Patrick McKenzie dives into the intriguing balance between fraud prevention and customer experience. He examines how businesses and governments accept some level of fraud as a cost of doing business, using examples from payment systems and pandemic policies. The discussion highlights the ethical dilemmas in retail security and the complexities of navigating fraud in government benefit programs. Listeners will discover why reducing fraud to zero could stifle legitimate commerce and how different sectors calibrate their tolerance for fraud based on their unique challenges.
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insights INSIGHT
Fraud as Equilibrium
Fraud is an equilibrium quantity, influenced by how much effort an economy puts into checking.
Checking costs money, and since trucks are productive, some fraud is economically optimal.
insights INSIGHT
Private Sector Fraud Enforcement
Private sector actors stop, detect, and punish most fraud.
They balance fraud's undesirability against social goods like easy service access.
insights INSIGHT
Fraud is Possible By Design
Payment fraud is possible by design, a collective decision by government, finance, and business.
Businesses absorb fraud costs as a business expense.
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In 'Lying for Money,' Dan Davies delves into the world of financial fraud, explaining how such crimes work by manipulating institutional psychology. The book categorizes frauds into four main types: long firm, counterfeiting, control fraud, and market crimes. Davies uses historical and contemporary examples, such as the Great Salad Oil swindle and the Theranos scandal, to illustrate how these frauds operate and how they shape the development of the modern world economy. The book emphasizes the systemic weaknesses that fraudsters exploit and the importance of maintaining a skeptical approach to unusually rapid growth.
In this episode, Patrick McKenzie (patio11) offers a reading of his viral essay, "The optimal amount of fraud is non-zero" with extensive live commentary. Patrick examines payment systems, benefits programs, and pandemic-era policies, to uncover how businesses and governments often intentionally accept some level of fraud as a cost of doing business. Reducing fraud to zero would require such restrictive verification that it would severely hamper legitimate commerce and social programs. Using examples from credit card processing to PPP loans, Patrick illustrates how different industries calibrate their tolerance for fraud based on their margins, mission, and societal role.
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- Timestamps: (00:00) Intro (00:32) Origins of the essay and Dan Davies' influence (02:16) Fraud is a policy choice (04:56) The unique nature of fraud enforcement (07:54) Who pays for payment fraud? (12:55) Fraud as a necessary business expense (21:13) Sponsors: GiveWell & Check (27:43) Credit reports (29:19) Anti fraud loops used in online commerce (35:38) Different business tolerances for fraud (37:20) High vs low margin fraud strategies (41:40) Fraud in Benefit Systems and Pandemic Programs (43:29) Taxes (45:38) Fraud as an intended component (51:55) Wrap
Complex Systems with Patrick McKenzie (patio11) 