502. Fraud, Cybernetics, and the Architecture of Unaccountability with Dan Davies

Jan 20, 2025

Dan Davies, an economist and author of 'Lying for Money' and 'The Unaccountability Machine', discusses the intertwined nature of fraud and systemic failures in financial systems. He explores how collective decision-making leads to accountability issues, using real-world examples like the Wells Fargo scandal. The conversation dives into the role of trust in fostering fraud and highlights the disconnect between economics and information theory. Davies advocates for improved organizational design to navigate these complexities and emphasizes the importance of adapting to market changes.

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INSIGHT

Fraud Implies Trust

Fraud exists in high-trust environments because trust is efficient.
Low-fraud environments may indicate low trust and thus less economic activity.

ANECDOTE

Canadian Fraud

Canada has high fraud rates due to its high-trust culture.
Despite this, Canada's economy thrives, showing fraud's complex relationship with growth.

INSIGHT

Organizations as Models

Organizational design and algorithm development are similar disciplines.
Both involve creating models of the world and revising them based on errors.

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Why do our most complex systems—from financial markets to corporate behemoths—consistently produce outcomes that nobody intended, and what forgotten science might hold the key to fixing them?

Dan Davies is an economist and author of the books, Lying for Money: How Legendary Frauds Reveal the Workings of Our World and most recently, The Unaccountability Machine: Why Big Systems Make Terrible Decisions - and How The World Lost its Mind.

Dan and Greg discuss the complexities of fraud in financial systems and why no individual seems accountable for major financial crises, how the historical and intellectual foundations of cybernetics and systems thinking can be applied to improving organizational design, and the role of information theory in management.

*unSILOed Podcast is produced by University FM.*

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Fraud thrives where trust exists

13:58: If you want to commit a big fraud, you don't go somewhere where there's low trust. You go somewhere where, as long as you show up, wear a nice suit, smile, and say please and thank you, people will assume that you're honest. But the thing is, that's what you want to do if you want to run a legitimate business too. So, people always say that the cost of fraud is never the amount of money that's stolen; it's the amount of legitimate business that doesn't get done. And that's just really saying that trust is an incredibly efficient way of organizing your economy compared to checking. Checking and trust are basically the only two kinds of technologies we have to ensure the integrity of information. And of the two of them, trust is a lot more efficient.

How fraud disrupts an economy

03:48: Fraud happens when not only does your assumption of perfect information break down, but there's some actual anti-information there. There's some actively false and misleading information that's been injected intentionally.

Why investors and economists lead in a data-driven era

58:40: A lot of the reason why economists rule the world in policy is the same reason why more and more companies are run by their investors or their investor relations departments. It's because they collect the data, and the economists collect the numbers that are used to make up the world of facts.