Fraud levels are a policy choice

Complex Systems with Patrick McKenzie (patio11)

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

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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