Business Process Audits

My weak solution for a challenging problem

Lyman Stone writes,

So no limits for winning, limits for losing is a pretty reasonable regulatory approach. Winners don’t threaten serious social harms. Losers do. Uncapping winners and protecting losers will also dramatically worsen the balance sheet of gambling sites, forcing them to charge higher spreads on bets, which will deter many gamblers.

Sports betting firms profit from their skill at finding psychological weaknesses in the population and exploiting them. That is their business model, and Stone does not like it. But would his proposed solution help? I would bet against it.

At best, it would amount to a tax on the economic rents earned by gambling firms, with the tax revenue going to the gambling winners rather than to the government. A tax on economic rents does not change the marginal conditions for the firm. It still tries to maximize profits obtained from gambling addicts. Moreover, my guess is that the firms will adapt by designing contests that inherently limit their possible loss to skilled gamblers, so that there will be no change in economic rents earned, either.

Predatory Business Models

Sports gambling is an example of a predatory business model. The entire business is designed to find psychologically weak people and exploit them. Maybe 95 percent of sports gamblers do it for fun and don’t hurt themselves, but the point of the business is to capture the other 5 percent. Or so I believe.

To really know whether sports gambling is predatory, I propose that either a government agency or a consumer organization conduct a business model audit for each firm in the industry. This would look at all of the business processes involved—product design, marketing, customer relations, etc. The goal would be to identify practices that either intentionally or unintentionally select for and take advantage of the customers who are least able to fend off exploitation.

Suppose that audit findings show that certain parts of the business model truly are exploitative. The libertarian response would be to let publicity about these findings take care of things. A less libertarian response would be for government to impose fines.

Are there other industries where the business model is evil? Politicians and courts have made that judgment concerning tobacco companies and opioid manufacturers. Perhaps business model audits might have found the problems sooner, and such exposure might have changed corporate behavior.

Many (most?) products harm some people some of the time. That is not sufficient to trigger an adverse finding from a business model audit. An adverse finding should be reported when the business model by design selects customers who will be harmed and particularly profits from those customers.

For example, suppose that we observe a correlation between teenage depression and use of a certain social app. The correlation may not be causal. Or it could be causal, without enabling providers of the app to profit. But if the auditors can prove that the social media app selects for especially susceptible teenagers and profits from feeding them content that sends them into depression, then that is a significant finding.

Another controversial example would be credit cards. Suppose that credit card companies do not make money from people who always pay on time, and they lose money on people who run up large unpaid balances and go bankrupt. But they do make money on people who occasionally do not pay their balances on time. Is that an evil business model? I would say that if consumers over-spend and incur high interest charges because of what the credit card company is nudging them to do, then that is a business model issue. Otherwise, who am I to say whether the customers do not benefit from the goods and services that they obtain when they incur subsequent interest charges?

If you like bright-line regulation with strict rules and definitions, then the business model audit will not appeal to you. But I think that it could be of some value in a world where there is so much potential for smart people to come up with ways to exploit the psychological weaknesses of others in the market.