Caroline Gerschlager, ed. . Deception in Markets: An Economic Analysis

American Journal of Economics and Sociology, The, Nov, 2007 by Sheryl Tuttle Ross

Caroline Gerschlager, ed. (2005). Deception in Markets: An Economic Analysis. Palgrave Macmillan.

Deception in Markets: An Economic Analysis is a series of essays edited by Caroline Gerschlager. The purpose of the book is to show how modern economic theory deals with or in some cases fails to deal with the phenomena of deception--dishonesty and cheating in the marketplace. Gershclager argues that the standard view in economic theory is that competitive markets will punish those that cheat because honest traders will out the dishonest ones and drive them from the marketplace. However, recent events related to the burst of the "new economy" bubble in 2001 such as the scandals at Enron, Tyco, and Worldcom call into question the adequacy of the above description. The essays here view key economic concepts from a variety of economic frameworks (game theory, new institutional economics, new classical macroeconomics, anthropological economics) through the lens of deception to see how well each view can accommodate this prevalent phenomena. Gerschlager claims that the upshot is that deception, including self-deception, if taken seriously may force economists to revise basic economic concepts such as rationality and self-interest.

The book is divided into five sections: (1) The Rationality of Deception; (2) Behavior and Incentives to Deceive: The Success of Deception in Markets; (3) Subjectivism and Deceptive Behavior in Markets; (4) Social Institutions and Regulation: How to Control Deception; and (5) Preconditions of Markets and Deception: An Anthropological Perspective. Although focusing on markets generally is thought to be the purview of economists, the book is interdisciplinary in its appeal. It is of obvious interest to economists, but sociologists and anthropologists as well as political scientists and philosophers who are interested in rationality and social structures would profit from reading it. Overall the essays are clearly written and thought provoking; however, I would hesitate to assign it to all but the most advanced undergraduates because of the extensive background knowledge presupposed by many of the authors. For example, students would have to know quite a bit about game theory to make sense of the essays by S. Abu Turab Rizvi and Paul Dumouchel. Likewise, some of the technical discussions in Alan Hamlin's essay would be out of range of many undergraduate students.

The aim of the first section is to describe conceptual difficulties that arise when trying to account for deception in game theory and new classical economics. In "Deception in Game Theory," Rizvi claims that game theory cannot account for rational agents who agree to disagree, and that these same factors lead to the inability of game theory to account for deception. If rational agents revised their hypotheses in light of information revealed by the actions of others in the exchange, then the beliefs would likely converge. Dumouchel argues in "Rational Deception" that standard cases that intuitively capture our ordinary conception of deception, such as the free-rider problem and the prisoner's dilemma, are regarded as rational outcomes of economic choice. Esther-Mirjam Sent, in '% Deceptive Journey from Rational Expectations to Bounded Rationality," argues that the concept of rational expectation cannot account for agents learning through market transactions, and that the concept of bounded rationality cannot account for agents acting against their own self-interest, which Sent claims amounts to a form of self-deception.

The second section addresses deceptive behavior and aims to diagnosis some causes of deception. Gerschlager's essay "Deception in the Markets: The Enron Case" highlights the operation of perverse incentives. That is, she examines cases in which certain information asymmetries may create the grist for economic scandal, cases where an individual's pursuit of his or her own interest does not further the public good. Rachel T. A. Croson in "Deception in Economic Experiments" argues on the basis of research in cognitive psychology that "deception succeeds to a greater extent than equilibrium theory predicts" (p. 118). This is because agents are gullible and, further, overconfident in their ability to detect deception. Joshua Coval, David Hirshleifer, and Slew Hong Teoh "argue that self-deception underlies various aspects of the behavior of investors and of prices in capital markets" (p. 131). Some might say that say that they echo Alan Greenspan's concerns about the market's irrational exuberance. They also argue that the same reasons that create the conditions for self-deception make individuals a target for deception by others. Laurence Moss continues this theme in his article "Price Theory and the Study of Deception in the Exchange Process," where he argues that deceptive behavior is created by the market processes. Moss contrasts his position to Hayek's, who argues that deceptive behavior arises from imposed market order by central banks.