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October 18 - November 22, 2018
a) uncertainty and the reliability of knowledge (both practical and scientific, assuming there is a difference), or in less polite words bull***t detection, b) symmetry in human affairs, that is, fairness, justice, responsibility, and reciprocity, c) information sharing in transactions, and d) rationality in complex systems and in the real world.
It is not just that skin in the game is necessary for fairness, commercial efficiency, and risk management: skin in the game is necessary to understand the world.
in academia there is no difference between academia and the real world; in the real world, there is
If you have the rewards, you must also get some of the risks, not let others pay the price of your mistakes.
Don’t tell me what you “think,” just tell me what’s in your portfolio.
No. It is about symmetry, more like having a share of the harm, paying a penalty if something goes wrong. The very same idea ties together notions of incentives, used car buying, ethics, contract theory, learning (real life vs. academia), Kantian imperative, municipal power, risk science, contact between intellectuals and reality, the accountability of bureaucrats, probabilistic social justice, option theory, upright behavior, bull***t vendors, theology…I stop for now.
The Less Obvious Aspects of Skin in the Game: Those Hidden Asymmetries and Their Consequences.
But never engage in detailed overexplanations of why something important is important: one debases a principle by endlessly justifying it.
Understanding the workings of skin in the game allows us to understand serious puzzles underlying the fine-grained matrix of reality.
But, to this author, skin in the game is mostly about justice, honor, and sacrifice, things that are existential for humans.
Skin in the game, applied as a rule, reduces the effects of the following divergences that grew with civilization: those between action and cheap talk (tawk), consequence and intention, practice and theory, honor and reputation, expertise and charlatanism, concrete and abstract, ethical and legal, genuine and cosmetic, merchant and bureaucrat, entrepreneur and chief executive, strength and display, love and gold-digging, Coventry and Brussels, Omaha and Washington, D.C., human beings and economists, authors and editors, scholarship and academia, democracy and governance, science and scientism,
...more
centrally, collective and individual.
The entire point of the book is that in the real world it is hard to disentangle ethics on one hand from knowledge and competence on the other.
Actually, you cannot separate anything from contact with the ground. And the contact with the real world is done via skin in the game—having an exposure to the real world, and paying a price for its consequences, good or bad.
The knowledge we get by tinkering, via trial and error, experience, and the workings of time, in other words, contact with the earth, is vastly superior to that obtained through reasoning, something self-serving institutions have been very busy hiding from us.
Their three flaws: 1) they think in statics not dynamics, 2) they think in low, not high, dimensions, 3) they think in terms of actions, never interactions.
They can’t get the idea that, empirically, complex systems do not have obvious one-dimensional cause-and-effect mechanisms, and that under opacity, you do not mess with such a system.
The principle of intervention, like that of healers, is first do no harm (primum non nocere); even more, we will argue, those who don’t take risks should never be involved in making decisions.
We have always been crazy but weren’t skilled enough to destroy the world. Now we can.
Bureaucracy is a construction by which a person is conveniently separated from the consequences of his or her actions.
Decentralization is based on the simple notion that it is easier to macrobull***t than microbull***t. Decentralization reduces large structural asymmetries.
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.
For instance, bank blowups came in 2008 because of the accumulation of hidden and asymmetric risks in the system: bankers, master risk transferors, could make steady money from a certain class of concealed explosive risks, use academic risk models that don’t work except on paper (because academics know practically nothing about risk), then invoke uncertainty after a blowup (that same
unseen and unforecastable Black Swan and that same very, very stubborn author), and keep past income—what I h...
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it is government, not markets, that makes these things possible by the mechanisms of bailouts. It is not just bailouts: government interference in general tends to remove skin in the game.
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 he...
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We saw that interventionistas don’t learn because they are not the victims of their mistakes, and, as we hinted at with pathemata mathemata: The same mechanism of transferring risk also impedes learning. More practically, You will never fully convince someone that he is
wrong; only reality can.
Actually, to be precise, reality doesn’t care about winning arguments: survival is what matters. For The curse of modernity is that we are increasingly populated by a class of people who are better at explaining than understanding,
or better at explaining than doing.
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.
There is no evolution without skin in the game.
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.
Systems learn by removing parts, via negativa.*4
Transportation didn’t get safer just because people learn from errors, but because the system does.
Skin in the game keeps human hubris in check.
And the very idea of law, divine or otherwise, resides in fixing imbalances and remedying such asymmetries.
and is deemed to be the first codification of our rule extant. The code has one central theme: it establishes symmetries between people in a transaction, so nobody can transfer hidden tail risk, or Bob Rubin–style risks.
Hammurabi’s best known injunction is as follows: “If a builder builds a house and the house collapses and causes the death of the owner of the house—the builder shall be put to death.”
was speaking right after the man who, in spite of looks (and personality) quite similar to those found in Mesopotamian statues, epitomizes absence of skin in the game: former Federal Reserve governor Ben Bernanke.
We know with much more clarity what is bad than what is good. The Silver Rule can be seen as the Negative Golden Rule, and as I am shown by my Calabrese (and Calabrese-speaking) barber every three weeks, via negativa (acting by removing) is more powerful and less error-prone than via positiva (acting by addition*1).
“others.” The idea is fractal, in the sense that it works at all scales: humans, tribes, societies, groups of societies, countries, etc., assuming each one is a separate standalone unit and can deal with other counterparts as such.
Immanuel Kant’s categorical imperative, which I summarize as: Behave as if your action
can be generalized to the behavior of everyone in all places, under all conditions.
Universal behavior is great on paper, disastrous in practice.
Even worse: the general and the abstract tend to attract self-righteous psychopaths similar to the interventionistas of Part 1 of the Prologue.
(As we saw, modernity likes the abstract over the particular; social justice warriors have been accused of “treating people as categories, not individuals.”)
