Project LinX: Theranos The Harbinger

Project LinXThe world is neither random nor cruel. It’s simply complex. We interrogate anything that looks simple and anyone promising easy answers. That causes problems. Bring it.

Today, 02/20/2019: The difference between a scandal and a scam.

Journalists covering tech companies have grown fond of referring to their massive screw-ups as “scandals,” particularly if a scandalized firm was once a darling or is currently a juggernaut. Samsung’s Galaxy Note 7, Foxconn suicides, Yahoo’s data breaches, and anything bad or embarrassing for Facebook over the last year or so are a few examples.

“Scam” in tech and finance journalism is reserved for fraud deliberately hidden from view and applies to schemes such as WorldCom and Bernie Madoff’s Ponzi scheme. On this scale the word’s pronunciation (so evocative of under-handedness and double-dealing) captures both extreme perfidy as well as the corporate culture that made it acceptable and routine.

“Scandal” suggests an aberration within an established order. “Scam” suggests an aberration that is the established order. Both have perpetrators, but only the scam has suckers. When the stakes are high sometimes we ache to believe the unbelievable as the scam becomes systemic, the system itself a virus that rewrites the business plan as it reaches a scale of fraud that’s indicative of our age:

“Former tech billionaire Elizabeth Holmes was able to dupe wealthy backers, the media and others because “we’re all invested in dreams.”

So says prolific filmmaker Alex Gibney, whose latest documentary—“The Inventor: Out for Blood in Silicon Valley”—examines how Holmes’ promise to revolutionize blood testing was too good to be true.

“We all like people who over promise and overachieve,” Gibney told journalists Friday at the Television Critics Association press tour. “So the grandeur of these visions is compelling to us, which is why I think we’re all invested in them. … But we’re also interested in when people take us in, and then lie to us, and fail. I think we’re happy that they fail.””

“HBO to air documentary on Elizabeth Holmes’ Theranos scandal” | The Mercury News | Chuck Barney | 02/08/2019

Just what did Theranos CEO overachieve? Absolutely nothing. Even Gibney is spellbound.

To most of us cases like WorldCom or Tyco or Madoff highlight the dark side of arcane fintech that can crash companies and ruin lives. However, to me all that financial black magic highlights the extent to which the light side—the honest and respectable aspects of tech and finance that function as advertised and return real value to investors and shareholders—have nonetheless been mystified beyond our abilities to really know what’s true and what’s bullshit. (Lots of people still believe that trading stocks and bonds looks like a scene from Wall Street. More and more it looks like algorithms.) In that sense the line between fair and foul becomes a thin, endless stream of 1’s and 0’s.

I’m currently listening to The Dropout, an ABC Radio-produced podcast as well as reading John Carreyrou’s Bad Blood. Both are riveting accounts of how CEO Elizabeth Holmes dropped out of Stanford and used her tuition money to start Theranos with a goal of producing a device that could run 200 tests on a single drop of blood even though she had none of the technical training needed to achieve such a feat.

Nearly twenty years ago I read Bethany McClean’s classic article “Is Enron Overpriced?” in Fortune and then her book The Smartest Guys In The Room. I’ve watched the Enron documentary of that book dozens of times. Guys like Enron’s former CEO Jeff Skilling and former CFO Andrew Fastow were really smart guys who could’ve done good instead of committing massive fraud by hiding Enron’s debt and boondoggles in order to keep its stock flying high. It’s still such a poster child now that even when I tell people that Enron was the first to trade weather futures (thus saving many farms from bankruptcy) and pioneered the technology that made Netflix as we know it now possible they look at me like I’m nuts, assured that Enron was evil to the core.

The Theranos scam looks like the Enron scam. Both are black box scams. There are inputs and outputs, but how inputs become outputs is obscured. The perfect black box is one in which what’s obscured generates faith instead of suspicion.

Some will say that suckers for the black box scam will ignore what’s obscured because the promise of a huge pay-off has greater emotional weight and proves them smarter than their more cautious peers. What fascinates me is the possibility that believers won’t ignore the obscured at all. They might want what goes on in that box to be obscured so that after the big payoff they can say they saw what naysayers didn’t.

It’s quite chilling that both ex-Enron Jeff Skilling and Elizabeth Holmes are on record talking about how their companies will change the world. In YouTube clips Skilling looks like one of the Bush family. Holmes sounds like a boarding school field hockey coach. Each exudes remarkable talent for making us believe in black boxes because each is a black box.

As I’ve watched them closely I’ve realized that the next massive tech scam is likely brewing right now. It will likely be a scam involving artificial intelligence, which (as I’ve discussed here and here) will prove to be the blackest box of all.

We should expect and be prepared for large numbers of AI scams in the future, as there will be many ways for it to be more artificially rather than truly intelligent. This is but one more nail for which we have no hammer.


Where are your hammers for these nails?

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IMAGE SOURCE: laboratory-3827745_1920 (CC0 Creative Commons)

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