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.