a book by
neuroscientists Dean Buonomano called “Brain Bugs.” His premise is that the
brain is a computer, and it has a built
in program as well as adjustments that you add as a
part of your education later. But the built in
program has bugs in it. It’s a product of Darwinian
evolution, but only incomplete. Evolution is much slower
than computer programs are and writing code, and
so there are lots of bugs. The book details all the bugs. And I think it’s
interesting reading. It’s a funny perspective
to take on yourself. Well, apparently this
slot machine addiction has something to do
with a bug in the reward system in the brain that
for some people encourages repetitive behavior. I used to code in Fortran,
so I kind of think of it as being stuck in a do loop. [LAUGHTER] So according to Natasha Schull,
researchers on slot machines have tried to figure out what
makes for a successful slot machine. And they found out that I
guess the optimal interval between gambles is
3 and 1/2 seconds. So they try to make it,
that’s because it’s somehow the reward
neuroscientists have found tends to come at the
moment of anticipation. The work of Wolfram Schultz, so
the dopamine system sends out signals the moment
you think I’ve just placed a bet I’m hopeful. And then that dies out after
a certain interval of time. So if you want it to
be optimally addicting, you have to make it
easy for the person to keep playing bets
at that interval. So they’ve eliminated the
crank that used to pull down. That seemed to interfere
with the optimal frequency. And another thing
they’ve learned is that people are
trying to stop. They’re sitting there thinking,
you know I’ve lost $25 already, maybe I should stop. But they can’t quite
bring themselves to stop. Well, they’ve discovered
through research that people who are
gambling machine addicts tend to stop if there’s anything
interrupting the flow of just pushing, pushing, pushing. It used to be that coins
would come out when you won, and they’d make a loud noise
and a big spectacle and great. But the problem is that
it disrupted the flow, and many people would pack
up and leave at that point. You don’t want them to
pack up and leave right when they’ve won something. So they now substitute a
synthesised digital sound of coins falling, so it
won’t break the rhythm of your keeping on betting. They’ve also
discovered that people are a little bit ashamed to be
sitting at the slot machine, so they try to find a nook where
they are away from other people observing them too much. But they have a social component
to the gambling still has that. They like to see the
excitement of the Casino. So you optimize
the structure, so that they have the slight
sense that they’re hiding in privacy with this machine. Anyway, you get the idea. I don’t how you people, you’re
not doing anything like this here, right? I hope not. But even so, if you can
imagine taking a job designing slot machines, you
might be affected to do the same sort of thing. Let me give you another example. Coca-Cola is the most
famous beverage ever. Why? Now I’ve always wondered this,
because I never particularly liked it. I don’t dislike it either. I mean, it’s just,
Yeah, it’s fine. But how did it get to be so big? Well, it’s a testimony
to marketing. And the people at
Coca-Cola had a belief that– I’m relying this on
a book “Salt, Sugar, Fat” by Michael Moss. It was a best seller a year ago. According to his
history of this, the Coca-Cola
people were acutely aware of the
importance of attaching memories of good moments
to their beverage. And they would try
to use advertising to make a connection,
so that later on you would just think Coca-Cola,
it’s great, it’s good. Somehow, I feel good. Now I think that what
those people did was they did something that
was an anticipation of modern neuroscience. And that is that
neuroscience now says that the human
mind as a computer has a filing system for
memories that attach emotions to each memory. So I think it’s a good idea to
put an emotion on every memory. It’s not a human idea,
that’s an evolutionary idea. It’s like having a file cabinet
with different colored folders, and important stuff you
put in a red folder, so it attaches an emotion. Another is starting to see
that the brain is really structured that way. So for example, you
have the amygdala, which is somewhere in here, that
attaches emotions to memory. The right amygdala specializes
in fear, for example. Did any of you see the
new movie “Inside Out.” It’s a children’s
movie, Disney Pixar. I went with my wife to
see it, because it’s supposed to be a
children’s movie, but I thought it was
far more interesting than most adult movies,
most that I’ve seen lately. It features an 11 year old girl. It gives you a peek
inside her brain. Now it’s a little
bit simplified. It says there are
five emotions, just like there are five senses. You know sight, hearing,
touch, smell, and taste. There are five emotions. They’re fear, anger, joy,
disgust, and, I forget. AUDIENCE: Anger. ROBERT SHILLER: Anger, yes. And so the idea is that
these are already built in. It’s the same in every culture. And it shows, the whole
drama of this movie is that the attachment
of emotions to memories and the concern that the
people inside your brain have about the dangers
of attaching emotions to core memories, because it
can change your personality afterward. It’s dangerous to have
negative emotions attached to important memories. So I think Coca Cola people
appreciated this right from the beginning. And it was that sort of thing. Well, I’m giving
you some examples. We have many other examples. We attribute the financial
crisis recently to at least partly to phishing. People had the advantage of
selling certain securities. That a lot of emotional tension
in life that people have is running out of
money and fearing for their possible
bankruptcy, and I think that marketing
helps them do that. Anyway I’m supposed to wrap up. What I wanted to do
is get to what is our, I don’t know if I
presented this well, but I wanted to get
to the idea that we have about why we are
as successful as we seem to be in this country. What is our core
reason for success. A view has enveloped that it
is because of our free market institutions that
encourage entrepreneurs. That’s certainly partly right,
but is that the only thing. Or should we, it seems like
we might be oversimplifying to give quite so much. So why is America
a great country? I have a couple of suggested
readings on this, which you can find on Google Books. And I’m so thankful to Google,
which gives me so much help. In 1780, I think the year
was, Benjamin Franklin wrote a short article to be
published in Europe. And the title of the
article was “Information for People Contemplating
Repairing to America.” It was a description of
America in 1780 for Europeans. And in that description
he said, “Be warned. Your erudition will do
you nothing in America. The Americans are
very practical people, and they want to see results. If you are a skilled
workman of some sort, fine, come to America
and you’ll do well. But if you’re on an aristocrat
or an artist or a philosopher, don’t come.” That’s something about America. It reflects the kind
of people who came here and the attitude that developed. The other one you my read
is Alexis de Tocqueville who has a lot to say
about American character. The point is that this country
is a success partly because of free markets, but also
because of civil society. And it’s actions
that people have taken to prevent the phishing
equilibrium from dominating. So it’s not just individual acts
of ethics or acts of concern. We can exhibit, for example, the
founder of Ogilvy and Mather, the ad agency,
Ogilvy in the 1940s announced that his company would
not take on any more cigarette advertisements. I think that if you read
the medical literature in the 20th century,
it started to become like I have a hunch cigarette
smoking is bad for you by 1915. By 1940 it still wasn’t
proven, but someone who read the literature would
probably say, this is it, I’m not smoking. It looked pretty bad. So that’s when Ogilvy pulled
out of a cigarette advertising. But it didn’t have no
effect on the outcome, because somebody else
just goes right back in. There’s a profit to be made. And there was a profit
to be made from phishing. The cigarette companies tried
a strategy of sowing confusion about tobacco. They found that the president
of the University of Michigan, Little, was a
skeptic and a smoker. He loved his smoking. And they got him to
say that no one has proved at a statistically
significant level that smoking is harmful. Maybe he was right,
or maybe they didn’t understand causality
well enough to prove it. But basically, it was a feint
to try to get people confused, and it was for profit. So what we really
need is somebody who will stand above
the profit incentive and will do something to try
to limit profit opportunities for things that we can’t stand. And I’ve been
concluding my talks by just giving a few examples
of heroes who sort of started social movements. And there are a
great many heroes. What I’ve been doing as a game,
I’ve done a book tour for this. I’ll try it here, too. The game is I’ll give you
some names of famous people who upheld morality in
business and ask you if there’s anyone
here who can tell me who they are by their name. Now, if you read our
book, you’ll know, but that’s cheating. So let me start with
Florence Kelley. Anyone heard of her? As anticipated, no one has. Florence Kelley in 1899 set up
the National Consumers League, which tested products for
safety and put a white label, this was a nonprofit,
a white label on products that were safe. William Henry Merrill, now
this is not the Merrill Lynch Merrill. Again no one. In 1893 he was an
electrician who was asked to inspect the
electricity at the Chicago World’s Fair palace
of electricity. It was really an
exciting display of what things were going
to come through electricity, but it was unsafe. Their wiring wasn’t
right, so he decided to set up a nonprofit called
United Laboratories or UL, and they would put their
mark on safe products. This worked, because it
made it impossible to phish. The word got out, don’t
buy if it doesn’t say UL, and that stopped certain
kinds of phishing. By the way, UL made
a corporate change just as Google has in this month
in 2012, it went for profit. I believe it’s still
doing the same business, and it’s the same socially
conscious business. Another hero, Alice Lakey
and Harvey Washington Wiley. OK, 0. I’ve done this before. I hope I’m not offending you. What these people did is made
a public campaign about drugs. They argued that
as of 1900, most drugs that you could buy in
a drug store were fraudulent. There was something
like Swaim’s Panacea. What is that? First of all, it claimed
to cure any illness. There’s something
wrong about that. And then secondly, they
tested what was in it. And it was just ordinary
household flavoring. It was a complete fraud. And they said, but
what’s to stop a business from doing that? When they advertised
in magazines, they’re telling the
magazine, don’t criticize us or we’ll pull our ad. So there’s no incentive
for the advertising. Well, maybe there
was some incentive. But to do a testing lab
and to do– so anyway, they got the government to
create the Food and Drug Administration in 1906. Another hero, Stuart Chase
and Frederick Schlink. OK, Stuart, they wrote
a book in the 1920s called “Your Money’s Worth.” And they said the FDA is not
enough, because they’re still monkeying with you. They said, take the
example of toothpaste. I’m quoting from their book. “We go to a drug
store, and there’s 10 different brands
of toothpaste, and they all make health claims. Maybe they’re all safe,
the FDA has tested them, but what about
those health claims? How does anyone know?” So they said, “We need
a regular publication that tests products.” That was done in 1936. That’s Consumer Reports. Finally, one more
here, Ben Bernanke. [LAUGHTER] Well, I guess I
don’t have to tell. But I think that he’s a hero. It’s not a for profit
operation that he led, it was the Federal Reserve. And he probably prevented
another Great Depression, which was based on
a loss of confidence and a tumult within
the financial sector. Controversial
things that he did. So anyway, that’s my view, our
view expressed in this book. I say that our book is,
I’m already controversial. I may have offended some of you. It’s considered unpatriotic to,
it seems considered unpatriotic here in America
especially to say anything in favor of any
kinds of regulation. But I wanted to
add that I’m not, there’s a tendency to
think about free markets versus government. I’m not thinking so
much about government. Those heroes I gave you were
outside of the government except for Ben Bernanke. The idea of civil
society is a society with people who have
a sense of community, a sense of responsibility
for what goes on. They tend to view the government
as just people we hire to do what we want as a community. They don’t allow
themselves to be captured by propaganda,
because of their sense of responsibility. And they tend to
be educated people, and they take the
effort to get knowledge. So that’s what this
book is a plea for. Now how this fits into
Google with its big data and its Cloud. There’s so many
things you do here, I find it hard to summarize
what I would think. But it seems to me
that there is already a moral spirit at Google as I
was saying at the beginning. And I think you have
more organizational slack than a grocery store does. That means you can
philosophize about the long run future of this organization. And you can take steps that
are maybe costly in terms of profits today, but in the
long run are the right things to do, and may not even be
in the long run crossly. I’ll stop with that and
open this up to questions. [APPLAUSE] Thank you. AUDIENCE: How can behavioral
economic theory influence like what’s taught
in universities? Will it take over? Will rational actor
eventually not be taught? ROBERT SHILLER: Well,
I think it will always be taught, because it’s
actually a useful thing to the rational actor,
and the idea of Pareto optimality is worth
talking about. But the problem with
the economics profession now is that it like other
academic disciplines, they get separated and isolated. And it develops a sort
of departmental inertia. Here’s what happens. You become the
economics department. Now in your research. Now you’re a community. There’s a social
tendency, tribal tendency. You start to view the psychology
department as arrival, arrival for university funding. And moreover, you start
developing a brand. So you attract PhD
students, let’s say, who wanted to become
mathematical economist. So what do you do? You can’t say, well, we’ve
changed our mind this year, we’re going to teach
you psychology. That’s not what they want. They want to get jobs. It becomes all routinized. They want to get
jobs, so you have to teach them what
will get them a job in a conventional
economics department. And also there’s
this pressure to be at the frontier that means
that you don’t have time to read other things. So you’re struggling
so hard to get at the pinnacle of some
mathematical discourse. You just run out of time. By the way, there’s
another interesting book, which just came out by
Gillian Tett called “The Silo Effect,” which argues this more
generally for corporations. Maybe this is an argument
against Alphabet, by the way. They said, Larry
Page said it would be neater and more incentivizing
or accountable or something if we divide Google
into a separate unit with separate CEOs. But what Gillian Tett
says is that can produce a bad outcome of too
much specialization, and then also a kind
of culture developing in each one of
these units that’s kind of antagonistic to
other cultures in a sense that if you defy the
norms of your tribe, you will be unpatriotic
in some sense. So I haven’t finished
reading her book, bu it sounds like it’s a
really important topic. And it accounts for the kind
of errors that are commonly made in modern society. AUDIENCE: So because of some
of this momentum in economics like forgetting
graduate students that want to do
mathematical economics, is there any math associated
with some of these more behavioral approaches? ROBERT SHILLER: Oh, Yeah. AUDIENCE: Can it? ROBERT SHILLER: Yeah,
behavioral economics has some mathematics in it. Right, I mean you can ask
what is it that people do, and there can be, there’s
mathematical psychology. But the problem
is it doesn’t have the elegance of general
equilibrium economic theory. And people who
want to understand how did this whole
set of prices get set. Where did they come from? Free markets generate them,
but where and how and why? That incline, there’s a sort
of wishful thinking bias that develops if you are a theorist. You kind of hope this
expected utility maximization theory is right, because it
makes for a nice modeling. If you look at what
psychologists say, it’s just too messy. And you can’t say whether
we’ve– parade or optimality is a nice concept, because it
gives you a clear conclusion. But if people are
psychological animals, how do we know that we’ve
made them better off? I’ll give you an example
that Daniel Kahneman, who wrote a nice book,
“Thinking Fast and Slow.” He’s a psychologist
interested in economics. But one thing he did is he
questioned whether we even know our own happiness. You assume that people
are making purchases to make themselves happy. Do people know what
makes them happy? So he did the
following experiment. He asked subjects
to thrust their hand into a bowl of ice
water for 60 seconds. By the way, try that. You won’t like it. It gets really annoying. That was condition
A. Then condition B, he asked them to do that
again, but actually it’s for 90 seconds. But he’s got a little
temperature raiser in the bowl that raises the
temperature for the last 30 seconds to something
more comfortable. And then later asks which
did you like better A or B? Most people like B better. That’s because,
apparently their memory is affected by the improvement. It’s been 70 seconds, now I’m
starting to feel OK again. But they were actually
in ice water longer. So by some objective criteria,
they should have picked A, but they didn’t. So the question is
whether people even know whether they’re happy or not. It’s a different view. It makes it harder to do
economics, because yeah, the human brain is this
complicated interconnected calculating machine. What’s good? I don’t know what’s good for it. And if people don’t know,
it just kind of leaves you inconclusive. So economists won’t like that. AUDIENCE: It’s interesting
that your heroes were not government people. And of course, the
defenders of pure– ROBERT SHILLER: Ben Bernanke
was, but most weren’t. AUDIENCE: Your
free market theory would argue that the
most extreme would say, oh well, we don’t
need government regulation, because the markets will
pop up people like this where there’s demand for them. I’m curious about your
general views about that. And even professional
licensing, of course, Milton Friedman famously
argued that not even doctors and lawyers should be licensed. But I’m interested in
the latest phenomenon of this seems to be reviews. So Amazon has
reviews of products, Uber, Airbnb both have
reviews of both sides of the transaction. Google is trying to
get more reviews. I’m curious about your thoughts
about the review phenomenon. Obviously, it has
lots of problems, not just organized campaigns
to do biased reviews, but sort of the herd
instinct with reviews and lots of other things. Are reviews really the latest
of this heroic phenomenon or is it all just self
deception or what’s going on with the whole review thing? ROBERT SHILLER: Well, you raise
a lot of interesting points. Let me start with
Milton Friedman. In 1962 he wrote a book called
“Capitalism and Freedom” that was actually an outgrowth of
an earlier work he’d done with, who was at, Kuznets on
occupational licensing. And in that book, he argued
that occupational licensing is merely an effort
by the practitioners to exclude competition. So here’s what happens. The AMA goes to appear before
a medical licensing board and argues persuasively
that something has to be, a practice has to be prohibited
unless it’s licensed. But that in fact is
merely keeping others out of practicing. The outcome is that our
medical services are excellent, but there aren’t enough of
them, and they’re too expensive. He said that somehow the
community doesn’t understand that, and so it’s a doop. He’s really talking
about it kind of manipulation and deception. But the problem
is, what would we do about not having any
licensure for doctors? The problem is we
know that there is a lot of quack
medicine that could be sold to ignorant people. So maybe what he proposed
has never been adopted by any country, I think. Any advanced country has
licensing for doctors. But another thing is I actually
like Milton Friedman and admire his works. What he actually
did with that book was quite significant,
because within a few years of the publication of that book,
the first nurse practitioner program was started, or
a physician’s assistant. What that did is
it really increased the supply of medical services. The AMA back down and allowed
that a physicians assistant could practice in the
office of a licensed MD. The outcome of that
was the reduction in the cost of medical
services and improved health. So I think that the
idea that regulators can be captured
by the regulator, that the regulations don’t
always serve the public is correct. But that shouldn’t
be taken as a blanket argument against regulation. The other thing you’ve asked is
about reviews on websites now that allow people to
see others comments. I think that is a
wonderful development. It used to be that–
our ability to shop has become so much better. We get the right thing. By the way, our GDP
numbers don’t reflect that. If you were back in 1955
buying shoes that bothered you, buying medicines
that made you sick, things like that, because you
couldn’t read those reviews, you had a salesman
who wasn’t unbiased. That’s all you could
get information from. So I think our human
welfare has gone up much more than GDP has gone up. So there’s a real question
about the productivity numbers and the outcome numbers. So what you talk about
are wonderful things. But offsetting that there are
risks on the other side that phishing that is malicious can
be pursued more dramatically. Well, that’s why we use that
word phishing and with a “ph.” It goes both ways. I’m reminded that ISIS is
a product of the internet. Apparently, their ability–
the whole business model of the Islamic State
is to recruit fanatics from all over the world. And they have a
way to do that now. And it’s creating
a real problem. So I don’t know where
all this is going net, but I think it’s important
that people at Google maintain a sort of
philosophic and moral stance about what they do. And they already are doing that
as I said at the beginning, and it is important
to keep that up. Yeah. AUDIENCE: So I
have two comments. One is about physicians
and licensing. I once proposed
to a friend who’s a physician that that
was a means of limiting the number of doctors
and keeping costs up. And she told me that, well,
actually it’s the opposite. In the cities where we have
more doctors per capita, the medical expenses
are much higher. And so the more
doctors you have, the more you spend on them. ROBERT SHILLER: Yeah. AUDIENCE: And so
I have a question, what you think of that. And then I have another
question follow up, which is in the press we’ve
seen a lot of articles recently about
the cost of drugs, and how drug companies are
buying up old generic drugs and combining them
in interesting ways, and then charging
essentially whatever they want for them, because
they are the only supplier. They really have a monopoly. And I’m curious how you
think the government or the population as a whole
should deal with that issue. ROBERT SHILLER: Yeah, OK,
well, first thing there is a natural moral hazard
in the medical profession that doctors will recommend
surgery that’s not necessary, because they want
to make the money. And you as a client have
no ability to judge. That apparently goes on. Similar things happen in
now financial professions. Financial advisors
will steer you to client the products that
charge huge management fees for questionable activities. These are all part of
the phishing equilibrium. So what do we do about that? Well, that’s a big and
long and complicated story. One thing is I think
that there is something about appealing to ethics. And also you’re asking doctors
to sign an oath of loyalty to their client. I was proposing
in one of my books that right now we have a tax
subsidy for financial advice, that is it’s
deductible, but I think that we should make two
changes in that deductibility. One is it should be a tax
credit rather than a deduction, because the people who need
financial advice the most are low income who generally
don’t have any advantage to itemizing. The other thing is that I
think financial advisors should get a government
subsidy of this form only if they sign
an oath of loyalty to their client meaning that
they will not steer them toward products that are
more lucrative for them. So that would create, I think
a financial advice profession that resembles the
medical profession. I think most doctors don’t
schedule you for surgery that you don’t need. And that’s especially
true, because they have signed some kind of oath. And they could be
sued for malpractice. So it’s partly a fear, but
I think it goes beyond that. People do have some morals. And if you said you
would do something, you probably would just,
most people will just do it. So buying up drugs and
raising the price, that is something that we,
it was in the news recently for an
outrageous example. I can think of free market
justifications for that if that additional profits
would then eventually go to more drug research
that would help. Maybe it’s expensive
to do the research, and so maybe some
drugs have to be high. AUDIENCE: The
government funds it. ROBERT SHILLER:
Well, anyway, you’ve brought an example of
a questionable activity that I don’t have
answers to all of them. This book is just a
general thought piece that’s supposed to change
people’s deep assumptions about the free market. I think I’m out of time. Is that right? OK, well, thank you. [APPLAUSE]

10 thoughts on “Robert J. Shiller: “Phishing for Phools” | Talks at Google

  1. Great talk. Added the book to "To Read" list. Books Dr. Shiller talked about in this lecture 1)"Nudge" – http://www.amazon.com/Nudge-Improving-Decisions-Health-Happiness/dp/014311526X 2)The Hidden Persuaders – http://www.amazon.com/Hidden-Persuaders-Vance-Packard/dp/097884310X/ref=sr_1_1?s=books&ie=UTF8&qid=1448569174&sr=1-1&keywords=%22The+Hidden+Persuaders3)Addiction by Design – http://www.amazon.com/Addiction-Design-Machine-Gambling-Vegas/dp/0691160880/ref=sr_1_1?s=books&ie=UTF8&qid=1448569219&sr=1-1&keywords=%22Addiction+by+Design 4)Salt, Sugar, Fat – http://www.amazon.com/Salt-Sugar-Fat-Giants-Hooked/dp/0812982193/ref=sr_1_1?s=books&ie=UTF8&qid=1448569258&sr=1-1&keywords=salt+sugar+fat

  2. Google is the biggest phishing company of all. It offer their product (search engine) for free to lure users in and then make money off of their personal information by selling targeted ads. By paying Google for targeted ads, businesses can more easily sell their products without having to lower prices as much or create higher value products. Therefore users loose out by paying more and/or getting less value. They are effectively paying Google to use its product without knowing it. The only reason Google is doing this is it can make much more money this way then selling its product for a price (charging a fee for use of their search engine). In other words, Google managed to get more money from its users than what the users are willing to pay for its product. There is thus a net transfer of value from users to Google. The same thing can be said for Facebook and other similar platforms. Together this represents a substantial transfer of wealth from society to a few companies.

  3. Schiller lost all remaining credibility when he listed Ben Bernake in the list of "good guys". The Federal Reserve is the absolute biggest Phool Phisher in the history of the United States.

  4. Min. 24:20 – I think the slot-machine phenom has a different explantion. It's still a brain bug, but it has something to do with the human learning process through trial & error. People keep trying, because that's how babies get better at walking. The reward tells us that we got better at it, so we keep trying in order to reach perfection.

  5. I'm surprised that Robert Shiller knows little about Google when the co-founder of Google and CEO of its parent company is Larry Page, a fellow University of Michigan alumnus. Isn't Google a huge technology firm as well as a major search engine on the internet? I better read his book. lol

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