The optimal amount of fraud is non-zero

The point is not that all banking is a fraud, but rather the more subtle point that we rely on the judgments of others when we decide whom to trust. For years, Madoff had been a well-respected figure in the investment community. Madoff’s fraud was possible only because so many people trusted him. The more people trusted him, the easier it was for M

the absence of trust adds immense costs to transactions. When we do business with people we know and trust, we are willing to extend credit, send orders before we receive payment, and otherwise take steps to speed a transaction. When we lack that trust, we invoke intricate mechanisms to prevent bad behavior.