Luddic Fraud and Public Savagery

We had rekt the competition. By Year 3, our company had a 40% market share and a couple of our dozen-or-so competitors were already insolvent. Most of the rest were choking on massive unsold inventories and worthless real estate. Even when the economy had soured a couple of years later, we were swimming in free cash flow, kept investing in new products and facilities, and – to crush the spirit of the competition completely – paid out fat dividends.

This happened in the simulation game during the final year of my business degree. It was a high-value experience not just because of all the fun my partner and I had while cruising through our final year. There was just so much good teaching in the “International Strategic Management” course that we were taking together (obviously none of it came from the textbook – I’m not even sure there was one). Fraud was the very pinnacle of that good teaching.

Just before the final round, our nearest competitor was light years behind, on both financials and game points. But two of the middling teams (and by “middling” I mean “near-bankrupt”) conspired to game the system through classic accounting fraud (which was not prohibited by the rules of the simulation). They sold each other assets at inflated prices, thereby booking enormous profits and reporting gigantic balance sheets on the asset side in the final tally. Despite their fraud, we ended up a very close second. So hard had we rekt the competition, even fraud couldn’t help them. And ultimately the professor figured out what had happened and nullified the fraudulent transactions.

Much of the credit for our winning big goes to my partner-in-virtu – a longtime friend, who’s gone on to a great career in finance. She was terrific in handling the technicalities of the game, had the character to be completely unperturbed by the savagery I was inflicting on our operations (I kept pushing the limits of what we were doing despite our early success), and exercised the good judgement to keep our plans secret. We barely had to meet outside of class to do any of it, so well did we work together. And when we met (in secret) we spent most of the time laughing. (In case you were wondering what winners do in their private time, now you know.)

How to Win Even More Bigly

Winning, and winning big, is surely enjoyable. But in the end, it was bittersweet. Not because we didn’t get the most points on the final board and missed that excitement (the board went out before the fraud was discovered and publicized). I was kicking myself for not having invented the scheme earlier, and finding a way to prevent it or turn it to our advantage. The game (as poorly designed as it was) had turned out extremely useful – not for the financial inputs but for the human behavior. In vino veritas, in ludo civitas.

Here are some of the lessons it taught me, in no particular order:

1. Complacency is euthanasia.
2. No-one is more dangerous than the weak/stupid/incompetent.
3. To win, you don’t just master the game – you master every which way to break the game (hunter).
4. Avoid unnecessary commitments.
5. When something is too good to be true, it is too good to be true.
6. Only ally yourself with the competent.
7. If some glaring success cannot be explained, it’s probably fraud.
8. Fraud has to be invented.

(Be aware that I had to learn Lesson 1 although we were not complacent even for a moment throughout the semester. We learnt from something that didn’t happen.)

Understand that most fraud you’d encounter in life is luddic – committed by people who think they are better than you, but fold quickly when the going gets even a tiny bit tough. That’s why public savagery is so effective as a fraud deterrent. Both D. J. Trump and N. N. Taleb are extreme practitioners of this tactic. The really juicy bit is that it works prospectively and cross-domain. If you feed a couple of people to the lions – just for fun – no luddic burglar will try to break into your villa (only the very best heisters will). Because I fired and sued a back-office employee publicly yesterday, my construction contractor is doing an excellent job today. (Note that a corporation or government would do the exact opposite – try to cover up any fraud or incompetence, or any appearance of unpleasantness.)

If you’ve read any of President Trump’s books, you will have noticed that he’s never been particularly effective in suing people. Not on the legal side. But he kept threatening to sue this guy or that, and sometimes filing lawsuits. Why did he keep doing that if it was so see-through, sometimes cost him money, and could even be seen as a weakness? One big reason is how well it works as a filter against luddic fraud. Brassless fraudsters shrivel away even when they can see through your posturing.

Imagine me working on a research note with Nassim Taleb. Knowing what you know about him, you can probably see it would be very successful, but also a lot of rigor and hard work, wouldn’t it? Or else.

It would be even more obvious – and onerous – for the fraudster: not just the pretend work, but the fraud itself would be a lot of hard work. And the consequences of getting caught would be severe. So even with a high potential reward, the luddic fraudster would be deterred (a hardcore fraudster wouldn’t). If I had been more savage publicly as a student (outside the frame of the game), the teams which committed the accounting fraud would have thought twice before doing it. Despite that their transactions were not prohibited by the game. Luddix are bullies in the sandbox, but cower when they pass through a dark alley alone.

The Problem with Cowardice and Stupidity

As with most things, stupidity immunizes even luddic fraudsters against deterrence. You can witness this in the comments of Nassim Taleb’s Twitter account on a daily basis. You will see a bimodal distribution (the proverbial barbell is omnipresent!). On one end you find lots of interesting questions and useful contributions; on the other – lots of mind-numbingly boring trolls and downright idiotic complaints; the endless expanse of the Sahara in-between.

Deterrence cannot immunize you against cowardice either. The coward with a chip on his shoulder (which is often his own cowardice) will wait in the shadows for an opportunity to backstab you. This is one of the hidden, however small, costs of public savagery – it attracts the resentment of dangerous cowards. The good news is that the more savage you are, the better the backstabbing opportunity that the coward will want to wait for. So most cowards will end up waiting forever.

The lesson here is that if you decide to be savage publicly, you have to go all the way. The middle ground is stupid ground. Because the middle ground is dangerous ground.

Update: Context and why I wrote this today. Would they do anything like this if they were playing against the Mob?

These Are The 6 Traders Who Were Just Arrested For Manipulating The Gold Market https://t.co/kQVetXi1eZ

— zerohedge (@zerohedge) January 29, 2018