A Piece of Paper Worth a Billion Dollars

Slate’s The Big Money had an amusing post the other day about some fake Treasury Bonds that were seized earlier this year. The post is mostly about the implausible conspiracy theories that were subsequently hatched, but US-Treasury-Small what’s interesting to me is the implausible nature of the fake bonds themselves.

In two separate incidents, Italian authorities confiscated stacks of bonds with a  total face value of $250 billion. A collection of US debt that large is itself pretty unlikely, but what really pushed it over the frontier of believability was the fact that these stacks weren’t all that tall. Denominations for single bonds, that is, single certificates, went as high as $1 billion.

To understand just how far beyond the realm of reasonable this is, you need to know that a) the government stopped printing paper certificates in 1986 and b) in the days in which it did print certificates the highest denomination was $100,000. The total amount of authentic paper bonds still in circulation is $105 million. That’s million with an M.

Why would anybody want to fake a $1 billion bond? Apparently the scam is to use the fake bond as collateral for a loan and then skip out on the lender. I suppose that trying to sell it outright would raise too many red flags as a real bond could just be cashed in or sold through a bank or broker.

But why a billion dollars? Isn’t that like counterfeiting a $300 bill? Actually, it’s more like counterfeiting a $1 million bill.  And human nature, and our typical inability to do math, being what it is, counterfeiting a $1 million bill makes more sense than it should.

Imagine you are a con-man/forger. It’s the same amount of effort to produce a decent looking $100 bill as an equally crisp $1,000,0000 bill. You plan to stand on a street corner and attempt to sell your product for $50 a copy, using some complicated story about how you need the cash in the next 60 seconds and are willing to take the loss.

Which will sell better, the $100 bill or the $1,000,000 bill? In a more perfect world the more plausible $100 would be a better product, but I bet you would do better with the $1,000,000 one.

Your customers will be pretty sure that both bills are fake. Otherwise why would you be willing to sell it at a discount? But most of them will not be able to dismiss from their heads the possibility that maybe it is real after all. That’s human nature. If we can imagine it, then it could happen.

The inability to do math comes in when we try to apply a probability to that slim chance the bill is real. Most people, I think, can’t really get their heads around probabilities less than 1 in 100. Paying $50 for a $100 bill that has only a 1 in 100 chance of being real is a poor idea. But $50 for a 1 in 100 shot at $1,000,000 is not a bad bet at all.

This is why, as the Big Money post points out, that those Nigerian spam scams always promise princely sums, even though the sheer size of the promised windfall ought to alert any reasonable person that the offer is fake. And, of course, this is why lotteries work. A chance at millions of dollars always seems worth $1, no matter how slim that chance is.

In some ways this is the flip side to similar difficulties many people have keeping themselves from rounding up a 90% chance to a certainty. We can appropriately deal with probabilities that are non-extreme, a coin flip, whether or not the stock market goes up today, who will win American Idol, etc., but when a probability approaches 0% or 100% our instincts fail us and we act foolishly.

So we buy lottery tickets. We worry about our kids being abducted by strangers. Or aliens. But we don’t worry about them dying in a car crash. We assume that a 90% certainty of having enough to retire on in ten years is a guarantee of having enough to retire on. And we buy $1 billion Treasury Bonds because, well, they could be real, after all.

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