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

by Nassim Nicholas Taleb

Let us call the first set ensemble probability, and the second one time probability (since the first is concerned with a collection of people and the second with a single person through time).

“in order to succeed, you must first survive.”

I effectively organized all my life around the point that sequence matters and the presence of ruin disqualifies cost-benefit analyses;

Jacob Bernoulli, one that has since become standard, almost all people involved in the field have made the severe mistake of missing the effect of the difference between ensemble and time.

The father of insurance mathematics, the Swedish applied mathematician Harald Cramér, also got the point.

Mark and I have been frustrated by economists who, not getting ergodicity, keep saying that worrying about the tails is “irrational.”

For it looks like you need a lot of intelligence to figure probabilistic things out when you don’t have skin in the game.

But for an overeducated nonpractitioner, these things are hard to figure out.

Adding people without fundamental insights does not sum up to insight; looking for clarity in

these fields is like looking for aesthetic harmony in the cubicle of a self-employed computer hacker or the attic of a highly disorganized electrician.

a situation is deemed non-ergodic when observed past probabilities do not apply to future processes.

The central problem is that if there is a possibility of ruin, cost-benefit analyses are no longer possible.

In my war with the Monsanto machine, the advocates of genetically modified organisms (transgenics) kept countering me with benefit analyses (which were often bogus and doctored up), not tail risk analyses for repeated exposures.

as there is an innate tendency to “overestimate” small probabilities.

Smoking a single cigarette is extremely benign, so a cost-benefit analysis would deem it irrational to give up so much pleasure for so little risk! But it is the act of smoking that kills, at a certain number of packs per year, or tens of thousand of cigarettes—in other words, repeated serial exposure.

If you incur a tiny probability of ruin as a “one-off” risk, survive it, then do it again (another “one-off” deal), you will eventually go bust with a probability of one hundred percent.

The flaw in psychology papers is to believe that the subject doesn’t take any other tail risks anywhere outside the experiment and, crucially, will never again take any risk at all.

Unless you are perfectly narcissistic and psychopathic—even then—your worst-case scenario is never limited to the loss of only your life.

If humans were immortals, they would go extinct from an accident, or from a gradual buildup of misfitness. But shorter shelf life for humans allows genetic changes across generations to be in sync with the variability of the environment.

Courage is when you sacrifice your own well-being for the sake of the survival of a layer higher than yours.

If superstition is what it takes, not only is there absolutely no violation of the axioms of rationality there, but it would be technically irrational to stand in its way. If superstition is what’s needed to satisfy ergodicity, let it be. Let us return to Warren Buffett. He did not make his billions by cost-benefit analysis; rather, he did so simply

by establishing a high filter, then picking opportunities that pass such a threshold.

“The difference between successful people and really successful people is that really successful people say no to almost everything,” he said. Likewise our wirin...

Whenever I hear someone saying “we need to take (tail) risks” I know it is not coming from a surviving practitioner but from a finance academic or a banker—the latter, we saw, almost always blows up, usually with other people’s money.

Indeed, it doesn’t cost us much to refuse some new shoddy technologies. It doesn’t cost me much to go with my “refined paranoia,” even if wrong. For all it takes is for my paranoia to be right once, and it saves my life.

I make the case for risk loving, for systematic “convex” tinkering, and for taking a lot of risks that don’t have tail risks but offer tail profits.

Never compare a multiplicative, systemic, and fat-tailed risk to a non-multiplicative, idiosyncratic, and thin-tailed one.

Recall that I worry about the correlation between the death of one person and that of another. So we need to be concerned with systemic effects: things that can affect more than one person should they happen.

Mediocristan and Extremistan. Mediocristan is thin-tailed and affects the individual without correlation to the collective. Extremistan, by definition, affects many people.

Journalists and social scientists are pathologically prone to such nonsense—particularly those who think that a regression and a graph are sophisticated ways to approach a problem.

One may be risk loving yet completely averse to ruin.

In a strategy that entails ruin, benefits never offset risks of ruin.

Ruin and other changes in condition are different animals. Every single risk you take adds up to reduce your life expectancy.

Rationality is avoidance of systemic ruin.