Skin in the Game: Hidden Asymmetries in Daily Life (Incerto, #5)

by Nassim Nicholas Taleb

How is it that maximally intolerant minorities run the world and impose their taste on us? How does universalism destroy the very people it means to help? How is it that we have more slaves today than we did during Roman times? Why shouldn’t surgeons look like surgeons? Why did Christian theology keep insisting on a human side for Jesus Christ that is necessarily distinct from the divine? How do historians confuse us by reporting on war, not peace?

What is the foundational logic of risk bearing?

But not to worry, if we do not decentralize and distribute responsibility, it will happen by itself, the hard way: a system that doesn’t have a mechanism of skin in the game, with a buildup of imbalances, will eventually blow up and self-repair that way. If it survives.

The Bob Rubin trade? Robert Rubin, a former Secretary of the United States Treasury, one of those who sign their names on the banknote you just used to pay for coffee, collected more than $120 million in compensation from Citibank in the decade preceding the banking crash of 2008. When the bank, literally insolvent, was rescued by the taxpayer, he didn’t write any check—he invoked uncertainty as an excuse.

But the worst casualty has been free markets, as the public, already prone to hating financiers, started conflating free markets and higher order forms of corruption and cronyism, when in fact it is the exact opposite: it is government, not markets, that makes these things possible by the mechanisms of bailouts.

The good news is that in spite of the efforts of a complicit Obama administration that wanted to protect the game and the rent-seeking bankers,*3 the risk-taking business started moving toward small independent structures known as hedge funds.

In the decentralized hedge fund space, on the other hand, owner-operators have at least half of their net worth in the funds, making them relatively more exposed than any of their customers, and they personally go down with the ship.

So learning isn’t quite what we teach inmates inside the high-security prisons called schools. In biology, learning is something that, through the filter of intergenerational selection, gets imprinted at the cellular level—skin in the game, I insist, is more filter than deterrence. Evolution can only happen if risk of extinction is present. Further,

This last point is quite obvious, but I keep seeing academics with no skin in the game defend evolution while at the same time rejecting skin in the game and risk sharing. They refuse the notion of design by a creator who knows everything, while, at the same time, want to impose human design as if they knew all the consequences. In general, the more people worship the sacrosanct state (or, equivalently, large corporations), the more they hate skin in the game. The more they believe in their ability to forecast, the more they hate skin in the game. The more they wear suits and ties, the more they hate skin in the game.

Many bad pilots, as we mentioned, are currently in the bottom of the Atlantic, many dangerous bad drivers are in the local quiet cemetery with nice walkways bordered by trees. Transportation didn’t get safer just because people learn from errors, but because the system does. The experience of the system is different from that of individuals; it is grounded in filtering.

In its early phase, as the church was starting to get established in Europe, there was a group of itinerant people called the gyrovagues. They were gyrating and roaming monks without any affiliation to any institution. Theirs was a freelance (and ambulatory) variety of monasticism, and their order was sustainable, as the members lived off begging and from the good graces of townsmen who took interest in them.

Until sometime around the fifth century, when they started disappearing—they are now extinct. The gyrovagues were unpopular with the church, banned by the Council of Chalcedon in the fifth century, then banned again by the second Council of Nicaea about three hundred years later.

Why were they banned? They were, simply, totally free. They were financially free, and secure, not because of their means but because of their lack of wants. Ironically, by being beggars, they had the equivalent of f*** you money, which we can more easily get by being at the lowest rung than by joining the income-dependent classes.

Total freedom for your employees is also a very, very bad thing if you have a firm to run,

In short, every organization wants a certain number of people associated with it to be deprived of a certain share of their freedom. How do you own these people?

First,

se...

Let us say that you own a small airline company.

People you find in employment love the regularity of the payroll, with that special envelop on their desk the last day of the month, and without which they would act as a baby deprived of mother’s milk.

So employees exist because they have significant skin in the game—and the risk is shared with them, enough risk for it to be a deterrent and a penalty for acts of undependability, such as failing to show up on time. You are buying dependability.

Someone who has been employed for a while is giving you strong evidence of submission.

Even when an employee ceases to be an employee, he will remain diligent. The longer the person stays with a company, the more emotional investment they will have in staying, and, when leaving, are guaranteed in making an “honorable exit.”

The company man is best defined as someone whose identity is impregnated with the stamp his firm wants to give him.

If the company man is, sort of, gone, he has been replaced by the companies person. For people are no longer owned by a company but by something worse: the idea that they need to be employable. The employable person is embedded in an industry, with fear of upsetting not just their employer, but other potential employers.

So market forces will cause the firm to aim for the optimal ratio of employees and outside contractors.

Slave ownership by companies has traditionally taken very curious forms. The best slave is someone you overpay and who knows it, terrified of losing his status. Multinational companies created the expat category, a sort of diplomat with a higher standard of living who represents the firm far away and runs its business there. All large corporations had (and some still have) employees with expat status and, in spite of its costs, it is an extremely effective strategy. Why? Because the further from headquarters an employee is located, the more autonomous his unit, the more you want him to be a slave

Another aspect of the dog vs. wolf dilemma: the feeling of false stability. A dog’s life may appear smooth and secure, but in the absence of an owner, a dog does not survive. Most people prefer to adopt puppies, not grown-up dogs; in many countries, unwanted dogs are euthanized. A wolf is trained to survive. Employees abandoned by their employers, as we saw in the IBM story, cannot bounce back.

One type was the salesperson whose resignation could cause a loss of business, or, what’s worse, could benefit a competitor by bringing clients there. Salespeople had tension with the firm as the firm tried to dissociate accounts from them by depersonalizing the relationships with clients, usually unsuccessfully:

Traders who made money, I realized, could get so disruptive that they needed to be kept away from the rest of the employees.

When I switched firms away from the proto-company man, I was explicitly told that my employment would terminate the minute I ceased to meet the P and L target.

If you were profitable you could give managers all the crap you wanted and they ate it because they needed you and were afraid of losing their own jobs.

Risk takers can be socially unpredictable people. Freedom is always associated with risk taking, whether it leads to it or

comes from it. You take risks, you feel part of history. And risk takers take risks because it is in th...

So cursing today is a status symbol, just as oligarchs in Moscow wear blue jeans at special events to signal their power. Even in banks, traders were shown to customers on tours of the firm as if they were animals in a zoo, and the sight of a trader cursing on a phone while in a shouting match with a broker was part of the scenery.

What matters isn’t what a person has or doesn’t have; it is what he or she is afraid of losing.

The exact obverse of the public-hotshot as slave is the autocrat.

Putin’s attitude mesmerizes his followers, particularly the Christians in the Levant—especially those Orthodox Christians who remember when Catherine the Great’s fleet came to allow the tolling of the bells of the Saint George Cathedral in Beirut.

Catherine the Great was “the last czar with balls,” and she is the one who took the Crimea from the Ottomans. Before that, the Sunni Ottomans had banned Christians in the coastal cities under their control from ringing church bells—only inaccessible mountain villages allowed themselves such freedom.

These Christians lost the active protection of the Russian czar in 1917 and now are hoping that Byzantium is coming back about a hundred years later. It is much easier to do business with the owner of the business than some employee who is likely to lose his job next year; likewise it...

Historically, the autocrat was both freer and—as in the special case of traditional monarchs in small principalities—in some cases had skin in the game in improving the place, more so than an elected official whose objective function is to show paper gains.

More generally: People whose survival depends on qualitative “job assessments” by someone of higher rank in an organization cannot be trusted for critical decisions.

Although employees are reliable by design, it remains the case that they cannot be trusted in making decisions, hard decisions, anything that entails serious tradeoffs. Nor can they face emergencies unless they are in the emergency business, say, firefighters. The employee has a very simple objective function: fulfill the tasks that his or her supervisor deems necessary, or satisfy some gameable metric.

If the employee when coming to work in the morning discovers the potential for huge opportunities, say selling anti-diabetes products to prediabetic Saudi Arabian visitors, he cannot stop and start exploiting it if he is officially in the light fixtures business, selling chandeliers to old-fashioned Park Avenue widows.

We have been witnessing the same problem in the U.S. attitude toward Saudi Arabia. It is clear since the attack on the World Trade Center (in which most of the attackers were Saudi citizens) that someone in that nonpartying kingdom had a hand—somehow—in the matter. But no bureaucrat, fearful of oil disruptions, made the right decision—instead, the absurd invasion of Iraq was endorsed because it appeared to be simpler.

So we lost a generation: someone who went to grammar school in Saudi Arabia (our “ally”) after September 11 is now an adult, indoctrinated into believing and supporting Salafi violence, hence encouraged to finance it. Even worse, the Wahhabis have accelerated their brainwashing of East and West Asians with their madrassas, thanks to high oil revenues. Instead of invading Iraq or blowing up “Jihadi John” and other individual terrorists, thus causing a multiplication of these agents, it would have been better to focus on the source of the problems: Wahhabi/Salafi education and the promotion of intolerant beliefs according to which a Shiite or an Ezidi or a Christian are deviant people. But, to repeat, this is not a decision that can be made by a collection of bureaucrats with a job description.