Why Free Markets Make Fools of Us

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Although investors were being phished, they “had no reason to be suspicious. They had been told of the wonders of free markets.” But free markets were not so wondrous, because they put the producers of the new, complex, risky securities at a big advantage over the producers of the older, simpler, safer ones. After all, the new securities promised higher returns while disguising the risk of default:

As long as a significant part of the bond-buying public was willing to swallow the myth whole, the investment bankers had an incentive to produce those rotten avocados, and to extract from the agencies the high ratings that would be the cover-up.

On modern advertising and one of my favorite, beloved Ogilvy’s ad :

Akerlof and Shiller think that the idea of phishing also helps to explain modern advertising, especially when we focus on the crucial role of narrative in human thinking. Clever marketers offer simple, attractive stories about their products, and get those stories to stick in the human mind. Consider a famous advertisement for Rolls-Royce, displaying an elegant young mother in the driver’s seat, turned slightly toward her elegant children, who are walking toward the car from outside the entrance to an elegant grocery store. The headline of the copy: “At 60 miles an hour the loudest noise in this new Rolls-Royce comes from the electric clock.” Advertisements of this kind tell an appealing story about what life would be like with the product.

→ The New York Review Of Books