Complex Systems with Patrick McKenzie (patio11)

Fraud levels are a policy choice

Dec 5, 2024

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.

50:07

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Quick takeaways

The concept of non-zero fraud is economically viable, as achieving zero fraud restricts legitimate commerce and social programs significantly.

Different industries shape their fraud tolerance based on their margins and societal roles, demonstrating the intricate balance between risk and operational efficiency.

Trust management in commerce requires an adaptable approach to fraud prevention, where companies must balance security measures with customer experience to maintain user engagement.

Deep dives

Understanding the Optimal Level of Fraud

Fraud within economies can be viewed as an equilibrium quantity, where the ideal level of fraud is non-zero. The speaker emphasizes that achieving a zero-fraud scenario is impractical and economically unfeasible. Decisions regarding how much fraud to allow are influenced by the costs associated with monitoring and enforcement efforts, which in turn shape broader policy choices. This perspective is supported by examples of legal regimes that differ radically in their approaches to fraud, highlighting how economic outcomes are directly tied to regulatory frameworks.

Intro

2min

The Acceptable Cost of Fraud

18min

Unraveling Fraud: The Money Mule Dilemma

4min

Navigating Fraud Prevention and Customer Experience

18min

The Intricacies of Fraud in Government Benefit Programs

8min

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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Full transcript available here: https://www.complexsystemspodcast.com/fraud-choice-patrick-mckenzie

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Sponsor: GiveWell | Check

Support proven charities that deliver measurable results and learn how to maximize your charitable impact with GiveWell. Go to givewell.org (and type in "Complex Systems" at checkout).

Check is the leading payroll infrastructure provider and pioneer of embedded payroll. Check makes it easy for any SaaS platform to build a payroll business, and already powers 60+ popular platforms. Head to checkhq.com/complex and tell them patio11 sent you.

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Links:

Bits about Money, "The optimal amount of fraud is non-zero" https://www.bitsaboutmoney.com/archive/optimal-amount-of-fraud/
Bits about Money, "The fraud supply chain" https://www.bitsaboutmoney.com/archive/the-fraud-supply-chain/
Dan Davies on Complex Systems https://open.spotify.com/episode/5QKxzgumJXSQuaWCmYAoM9?si=AWkgvWEBSymrQNqpehg5tQ

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Twitter:
@patio11

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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

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