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

by Nassim Nicholas Taleb

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 abrasions of your skin guide your learning and discovery, a mechanism of organic signaling, what the Greeks called pathemata mathemata (“guide your learning through pain,” something mothers of young children know rather well).

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.

every peasant in Mongolia, every waiter in Madrid, and every car-service operator in San Francisco knows that real life happens to have second, third, fourth, nth steps.

downside doesn’t affect the interventionist.

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.

And, one may ask, what can we do since a centralized system will necessarily need people who are not directly exposed to the cost of errors? Well, we have no choice but to decentralize or, more politely, to localize; to have fewer of these immune decision makers.

Decentralization reduces large structural asymmetries.

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.

government interference in general tends to remove skin in the game.

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.

You will never fully convince someone that he is wrong; only reality can.

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.

Evolution can only happen if risk of extinction is present.

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. To summarize so far, Skin in the game keeps human hubris in check.

Via negativa: the principle that we know what is wrong with more clarity than what is right, and that knowledge grows by subtraction.

Also, it is easier to know that something is wrong than to find the fix. Actions that remove are more robust than those that add because addition may have unseen, complicated feedback loops. This is discussed in some depth in Antifragile.

“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.”

Why? As we will belabor ad nauseam in this book, we are local and practical animals, sensitive to scale.

We should focus on our immediate environment; we need simple practical rules.

the deep message of this book is the danger of universalism taken two or three steps too far—conflating the micro and the macro.

There is another point: we may not know beforehand if an action is foolish—but reality knows.

You may not know in your mind where you are going, but you know it by doing.

Take for now that forecasting, especially when done with “science,” is often the last refuge of the charlatan,

higher-order questioning requires more intellectual confidence,

deeper understanding of statistical significance,

and a higher level of rigor and intellectu...

or, even better, experience selling rugs or specialized...

dishonorable to let others die in your stead. Honor implies that there are some actions you would categorically

There were people with whom we had a relational rapport,

others with whom we had a transactional one.

The two were separated by an ethical wall, much like the case with domestic...

harmed, while rules on cruelt...

The ethical is always more robust than the legal. Over time, it is the legal that should converge to the ethical, never the reverse.

Hence: Laws come and go; ethics stay.

Recall that tort laws put some of the seller’s skin back into the game—which is why they are reviled, hated by corporations. But tort laws have side effects—they should

only be used in a nonnaive way, that is, in a way that cannot be gamed.

I

hence view Sharia as a museum of the history of ideas on symmetry in transactions.

Things don’t “scale” and generalize, which is why I have trouble with intellectuals talking about abstract notions.

intellectuals talking

So we exercise our ethical rules, but there is a limit—from scaling—beyond which the rules cease to apply. It is unfortunate, but the general kills the particular.

In that sense, an American-style federalism is the ideal system.

particular to the general is behind my skepticism about unfettered globalization and large centralized multiethnic states.

instead of making the best of such a natural tendency—is one of the stupidities of interventionistas.

fail to generalize that ethics is something fundamentally local.

skin in the game for you would be just for you, as a unit. In reality, my skin lies in a broader set of people, one that includes a family, a community, a tribe, a fraternity. But it cannot possibly be the universal.

What Ostrom found empirically is that there exists a certain community size below which people act as collectivists, protecting the commons, as if the entire unit became rational. Such a commons cannot be too large. It is like a club. Groups behave differently at a different scale. This explains why the municipal is different from the national.

The skin-in-the-game definition of a commons: a space in which you are treated by others the way you treat them, where everyone exercises the Silver Rule.