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BW Businessworld

Book Review: Fraud Is All Around Us

The book is easy to read and relate; and more importantly will make you start thinking of the number of times you have been phished.

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By Madan Sabnavis

Phishing for phools could well be read as ‘fishing for fools’ which is what happens to us when we work in a free markets system. Written by two Nobel Prize winners Akerlof and Shiller, the book takes us through ways in which we are deceived or manipulated under capitalism which happens voluntarily, thus revealing the potency of deception.

The book is based on the psychologist Robert Cialdini’s typification of human beings. We tend to follow others in deciding how to behave and want our decisions to be internally consistent. We are phishable as we want to reciprocate gifts and favours. We are averse to taking losses and want to be nice to people we like. We do not want to disobey authority. The phishing equlibria is hence an inevitable result of the economic system.

According to the authors capitalism as enunciated by Adam Smith works differently and while we make our own choices they are seldom rational. This is fodder for private enterprise to make profit as we fall into the trap quite easily. Just like how we can be phished on the internet, the same happens when we are buying a car or a house where we can be charged differently. While we are very careful about spending money 99 per cent of the times, it is the 1 per cent that is worked on by the phishers to make us worse off. Credit cards is another area where we are given the comfort of convenience but end up spending more than we need to while all the time paying for the same commissions that passes through the system.

This is why the authors feel a government is a must to put checks on capitalists. But the latter know how to get away and a good example is the ‘Cinnabon’ which may not be good for health. The company adheres to putting the contents and ingredients in fine print to stick to the law but also ‘deceives’ the consumer. The government is also not outside phishing and any election campaigns bear testimony where a symbiotic relation with industry is evident. The ‘wrong’ person gives a ‘wrong’ impression to us while campaigning and we end up voting for the ‘wrong’ candidate and hence the ‘wrong’ government. While Shiller and Akerlof give examples in the US, we in India can draw parallels.

Another area of phishing is health, where we are led to pop pills that are not required but help to fatten the profits of the pharma industry. Obesity through fattening foods is another case of phishing and the ad industry plays a big role in perfecting the process. When we go beyond to tobacco or liquor and drugs, the scene is grim. There are lobby groups for the former two which ensure that these products are consumed by making it seem hip at airports, bars, parties and restaurants.

Further, during the financial crisis, the rating agencies became a part of the phishing exercise where there was perverse incentive on part of the agency, investment banks and mortgage companies to create the bubble to earn profits. As probability of a crash was very low at 0.15 per cent companies like AIG saw no harm in writing credit default swaps, which finally shattered the financial system. The myth was created that financial engineering was the new innovation and the public swallowed it. The system hence had incentive to create the bad assets and package them as securitisation deals which worked well in the market.
Phishing is hence the result of unbridled capitalism and while traditional theories talk of externalities as being a part of this system, the techniques used to make us behave in an irrational manner are played upon to ensure we make the wrong choice. Even innovation involves phishing according to the authors. Facebook has become an addiction. Further, we all know that the system of ranking of education institutes and examination is warped.

What are the solutions? Social security for people covering both income and healthcare, regulation of securities market and laws relating to role of corporates in influencing governments would reduce phishing to an extent.

The book is easy to read and relate; and more importantly will make you start thinking of the number of times you have been phished. The list would be endless!

The writer is chief economist, CARE Rating


(This story was published in BW | Businessworld Issue Dated 28-12-2015)