Some Thoughts on Davies’ “Lying for Money” (2018)

Dan Davies, Lying for Money: How Legendary Frauds Reveal the Workings of the World. US edition (Scribner: New York and London, 2018)

Lying for Money is one part a monograph by someone who has studied and taught a problem for decades, and one part an extended blog post. It is also a bleak book. Davies thinks that fraud grows out of the cost of verifying facts and the techniques by which managers simplify the world to make it comprehensible (legible in James C. Scott’s terms). The cost of auditing or checking references appears every day, but the cost of discovering that one of your nurses never completed high school and one of your suppliers disappeared overseas with your money only comes up occasionally, so people tend to take fewer and fewer precautions until they suffer for it. Whereas some fictional fraudsters target the psychology of individuals, Davies’ fraudersters target the psychology of institutions and cultural expectations about what is trustworthy and authoritative. Very few large frauds are the fraudster’s only attempt: many get out of prison for one fraud and are trusted with other people’s money a few years later. (I would be interested to hear more on why fraudsters are often the victims of other fraudsters, and sometimes throw in money to keep the illusion alive when they could just take it and run).¹

This is ‘white-collar’ crime we’re talking about, after all: one of its defining characteristics is that it’s carried out by people of the same social class as those responsible for making decisions about crime and punishment. We’re too easy on people who look and act like ourselves.

(p. 261 / ch. 12)

A strength of the book’s informal style is that it tells memorable stories. The first of these is how an online drug market was built so that sellers could not cheat buyers (funds were locked in escrow until the buyer confirmed receipt), and this was so inconvenient that traders promptly invented ways of doing business which were more convenient for sellers but also allowed sellers to take the money and run. The new ways let sellers charge less, but sometimes resulted in the buyer getting nothing. Since both sides were completely anonymous, there was little risk in taking the money and running, and the more a seller was trusted, the more she stood to gain if she just stopped sending the goods.

A weakness is that these stories are stories not case studies or examples. Lying for Money has no formal citations. There is a five-page list of further reading, and a few people and books are thanked in the main text. One reason it is like a blog post is that the reader is not supposed to care about individual facts, just the general plausibility and emotional power of the argument (Davies repeatedly encourages readers not to worry about the details, but of course skipping the details is how you get rooked). Fraud since 1822 is not an area of my expertise, and citations are one of the key technologies by which my culture checks dubious claims. The long list of endorsements by journalists and pundit-economists on the back cover reminds me of Davies’ warning about men in good suits and of spaces where everyone trusts everyone else because they assume that to get in everyone was verified.

Because of the rambling style, I also found it difficult to pick the principles or lessons out of each chapter. When a book tells readers to expect three things, I expect to be able to find three things before the topic changes.

If you want to understand how white-collar crime works … you need to think like a prosecutor. Financial frauds might be presented as a mass of overlapping documents and witnesses, but thy are created from simple plans following basic principles, Stick to the broad sweep. Don’t get bogged down in the detail.

p. 19 / ch. 1

Although this book begins with Gregor MacGregor‘s fictional colony of Poyais in 1822 and the execution of dine-and-run scammer Barbara Erni in 1784, its surprisingly interested in the ancient and medieval world. Large frauds were rare before the 19th century, with the noted exception of insurance scams on shipping, delivering bad products for good prices, and lying about credentials and ancestry. It was rarely possible to create a business which existed independently of the founder or a handful of founders. Davies suspects that relying on personal and family relationships and keeping businesses small were very effective at controlling fraud but also limited wealth and the ability to do big things. If you can only do business with people after interweaving your life and family with theirs for decades, then your pool of partners and investors will be small. His metaphor for these two types of economies is Greece (low-trust, low-fraud, poor) and Canada (high-trust, high-fraud, rich). If he is right, large-scale fraud is an inescapable part of the type of economies which have spread from the North Atlantic since the 19th century.

Davies also notes that the bounds between fraud and simple sharp or sleazy behaviour are unclear and culturally variable. This comes up in his discussion of insider trading as a market crime (a violation of the norms of a specific market) and the difference between legal tax avoidance and illegal tax evasion, but he alludes to companies which borrow money on the basis of an unlikely story of how they will make money one day. He has also thought about just what Theranos was doing that many web service companies did not do:

The rule ‘don’t deal with people who fake demos’ would have kept you out of all the biggest success stories. Even Microsoft, for example … This ‘smoke and mirrors’ approach seems to make an appearance in nearly every biography of any of the tech giants, and it is not always apparent that the authors understand that faking a nonexistent technology in order to attract sales or investors is pretty much the same thing as salting a gold assay.

p. 115

There are also many ways to take over a kingdom or a company and strip it for parts which are not traditionally classed as control frauds, even though the act of using a position of authority within an organization for your own benefit is the same. A complicated section tries to tease out the difference between a Ponzi scheme and the common business practice of taking out one loan to repay another (such as renewing a mortgage). Because of the rambling, conversational style, concepts like the three components that make a fraud a Ponzi are hard to pick out even though the language is very simple.

This book has two versions with the same title and subtitle. The British version came out first, then the North American edition was extensively rewritten. Apparently the British edition covers fraudsters like the Kray twins who his American editors thought readers would not recognize. This edition talks about the Bre-X fake gold mine in Indonesia and the Pigeon King International get-rick-quick scheme so it has some Canadian content!

Research fraud has a similar structure to financial fraud as Davies understand it. Dishonest researchers rely on the fact that its hard to check what the work cited in that footnote actually says, or write the author for a copy of the data and examine it yourself, and they rely on the certification of peer-review (“can all these peer-reviewed publications in famous journals be wrong?”) Financial fraudsters wave official-looking papers from distant jurisdictions, research fraudsters used to cite obscure publications in foreign languages and hope nobody would prove that they did not exist. Science relies on verified trust but it is mainly enforced by educating students into a culture of research, the peer-review process, and word-of-mouth about who can be trusted not the awesome penalties which licensed professions such as psychiatry, accounting, or engineering impose on violators. There are very few rewards for showing that someone else’s research is wrong, certainly not enough to make up for the fact that its harder work to show that something is false than assert that it is true. (Brandolini’s Law, or “Sometimes, an argument which cites no evidence is more convincing than an argument which cites weak evidence.”) Fraudulent researchers who get caught can usually keep their jobs and their institutional affiliation and even continue to publish research.

In Davies’ metaphor, “Greece science” would be something like archival research or Tycho Brahe’s astronomical observations which trusts relatively few things, while “Canada science” would be something like a grand theory of history or a ‘big ideas’ book on psychology by a Kahneman or Ariely which draws on dozens of other researchers and tends to assume that their papers prove what they say they prove.

Lying for Money left me with some useful and memorable ways of thinking about fraud. I had trouble picking out some details of the argument due to the rambling, allusive style (and I have not verified all of his examples). Sitting down and diagramming the arguments might have helped. I think this is the kind of popular book which boils down decades of experience into everyday language, and not the kind which just sounds knowledgeable.

PS. Since this post was scheduled, a review of the same book by Andrew Gelman has already appeared. Check it out! I like Gelman’s term linear and exponential frauds (skimming a bit off the payroll, versus creating a fake investment with rapid growth). Since I drafted this post I have briefly corresponded with Davies.

(scheduled 5 May 2023, updated 7 July 2023, 15 September 2023)

1. Edit 2024-11-02: Dan Bortolotti points me to a paper showing that current and retired financial advisors in Canada tend to invest in expensive, underperforming active funds just like they push on their clients (so they don’t just recommend these to clients because they get to keep some of the high fees) Juhani T. Linnainmaa et al., “The Misguided Beliefs of Financial Advisors,” Kelley School of Business Research Paper No. 18-9 (2018) https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3101426 ↩︎