What falls outside the standard assumptions and models of economics? How does that matter for development? Last week, the Africa Chief Economist’s Office and the Development Economics Research Group of the World Bank sponsored a star-studded course exploring exactly this issue.
Nobel Prize winner George Akerlof highlighted how, because of all the advantages of markets, we ignore the traps that come along with them. Sellers can deceive buyers and prey on their unconscious biases, lack of self-control, and naiveté.
Using his famous “lemons” market example, Akerlof showed that, instead of there being no equilibrium, naïve buyers will in equilibrium buy poor-quality used cars. He calls this phenomenon “Phishing for Phools”.