Anatomy of a Scam: The Pricing of Knowledge

Thursday, May 28, 2015

Legitimate businesses can be boring. They generally follow the same script every time: a company offers a useful product or service in exchange for money. After a while it gets boring, so I've begun to read about criminal enterprises. The most interesting crimes are "cons" (short for confidence tricks). Why are they so intriguing? Many of them involve the intentional mispricing of goods, services and information.

I recently came across a particularly interesting con. It involved the pricing of sports betting advice. As you can probably guess, the value of a correct prediction in the gambling world is immense. It's quite literally beyond measure as any amount invested could be paid back with the proceeds of a successful bet.

As such, every gambler is constantly seeking an edge. Wouldn't it be great if there were a business that would (for a fee) predict the winner of an upcoming game? Certainly! This particular strategy is very deceptive because it involves telling clients the actual winner of a future game without fixing the results. Here's how it works:

  1. The con man gathers a large number of customers ("marks").
  2. The con man randomly divides his customers into exactly two groups of equal size.
  3. The con man then selects a popular sporting event.
  4. The con man tells one group that one specific team will win.
  5. The con man tells the other group that the other team will win.
  6. The con man removes customers who were told to bet on the losing team from his list of clients.
  7. The con man then proceeds to step 2.

Over time, there will be a handful of people who have received the correct betting advice for many games in a row. Using this system, it would take 128 clients to ensure that one of them would receive the correct betting instructions seven times in a row.

How much do you think a client would pay to a service that had given him the winning pick four, five or even six times? Quite a bit, as I explained earlier. Such a service would appear like magic - after all, how could such a service have been right so often?

Of course, like all scams, it cannot continue forever. Eventually, the number of clients will dwindle to 1, at which point all bets are off.

Many of you may laugh off this situation. Perhaps gamblers are at fault for putting themselves at risk. Unfortunately, such schemes can easily be used elsewhere in the world. Instead of a scammer picking the winning team in a sports game, couldn't he pick whether a particular stock will go up or down? Congratulations! You have just received your first lesson in finance. Pricing knowledge can be used for both good and evil. Please choose wisely.

Trying to figure out how to price your product or service? Why not contact me for a consultation? Those working in the world of software will surely enjoy my book on software pricing.