Assuming financial criminals are rational, they deal with large sums of money, have feasible alternatives of finding legal ways of making money, financial crime must offer attractive rates of return. What might the rate of return be?
It would vary a lot across individuals. In financial markets, there is one discount rate for a paticular level of risk because financial assets are tradable. However, commiting a crime is certainly person-specific, this risk cannot be diversified away, and therefore it would vary hugely across people.
As the risk factor is very high when you commit such kind of criminal offence, obviously the higher demand of returns will be there.
such kind of risk is not tradable hence non diversified therefore the high return expectations might be possibl.
That is a very interesting question. First, are you asking everyone individually what their criminal hurdle rate is? Or, are you looking for a way to quantify or construct a model? Either way, I'd assume availability and cost of siphoning options, tolerable leakage rate, and acquaintance with Saul Goodman-esque persons would be major determinants. Moreover, assuming absence of ideological motivations, it should vary greatly sector-wise also. Hope this helps.
PS: kudos for the imagination. It's not often I get to scratch my head over an academic question pretending I'm Pablo Escobar.
Thanks for the ideas! I've been thinking about this from the individual person perspective, my intuition beeing that the hurdle rate would be higher than for the available legal forms profit. Otherwise, why would one risk it?
It's hard to look at this from a portfolio perspective, though major investment banks are subject of so many prosecutions (partly due to extensive regulation and the large number of employees and transactions involved) that the whole set of offenses might be seen as a portfolio. Same for the mafia. If you diversify crime, the hurdle rate will drop drastically, assuming there is little systematic risk involved.
Now, from a broader perspective. How could we conceptualize the "average" required rate of return on financial crime?
I think that when it comes to crime, discount rate is not the most useful concept. For a typical crime, you either get caught or not, and you know very quickly. Therefore, the time element of discount rate is not important here. I would instead consider risk aversion with respect to crime. Maybe asking people questions like:
If your ordinary salary is 10 USD per hour, would you commit a crime considering that it takes one hour to commit the crime, likelyhood that you will be caught is 5%, and if you are not caught, you will get 1000 USD?
Risk aversion maybe a good frame, as an alternative... Thinking Kahnemann&Tversky here. There are two issues that make financial crime singular:
1) The salary would be 500.000 and the proceeds from crime 50 million
2) Even if you do get caught, you will incurr any losses with a long delay, while the profit is immediate. Nobody goes to jail (or a scape goat does), there are just damages and penalties to be paid, but that's after 5 years or more.
3) It's often a corporate crime, not a single-person but many are involved.
cant ask for a reasonable return or return in general if it is immoral act and taking excessive risk
I actually think this is a very profound question that deserves following through with. Actually, a book needs to be written on this subject. Criminal activity and mindsets are normally immediately dismissed when they posit another point of view and world view that thankfully few follow, but which are and always have been part of human societies and activities. They need to be understood and indeed rationalised.
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