Skeptoid #1054: Let Yourself Get Scammed

The economics of scams

0:00Nobody likes getting scammed. We all get the fake emails, fake text messages, fake phone calls, always trying to trick us out of our credit card numbers or our bank login credentials or who knows what. It seems like something that is a complete drain on society that adds nothing. Well, that might well be true, but it doesn't mean that we'd be better off getting rid of all such scams. How could that be, you ask? The answer lies in economic theory.

0:33And in our extended content for premium members, how the same economic theory can be used to optimize types of punishments imposed upon criminals. All that and more is coming up right now on Skeptoid. Hey everyone, Brian here. Before we get started, a quick word about how you can support Skeptoid directly. If you've ever wanted your name permanently attached to an episode of this show, for example,

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2:06You're listening to Skeptoid. I'm Brian Dunning from Skeptoid.com. Let yourself get scammed. Welcome to the show that separates fact from fiction, science from pseudoscience, real history from fake history, and helps us all make better life decisions by knowing what's real and what's not. What would it be like to live in a society where there were no such things as scams? Where every email offer and spam phone call was perfectly legit, and where you no longer had to worry about your credit

2:40card numbers or protecting your computer from viruses. And in society at large, law enforcement would be freed up to pursue more serious crimes. Well, the fact is, it doesn't matter, because that's not the reality we live in. Scams are everywhere, whether it's phone calls, text messages, emails, emails, and even still the occasional snail mail. But here's a question you may have never pondered before. Is there actually some non-zero level of scamming out there that is optimal? Might society

3:13as a whole, and an individual, be better off with some baseline level of being victimized by scamming? The answer, it turns out, is not an automatic no.

Optimal level of enforcement

3:26It's necessary to establish one core concept up front, and that's that all scams, including fraud, theft, cons, or any kinds of crimes that cause harm, cause only harm, by definition. Zero scams is the optimal level for minimum harm. Please don't misunderstand this topic by inferring that there might be some low level of scams that results in people's situations being improved. It's just that the real world is more complicated than that. Fighting crime has a cost, and when the costs to society of fighting the crime

4:03exceed the losses to society resulting from the crime, then economic theory tells us that society as a whole would be better off if we let more crime happen, until a balance is reached. This balance is called the optimal level of enforcement. Similarly, for the individual, trying to get to a point of zero risk has an unacceptably high cost. Instead, it turns out that each of us is happier not when we have zero risk, but rather when we have acceptable risk.

4:36Here's an everyday example, boiling it down to something you and I are both likely familiar with. I know that I am paying too much for streaming services. I'm aware that my main service, Hulu, also includes a certain number of other services, but I'm never quite sure which ones or how many. ESPN, HBO Now, Disney, Paramount, I'm just not sure. I think I'm probably also paying for one or more of those services individually, and unnecessarily. Maybe around 15 bucks a month a piece. But frankly, I just don't have the time or patience to sit down and figure it out.

5:11The opportunity cost is just too high. I also don't care that much because I rarely or never watch anything on those services, even though a more rational choice might be to care even more about paying for services when I know I don't use them. Now, this isn't exactly me being scammed, but I'm letting myself be taken advantage of, because for me, I feel better off putting that time to other use. So it appears that probably something around $30 to $45 a month is the level

5:43of loss that I tolerate. Most of this comes down from a famous 1968 paper by Gary Becker, then at the National Bureau of Economic Research, titled Crime and Punishment and Economic Approach. This basic work has been built upon by countless economists in the decades since it was first published. Thinking like an economist turns out to be a great way to find solutions to all kinds of problems. Becker found that from the criminal's perspective, deciding whether to commit a crime

6:17is fundamentally an economic choice. Think of an equation where the variables are the number of crimes committed, the probability of conviction, the punishment if convicted, and probably others. It all breaks down to a cost-benefit equation for the criminal.

6:34Similarly, from most of our perspectives, that of the victims and law enforcement, we find that it's relatively inexpensive to combat most crime, and increasingly expensive as we get to the more difficult crimes to investigate and prosecute. Reducing crime to zero would be prohibitively expensive, and probably impossible no matter how much we spent. The goal for law enforcement, from an economic perspective anyway, should be to push crime down enough to make the criminal's cost-benefit equations

7:07reduced to the point that, quote, crime doesn't pay, to borrow a popular phrase. By this rationale, it's possible to fight crime too hard. If you've already achieved a net loss for the criminals, and already reached the optimal level of enforcement, spending more to push crime down even lower, produces a net loss to society.

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Calculating social damage

8:43You've probably noticed by now that reducing all of this down to a set of cold variables, giving us a net profit or loss, is not exactly the most human way to talk about serious crimes like rape and murder and their human cost. That's the one thing we can't attach a dollar value to. So it's the one thing we really can't put into a mathematical formula and find out whether we need to spend more or less on enforcement. Human life is literally priceless. In his paper,

9:14Becker made a special point to be clear about this. It's a serious limitation of the whole concept of using economic theory to fight crime. Imagine someone who gets scammed out of thousands of dollars. Giving them the thousands of dollars back as restitution might make them whole financially, but what of the shame, embarrassment, and other potential psychological damage? In fact, even in my glib example of being too lazy to figure out my streaming services, the value I place on the

9:46opportunity cost is purely subjective. What is my time worth to me to not sit down and do all that work? This is obviously negligible compared to the human cost of serious crimes, but it is still calculated in the same way. From a purely formulaic view, the human cost can be accounted for in the equations. It's just that we have no way to attach a dollar value to the variable. Becker's basic equation for determining the social damage from scamming is D equals H minus G, where D is the net

10:23damage to society, and it simply equals the harm to society, H, minus the gain to the criminals, G. Human cost, undefinable as it may be, is included in the H term. If we underestimate it, for example, by considering only the financial factors of a murder victim's loss and not the human cost, then our D value will also be underestimated, and we would thus not be spending enough on law enforcement. If you're questioning the inclusion of gain to the criminals, G, in this equation,

11:00especially in its role of reducing the net harm to society, you might be crying foul. It seems like Becker was saying, oh, if someone made a billion dollars from insider trading, that's a giant billion dollar win for society. Like criminal profits are a good thing. In point of fact, this is, for real, how this branch of economic theory works. Crimes do influence the economy, and we must take that into account to have an accurate understanding. Take Bernie Madoff. He made billions of dollars,

11:34but his victims lost tens of billions. Their loss, minus his gain, shows an enormous negative outcome for society. But now, imagine a victimless crime, and a random made-up example. Suppose bits of smelly, unsightly, fly-attracting seaweed from a state beach are suddenly worth money on Etsy, and a bunch of people go down, collect it, and sell it for a profit. Everyone's happy, and the beach even got cleaned up. Even though taking the seaweed was technically illegal, this might not be a great

12:10example, and you can probably come up with better ones. Those Etsy profits now get reinvested into the local economy, etc., etc. Economists would rightly call this crime wave a positive economic outcome for society. This might suggest that we should consider decriminalizing the great seaweed caper. But if we had counted the seaweed profits as a negative, it would have flipped the equation upside down, and we'd be looking into increasing law enforcement against the seaweed thieves, at the

12:42expense of enforcement against other crimes, most of which have victims who were harmed. So, even though it sounds weird to do so, the gain to the criminals is still counted as a gain to society at large, assuming we want these equations to give us comprehensive data upon which to build useful policy. So, to bring this all back around to where we opened, how much scamming should you be willing to accept? It's tempting to answer, none, I don't want any. But there is actually theory suggesting that's

13:16not what we want. We don't want zero risk. We want an acceptable level of risk. This is the risk homeostasis theory, proposed in 1982 by Gerald Wilde, and his original paper talked about the risk of, say, traffic accidents. Most of us will jaywalk from time to time. When the streets clear, the risk of either getting run over or ticketed are both low enough that we accept it. Some motorcyclists who ride without a helmet make the same choice. Most of us are usually a few miles per hour over the speed

13:50limit, knowing that the risk of getting a ticket is low. In none of these choices are we seeking zero risk.

Risk homeostasis and crime

13:58Risk homeostasis applies equally to getting scammed. If I wanted zero risk of getting fooled by a well-done phishing email, I would have no email. But it's clear that I prefer an acceptable level of risk. If I wanted zero risk of overpaying for my streaming services, I wouldn't have any. Clearly, I'm choosing a non-zero level of risk there, too, because the end result suits me better. So it turns out that for every

14:29individual person, there is a non-zero level of scamming that we find to be optimal. This does not mean the scam is a good thing. It's not. It means that the cost of being scammed needs to be balanced with the cost of managing that risk. In probably every case, our individual optimal level of scamming is non-zero. Similarly, for society as a whole, the only law enforcement decision that makes sense is to seek the optimal level of crime, not zero crime. Even when we factor in the human cost of

15:06crimes, which can be very high, everyone comes out ahead when crime is substantially reduced but never eliminated. The crimes themselves are absolutely still harmful. But the folly of trying to make them go away completely is even more harmful.

15:29We continue with what we'd get if we applied economic theory to punishing criminals once we catch and convict them in the ad-free and extended premium feed. To access it, become a supporter at Skeptoid.com slash go premium.

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