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There's 2 different things going on here: - The optimal amount of fraud in society is 0 - The optimal amount of fraud a business/industry should accept is non

There's 2 different things going on here: - The optimal amount of fraud in society is 0 - The optimal amount of fraud a business/industry should accept is non-zero The simple observation that the cost to prevent each marginal fraud attempt increases; the last 0.1% of fraud costs way too much to prevent compared to the first 99%. Obviously society would be better off if fraud didn't exist, but since it does the effort expended is only worth it up until when the marginal cost of prevention exceeds an acceptable threshold (when it starts to lose you money). The optimal amount of fraud is still 0, but the optimal amount of fraud prevention lies somewhere on the margin. This is why important transactions like banking have KYC checks, and buying a pair of sneakers don't.

permo-w 4y ago
this explains things significantly better than the article, which seems to be little more than dragging out a surprising-sounding headline with a pretty obvious concept
- patio11 4y ago
  The reason I went to the trouble of writing it was that many, many people in both business and the finance industry do not agree it is obvious and a good portion do not agree it is true, and they take actions consistent with those beliefs, which harm themselves and others.
  - ilaksh 4y ago
- jbuhbjlnjbn 4y ago
  To be more specific, the article mimics the topic of a counter-intuitive "surprising" truth (like, for example the goat problem; or flaws in human cognition), while letting the reader down by making an obvious, easy to understand truth unnecessarily complicated. "Clickbait light"
  - jbuhbjlnjbn 4y ago
    - barry-cotter 4y ago
      That you think something is obvious is a fact about you, not about the world. People are not downvoting you because your English has any problems. They are downvoting you because they you’re wrong and arrogant.
      - jbuhbjlnjbn 4y ago
        That's your understanding of a discussion. Good one. Go pester someone else.
      - deleted 4y ago
        [deleted]
asah 4y ago
"optimal amount of fraud in society is 0" - are you sure? why? Bad Things(tm) are useful for testing and improving safety/security, and when I see people/institutions with no experience reacting to Bad Things(tm), I know they're in for a world of hurt when it does happen. Perhaps you mean, the optimal amount of fraud that isn't prosecuted... or not detected... ? Even then, I'd argue that there's a tiny percentage that's useful for keeping the safety/security industry on its toes and at the ready. As a proof point, if you believe that war (world peace) is not a solved problem, then it's only a matter of time before your city/region/civilization/race faces an existential threat, for which the only true preparation is to be ready to innovate and mobilize. Sorry if this comes across as dark. I mean it in the same vein as having a small percentage of farmers is desirable. By contrast, I visited a traditional silk factory in Stockholm (amazing btw) and the craft has been lost to the point where they're struggling to find craftspeople able to work their looms and other old equipment. See Jonathan Blow's excellent talk about lost technology: https://www.youtube.com/watch?v=ZSRHeXYDLko https://www.youtube.com/watch?v=ZSRHeXYDLko
- deleted 4y ago
  [deleted]
calchris42 4y ago
Your explanation is so much more succinct than the article! I believe buried in there is one other factor that is somewhat related: - reducing friction helps drive more legitimate business. Accordingly, over-aggressive anti-fraud practices can result in reduced sales. A toy example: a business could eliminate exposure to credit card fraud by not accepting credit cards. That would however reduce overall sales. I guess this can all fit within a “marginal cost” explanation though.
- mlyle 4y ago
  > I guess this can all fit within a “marginal cost” explanation though. Yes, but it undermines the first point, a bit. There's costs-- direct and social costs-- to making transactions hard; so perhaps optimal for a society is still not 0. Also, there's nothing to say that the amount of fraud is stable and that we can't find a world where we have better mechanisms to reduce it for the same cost. (Improved technology, legal structures, norms, etc).
- ghaff 4y ago
  >reducing friction helps drive more legitimate business. A very real example in retail. I can minimize the possibility that I'll be hit with fraudulent returns. Require a receipt, short window, store credit only, must be in like new condition with all packaging, etc. (Or just sell everything on an all sales are final basis.) Different stores do many of these things to a greater or lesser degree on at least some merchandise. But you'd probably better be offering really good prices if you do.
  - rileymat2 4y ago
    And with all that effort all that friction, you still get hit with chargebacks no matter your policy for returns.
    - fijiaarone 4y ago
      Yeah, the system is set up so the payment processors benefit from fraud.
metacritic12 4y ago
Right, more generally: - X is ipso facto bad. The optimal amount is zero. - X is traded off against Y actually, so in general equilibrium with Y, it's nonzero. And the above pair could be: (Covid risk, attending fun parties) (Risk of getting hit by a car, being able to walk anywhere) (Discrimination in society, administrative costs of anti-discrimination laws). The list goes on. It's a simple concept in decision theory, rehashed with an attractive title.
- scott_w 4y ago
  Some of those aren’t analogous. Your Covid example: there’s also the cost _to others _ of you catching and spreading it, even if the risk to you is lower. Speeding is another example: the cost (or risk) might be acceptable to you but not to the person you have an increased likelihood of hitting and doing serious injury to. At a societal level, it holds, which is why we invest in measures to increase the cost of doing the wrong thing (speeding tickets, removing licenses).
LorenPechtel 4y ago
More generally--the cost to eliminate bad outcomes goes up exponentially as you deal with the easy bad outcomes. Credit card fraud is simply one example. Or consider a simple non-financial example: I left half a dozen pears on the tree this year--getting those last few pears would have required hauling a 50 pound ladder around the house and then struggle with setting it up. (Due to it's size it's a lot harder to handle than it's weight indicates.)
bell-cot 4y ago
This, definitely. But also - at the social policy level, there are two additional issues: - Outsiders: It's good to keep members of your society fraud-savvy enough that they can safely travel & do business outside your society...without being easy marks for fraudsters. - Stability over time: If your society somehow gets fraud down to ~0, that'll lead to big cut-backs in anti-fraud efforts, "end of history" dreamers proclaiming that fraud has died, etc. Which is obviously a set-up for a sudden huge resurgence in fraud.
filleokus 4y ago
Great explanation. But I'm not so sure about "The optimal amount of fraud in society is 0". Especially if we broaden fraud to include other crimes. There are costs to prevent other badness in society as well. Firstly it's the cost in taxes/allocating resources to its prevention: Do we really want to allocate a really large chunk of our shared human capital to police marginal criminal activity? How much more polices, judges, attorneys, lock makers, etc would we need to stop the last bike theft? Secondly and arguably more importantly is the cost of freedom. A lot of the digital surveillance initiatives that are discussed and dismissed here on HN are enforced in the name of zero tolerance against (really bad) badness in society. I think its hard, or impossible, to create a somewhat large society with zero crime rate. At least if we still want even just a sliver of the freedoms we are accustomed to in liberal democracies.
- konschubert 4y ago
  If you want something to be legal, make it legal. Don't make it illegal-but-not-enforced. Because then, whoever is in power can selectively enforce the law against any group they choose.
  - filleokus 4y ago
    Hmm. I think my mental model is more that it should be "randomly" enforced. The probability of getting caught is higher than some certain threshold, but that it's not necessarily bad if that threshold is lower than 100%. I can't think of any resonable society that have taken actions to show that they want the probability to be 100%. I would even argue that the most harsh dictatorships probably have the highest enforcement, but that laws were/are very selectively enforced in the favor of e.g regime officials.
    - konschubert 4y ago
      Okay, I see your point, I think we were talking about different things.
- thayne 4y ago
  I think the point is that in a theoretical society in whcih there are no bad actors, and there is no cost to prevent fraud, the optimal amount of fraud is zero. That is, there isn't a reason you would want to encourage fraud, because a little bit of fraud is good. But when you also consider the cost of reducing fraud the optimal state for the system as a whole will have a non-zero amount of fraud. And of course, bad actors do exist, so in a real system you want to accept some amount of fraud. The difference is significant, because if you discover a way to significantly reduce fraud for a low cost (including cost of freedoms and similar), it will be worth implementating. And there isn't some point where you say "we are already down to x% fraud, we don't want to go any lower than that, even if it doesn't cost us anything".
chongli 4y ago
I think you’re conflating the terms optimal and ideal. The ideal amount of fraud in society is zero. The optimal amount of fraud in society is not defined, because optimization problems are always subject to a set of constraints. So then we may ask: “what is the optimal amount of fraud in society such that the costs of legislation, education, and enforcement do not exceed X% of GDP?” and that is a different question. You might also throw technology and R&D in there because new tools make it easier to investigate fraud. Of course new technologies also open up new possibilities for fraud, so this is a very complicated exercise. But I think it’s fair to say that given any reasonable constraints, the optimal amount of fraud is nonzero.
- jbarciauskas 4y ago
  The way this is phrased, I expected to learn there was some benefit to a low amount of fraud, as such. There is not. There is a benefit to a high amount of trust, which necessitates accepting some amount of fraud.
  - chongli 4y ago
    We don’t need there to be a benefit to a low amount of fraud to optimize for it. Optimization is a purely mathematical exercise [1]. Once we construct the problem with a chosen set of constraints then we apply mathematical techniques to solve it. Of course, many types of optimization problems (especially non-linear or non-convex) can be extremely difficult to solve optimally without relaxing some constraints or settling for approximations to the optimal solution. But, besides that, the task of interpreting the results and of potentially selecting new constraints or even a new objective function is a separate matter. Perhaps we should be seeking to maximize trust rather than minimize fraud in society. But then we have to ask ourselves: “what would that look like?” [1] https://en.wikipedia.org/wiki/Mathematical_optimization https://en.wikipedia.org/wiki/Mathematical_optimization
    - auggierose 4y ago
      There does not need to be a set of constraints for optimisation to be defined. You can talk about optimisation on an unconstrained domain, for example all of ℝ⨯ℝ. But there DOES need to be a measure function that measures what you are optimising for. The benefit of fraud would be one such function you could optimise for, and that seems to be what GP is after. The pure amount of fraud is a different one, which seems to be what you are interested in.
sneak 4y ago
> This is why important transactions like banking have KYC checks, and buying a pair of sneakers don't. Banks do KYC checks because it is required by law, not because it does anything to reduce fraud. Fake IDs are a thing. Requiring identification does not make transactions safer without a lot of other stuff happening too.
not2b 4y ago
An optimal amount is an amount that can be achieved. The only way to achieve zero fraud is to have zero financial transactions.
lifeisstillgood 4y ago
This optimal (#) can and probably will change soon. We all carry around phones capable of trivial non-reputable verification, and centralised digital cash (not bitcoin but BankOfEnglandCoin) is technically feasible. So it's quite technically feasible for every day to day transaction to be completed with with the sort of KYC verification currently reserved for say house purchases. It's just the political / societal implications. These are beyond "hey it's expensive for banks to cut down on fraud" I disagree with the "banks should allow certain levels of bank fraud because X" for the simple reason we don't have "banks should provide interest free funding to murderers, sex traffickers, pornographers and drug ring" even though that is often the same thing. (And in a two page HN thread I am sure I am not the first to say that) (#) someone else mentioned the difference between ideal and optimal which is a very good distinction.
- bobthepanda 4y ago
  I would not call anything in the fragmented, legacy US financial system “trivial.” It took us a decade and counting to get chipped cards, longer to get contactless pay, and even then we don’t really use the PIN part of chip+pin. Something like FedNow is only coming next year.
  - lifeisstillgood 4y ago
    Anything I am describing is a decade plus away. I mean every central bank could tomorrow just put up a non-permissive (#) blockchain and just make a virtual coin for every cent out there. And this would cause utter chaos. It would essentially end fractional reserve banking. That makes loans ... difficult. The impacts are enormous, but a digital native currency is so simple, so attractive we may well try it. And then have to rethink our financial regulations. It will look a lot like ICOs. I still think it is inevitable. (#) ok the terminology I find either dubious or I misunderstand but basically every wallet holder gets their private / public key registered, then there is a known state of money globally, and the Bank is a verifying party to each transaction. Something like that anyway. Theee are many options but essentially if we all "trust" the money printer then the technical problems simplify.
- 4y ago
manholio 4y ago
> The optimal amount of fraud a business/industry should accept is non-zero Let's make that: "The optimal amount of fraud a business should accept under the current credit card online payment system is non-zero". There is absolutely nothing intrinsic about online commerce that requires fraud. Online business routinely operate with a money first, zero consumer trust paradigm. They ask for my payment credentials first, and only then deliver the products. If we were to design the online payment system from scratch, we would use cryptography to completely remove the notion of credit card theft, and escrow to settle consumer complaints, with an option for paid arbitration when things go bad. I guess you can call some of those cases "fraud" and some customers are so unreasonable that they border on criminal, yes, you can't make that segment zero, but I don't think that's the kind of fraud they are referring to. The reason we can't have those nice things is because of immense momentum of the current system designed in the 60s by companies that have very little reason to change anything. In fact, an online payment reform would most likely strip them of their oligopoly. So yes, the optimal fraud level is non-zero because Mastercard, Visa etc. can push that fraud onto consumers (via retailers), and they are making much more money anyway from the current situation.
tfehring 4y ago
An analogy that may resonate with readers here is that targeting zero fraud is like targeting 100% uptime in a computer system. You evaluate the business trade-offs and decide how many 9s of non-fraud are appropriate, knowing that (1) each additional 9 is more expensive than the last but only gives you 1/10 of the benefit, and therefore (2) infinity 9s (equivalent to zero fraud/100% uptime) is a useless aspiration for all practical purposes.
- kelnos 4y ago
  That's incomplete, though. The business running the computer system would bear all the costs in attempting to target 100% uptime. Targeting zero payments fraud does mean the business has to bear the costs of the fraud prevention measures, but their customers also have to bear intangible costs, like the annoyance of a detailed, invasive know-your-customer process before being able to buy anything. But if I'm a user of this computer system that targets 100% uptime, I don't have to see any of the downsides/costs that the business incurs to try to get that uptime. I just see great uptime, and it's all rosy for me. I think it's important to acknowledge that, in pursuing lower (or zero) fraud, both the business and its customers have to bear costs related to that goal.
bawolff 4y ago
There are also arguments that a certain amount of rule breaking is neccesary in society to support innovation. A society with no rule breaking becomes static.
deleted 4y ago
[deleted]
lamontcg 4y ago
> - The optimal amount of fraud in society is 0 If you had zero fraud in society then nobody would build in any defenses against fraud at all. You'd have a society of completely naive and trusting souls, which sounds blissful until someone wakes up one day and realizes that they can commit as much fraud as they like since society has no defenses against it. It is like saying that the optimal amount of disease is zero, but if you have never had your immune system challenged by any kind of disease, then the first virus you come across will probably kill you. Your suffering from childhood colds and getting burned by something like the car-out-of-gas scam help build defenses.
- ablob 4y ago
  If then someone came and did the fraud, there wouldn't be an amount of 0.
- AaronFriel 4y ago
  Not a perfect analogy with disease. And maybe it should suggest to you that maybe in fact, the optimal amount of fraud is zero. With disease, the optimal amount is likely still zero. The immune system we have is not great, its only selection criteria is to keep people alive long enough to have children and keep them alive long enough so they can. We're beginning to understand, like with HPV, that anything from a life threatening case to an asymptomatic one can cause lifelong changes in the immune system and either cause or increase lifelong risk of non-infectious diseases. And that's setting aside that we can, for example, just eradicate certain diseases if we set ourselves to it. Polio, smallpox, and hopefully malaria. If we could eliminate certain kinds of fraud - through education, through making it impractical - that seems good, yeah?
  - lamontcg 4y ago
    But I think you just showed that its really pretty similar. And my gut reaction to the title of the article is that we really need less fraud and that we're very, very far from optimal right now. Although I'm not very concerned at all about fraud against government programs to help the disenfranchised. I'm more concerned about the endless e-mail, phone scams, door to door scams and all the stuff that prey on the elderly and vulnerable. Similarly with the immune system it would be interesting to consider wiping out Epstein Barr and maybe eliminate Multiple Sclerosis, along with exterminating the mosquitoes that bite humans and cause disease. But zero is likely not achievable or a stable optimum, and we're probably not going to cure the common cold or wipe out influenza and we may not want to (at least not without quite a bit of science fiction, global access to medicine and nearly 100% acceptance of vaccination in the population).
elcomet 4y ago
I'm not sure your definition of optimal makes sense if you don't take into account the cost of reducing it?

permo-w 4y ago

this explains things significantly better than the article, which seems to be little more than dragging out a surprising-sounding headline with a pretty obvious concept

patio11 4y ago
The reason I went to the trouble of writing it was that many, many people in both business and the finance industry do not agree it is obvious and a good portion do not agree it is true, and they take actions consistent with those beliefs, which harm themselves and others.
- ilaksh 4y ago
jbuhbjlnjbn 4y ago
To be more specific, the article mimics the topic of a counter-intuitive "surprising" truth (like, for example the goat problem; or flaws in human cognition), while letting the reader down by making an obvious, easy to understand truth unnecessarily complicated. "Clickbait light"
- jbuhbjlnjbn 4y ago
  - barry-cotter 4y ago
    That you think something is obvious is a fact about you, not about the world. People are not downvoting you because your English has any problems. They are downvoting you because they you’re wrong and arrogant.
    - jbuhbjlnjbn 4y ago
      That's your understanding of a discussion. Good one. Go pester someone else.
    - deleted 4y ago
      [deleted]

asah 4y ago

"optimal amount of fraud in society is 0" - are you sure? why? Bad Things(tm) are useful for testing and improving safety/security, and when I see people/institutions with no experience reacting to Bad Things(tm), I know they're in for a world of hurt when it does happen. Perhaps you mean, the optimal amount of fraud that isn't prosecuted... or not detected... ? Even then, I'd argue that there's a tiny percentage that's useful for keeping the safety/security industry on its toes and at the ready. As a proof point, if you believe that war (world peace) is not a solved problem, then it's only a matter of time before your city/region/civilization/race faces an existential threat, for which the only true preparation is to be ready to innovate and mobilize. Sorry if this comes across as dark. I mean it in the same vein as having a small percentage of farmers is desirable. By contrast, I visited a traditional silk factory in Stockholm (amazing btw) and the craft has been lost to the point where they're struggling to find craftspeople able to work their looms and other old equipment. See Jonathan Blow's excellent talk about lost technology: https://www.youtube.com/watch?v=ZSRHeXYDLko https://www.youtube.com/watch?v=ZSRHeXYDLko

deleted 4y ago
[deleted]

calchris42 4y ago

Your explanation is so much more succinct than the article! I believe buried in there is one other factor that is somewhat related: - reducing friction helps drive more legitimate business. Accordingly, over-aggressive anti-fraud practices can result in reduced sales. A toy example: a business could eliminate exposure to credit card fraud by not accepting credit cards. That would however reduce overall sales. I guess this can all fit within a “marginal cost” explanation though.

mlyle 4y ago
> I guess this can all fit within a “marginal cost” explanation though. Yes, but it undermines the first point, a bit. There's costs-- direct and social costs-- to making transactions hard; so perhaps optimal for a society is still not 0. Also, there's nothing to say that the amount of fraud is stable and that we can't find a world where we have better mechanisms to reduce it for the same cost. (Improved technology, legal structures, norms, etc).
ghaff 4y ago
>reducing friction helps drive more legitimate business. A very real example in retail. I can minimize the possibility that I'll be hit with fraudulent returns. Require a receipt, short window, store credit only, must be in like new condition with all packaging, etc. (Or just sell everything on an all sales are final basis.) Different stores do many of these things to a greater or lesser degree on at least some merchandise. But you'd probably better be offering really good prices if you do.
- rileymat2 4y ago
  And with all that effort all that friction, you still get hit with chargebacks no matter your policy for returns.
  - fijiaarone 4y ago
    Yeah, the system is set up so the payment processors benefit from fraud.

metacritic12 4y ago

Right, more generally: - X is ipso facto bad. The optimal amount is zero. - X is traded off against Y actually, so in general equilibrium with Y, it's nonzero. And the above pair could be: (Covid risk, attending fun parties) (Risk of getting hit by a car, being able to walk anywhere) (Discrimination in society, administrative costs of anti-discrimination laws). The list goes on. It's a simple concept in decision theory, rehashed with an attractive title.

scott_w 4y ago
Some of those aren’t analogous. Your Covid example: there’s also the cost _to others _ of you catching and spreading it, even if the risk to you is lower. Speeding is another example: the cost (or risk) might be acceptable to you but not to the person you have an increased likelihood of hitting and doing serious injury to. At a societal level, it holds, which is why we invest in measures to increase the cost of doing the wrong thing (speeding tickets, removing licenses).

LorenPechtel 4y ago

More generally--the cost to eliminate bad outcomes goes up exponentially as you deal with the easy bad outcomes. Credit card fraud is simply one example. Or consider a simple non-financial example: I left half a dozen pears on the tree this year--getting those last few pears would have required hauling a 50 pound ladder around the house and then struggle with setting it up. (Due to it's size it's a lot harder to handle than it's weight indicates.)

bell-cot 4y ago

This, definitely. But also - at the social policy level, there are two additional issues: - Outsiders: It's good to keep members of your society fraud-savvy enough that they can safely travel & do business outside your society...without being easy marks for fraudsters. - Stability over time: If your society somehow gets fraud down to ~0, that'll lead to big cut-backs in anti-fraud efforts, "end of history" dreamers proclaiming that fraud has died, etc. Which is obviously a set-up for a sudden huge resurgence in fraud.

filleokus 4y ago

Great explanation. But I'm not so sure about "The optimal amount of fraud in society is 0". Especially if we broaden fraud to include other crimes. There are costs to prevent other badness in society as well. Firstly it's the cost in taxes/allocating resources to its prevention: Do we really want to allocate a really large chunk of our shared human capital to police marginal criminal activity? How much more polices, judges, attorneys, lock makers, etc would we need to stop the last bike theft? Secondly and arguably more importantly is the cost of freedom. A lot of the digital surveillance initiatives that are discussed and dismissed here on HN are enforced in the name of zero tolerance against (really bad) badness in society. I think its hard, or impossible, to create a somewhat large society with zero crime rate. At least if we still want even just a sliver of the freedoms we are accustomed to in liberal democracies.

konschubert 4y ago
If you want something to be legal, make it legal. Don't make it illegal-but-not-enforced. Because then, whoever is in power can selectively enforce the law against any group they choose.
- filleokus 4y ago
  Hmm. I think my mental model is more that it should be "randomly" enforced. The probability of getting caught is higher than some certain threshold, but that it's not necessarily bad if that threshold is lower than 100%. I can't think of any resonable society that have taken actions to show that they want the probability to be 100%. I would even argue that the most harsh dictatorships probably have the highest enforcement, but that laws were/are very selectively enforced in the favor of e.g regime officials.
  - konschubert 4y ago
    Okay, I see your point, I think we were talking about different things.
thayne 4y ago
I think the point is that in a theoretical society in whcih there are no bad actors, and there is no cost to prevent fraud, the optimal amount of fraud is zero. That is, there isn't a reason you would want to encourage fraud, because a little bit of fraud is good. But when you also consider the cost of reducing fraud the optimal state for the system as a whole will have a non-zero amount of fraud. And of course, bad actors do exist, so in a real system you want to accept some amount of fraud. The difference is significant, because if you discover a way to significantly reduce fraud for a low cost (including cost of freedoms and similar), it will be worth implementating. And there isn't some point where you say "we are already down to x% fraud, we don't want to go any lower than that, even if it doesn't cost us anything".

chongli 4y ago

I think you’re conflating the terms optimal and ideal. The ideal amount of fraud in society is zero. The optimal amount of fraud in society is not defined, because optimization problems are always subject to a set of constraints. So then we may ask: “what is the optimal amount of fraud in society such that the costs of legislation, education, and enforcement do not exceed X% of GDP?” and that is a different question. You might also throw technology and R&D in there because new tools make it easier to investigate fraud. Of course new technologies also open up new possibilities for fraud, so this is a very complicated exercise. But I think it’s fair to say that given any reasonable constraints, the optimal amount of fraud is nonzero.

jbarciauskas 4y ago
The way this is phrased, I expected to learn there was some benefit to a low amount of fraud, as such. There is not. There is a benefit to a high amount of trust, which necessitates accepting some amount of fraud.
- chongli 4y ago
  We don’t need there to be a benefit to a low amount of fraud to optimize for it. Optimization is a purely mathematical exercise [1]. Once we construct the problem with a chosen set of constraints then we apply mathematical techniques to solve it. Of course, many types of optimization problems (especially non-linear or non-convex) can be extremely difficult to solve optimally without relaxing some constraints or settling for approximations to the optimal solution. But, besides that, the task of interpreting the results and of potentially selecting new constraints or even a new objective function is a separate matter. Perhaps we should be seeking to maximize trust rather than minimize fraud in society. But then we have to ask ourselves: “what would that look like?” [1] https://en.wikipedia.org/wiki/Mathematical_optimization https://en.wikipedia.org/wiki/Mathematical_optimization
  - auggierose 4y ago
    There does not need to be a set of constraints for optimisation to be defined. You can talk about optimisation on an unconstrained domain, for example all of ℝ⨯ℝ. But there DOES need to be a measure function that measures what you are optimising for. The benefit of fraud would be one such function you could optimise for, and that seems to be what GP is after. The pure amount of fraud is a different one, which seems to be what you are interested in.

sneak 4y ago

> This is why important transactions like banking have KYC checks, and buying a pair of sneakers don't. Banks do KYC checks because it is required by law, not because it does anything to reduce fraud. Fake IDs are a thing. Requiring identification does not make transactions safer without a lot of other stuff happening too.

not2b 4y ago

An optimal amount is an amount that can be achieved. The only way to achieve zero fraud is to have zero financial transactions.

lifeisstillgood 4y ago

This optimal (#) can and probably will change soon. We all carry around phones capable of trivial non-reputable verification, and centralised digital cash (not bitcoin but BankOfEnglandCoin) is technically feasible. So it's quite technically feasible for every day to day transaction to be completed with with the sort of KYC verification currently reserved for say house purchases. It's just the political / societal implications. These are beyond "hey it's expensive for banks to cut down on fraud" I disagree with the "banks should allow certain levels of bank fraud because X" for the simple reason we don't have "banks should provide interest free funding to murderers, sex traffickers, pornographers and drug ring" even though that is often the same thing. (And in a two page HN thread I am sure I am not the first to say that) (#) someone else mentioned the difference between ideal and optimal which is a very good distinction.

bobthepanda 4y ago
I would not call anything in the fragmented, legacy US financial system “trivial.” It took us a decade and counting to get chipped cards, longer to get contactless pay, and even then we don’t really use the PIN part of chip+pin. Something like FedNow is only coming next year.
- lifeisstillgood 4y ago
  Anything I am describing is a decade plus away. I mean every central bank could tomorrow just put up a non-permissive (#) blockchain and just make a virtual coin for every cent out there. And this would cause utter chaos. It would essentially end fractional reserve banking. That makes loans ... difficult. The impacts are enormous, but a digital native currency is so simple, so attractive we may well try it. And then have to rethink our financial regulations. It will look a lot like ICOs. I still think it is inevitable. (#) ok the terminology I find either dubious or I misunderstand but basically every wallet holder gets their private / public key registered, then there is a known state of money globally, and the Bank is a verifying party to each transaction. Something like that anyway. Theee are many options but essentially if we all "trust" the money printer then the technical problems simplify.
4y ago

manholio 4y ago

> The optimal amount of fraud a business/industry should accept is non-zero Let's make that: "The optimal amount of fraud a business should accept under the current credit card online payment system is non-zero". There is absolutely nothing intrinsic about online commerce that requires fraud. Online business routinely operate with a money first, zero consumer trust paradigm. They ask for my payment credentials first, and only then deliver the products. If we were to design the online payment system from scratch, we would use cryptography to completely remove the notion of credit card theft, and escrow to settle consumer complaints, with an option for paid arbitration when things go bad. I guess you can call some of those cases "fraud" and some customers are so unreasonable that they border on criminal, yes, you can't make that segment zero, but I don't think that's the kind of fraud they are referring to. The reason we can't have those nice things is because of immense momentum of the current system designed in the 60s by companies that have very little reason to change anything. In fact, an online payment reform would most likely strip them of their oligopoly. So yes, the optimal fraud level is non-zero because Mastercard, Visa etc. can push that fraud onto consumers (via retailers), and they are making much more money anyway from the current situation.

tfehring 4y ago

An analogy that may resonate with readers here is that targeting zero fraud is like targeting 100% uptime in a computer system. You evaluate the business trade-offs and decide how many 9s of non-fraud are appropriate, knowing that (1) each additional 9 is more expensive than the last but only gives you 1/10 of the benefit, and therefore (2) infinity 9s (equivalent to zero fraud/100% uptime) is a useless aspiration for all practical purposes.

kelnos 4y ago
That's incomplete, though. The business running the computer system would bear all the costs in attempting to target 100% uptime. Targeting zero payments fraud does mean the business has to bear the costs of the fraud prevention measures, but their customers also have to bear intangible costs, like the annoyance of a detailed, invasive know-your-customer process before being able to buy anything. But if I'm a user of this computer system that targets 100% uptime, I don't have to see any of the downsides/costs that the business incurs to try to get that uptime. I just see great uptime, and it's all rosy for me. I think it's important to acknowledge that, in pursuing lower (or zero) fraud, both the business and its customers have to bear costs related to that goal.

bawolff 4y ago

There are also arguments that a certain amount of rule breaking is neccesary in society to support innovation. A society with no rule breaking becomes static.

deleted 4y ago

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lamontcg 4y ago

> - The optimal amount of fraud in society is 0 If you had zero fraud in society then nobody would build in any defenses against fraud at all. You'd have a society of completely naive and trusting souls, which sounds blissful until someone wakes up one day and realizes that they can commit as much fraud as they like since society has no defenses against it. It is like saying that the optimal amount of disease is zero, but if you have never had your immune system challenged by any kind of disease, then the first virus you come across will probably kill you. Your suffering from childhood colds and getting burned by something like the car-out-of-gas scam help build defenses.

ablob 4y ago
If then someone came and did the fraud, there wouldn't be an amount of 0.
AaronFriel 4y ago
Not a perfect analogy with disease. And maybe it should suggest to you that maybe in fact, the optimal amount of fraud is zero. With disease, the optimal amount is likely still zero. The immune system we have is not great, its only selection criteria is to keep people alive long enough to have children and keep them alive long enough so they can. We're beginning to understand, like with HPV, that anything from a life threatening case to an asymptomatic one can cause lifelong changes in the immune system and either cause or increase lifelong risk of non-infectious diseases. And that's setting aside that we can, for example, just eradicate certain diseases if we set ourselves to it. Polio, smallpox, and hopefully malaria. If we could eliminate certain kinds of fraud - through education, through making it impractical - that seems good, yeah?
- lamontcg 4y ago
  But I think you just showed that its really pretty similar. And my gut reaction to the title of the article is that we really need less fraud and that we're very, very far from optimal right now. Although I'm not very concerned at all about fraud against government programs to help the disenfranchised. I'm more concerned about the endless e-mail, phone scams, door to door scams and all the stuff that prey on the elderly and vulnerable. Similarly with the immune system it would be interesting to consider wiping out Epstein Barr and maybe eliminate Multiple Sclerosis, along with exterminating the mosquitoes that bite humans and cause disease. But zero is likely not achievable or a stable optimum, and we're probably not going to cure the common cold or wipe out influenza and we may not want to (at least not without quite a bit of science fiction, global access to medicine and nearly 100% acceptance of vaccination in the population).

elcomet 4y ago

I'm not sure your definition of optimal makes sense if you don't take into account the cost of reducing it?