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

by Nassim Nicholas Taleb

COASE’S THEORY OF THE FIRM

An employee is—by design—more valuable inside a firm than outside of it; that is, more valuable to the employer than the marketplace.

But the wild ass ends up eaten by the lion. Freedom entails risks—real skin in the game. Freedom is

never free.

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

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

To

make ethical choices you cannot have dilemmas between the particular (friends, family) and the general.

Wittgenstein’s ruler*2: by measuring the table with a ruler am I measuring the ruler or measuring the table? Far-fetched comparisons are more likely to discredit the commentator than the commentated.

To be free of conflict you need to have no friends.

you’d even rather have a failed real person than a successful one, as blemishes, scars, and character flaws increase the distance between a human and a ghost.*2 Scars signal skin in the game. And People can detect the difference between front- and back-office operators.

action without talk supersedes talk without action.

True equality is equality in probability. and Skin in the game prevents systems from rotting.

Static inequality is a snapshot view of inequality; it does not reflect what will happen to you in the course of your life.

Dynamic (ergodic) inequality takes into account the entire future and past life.

The way to make society more equal is by forcing (through skin in the game) the rich to be subjected to the risk of exiting from the 1 percent.

Perfect ergodicity means that each one of us, should he live forever, would spend a proportion of time in the economic conditions of the entire cross-section: out of, say, a century, an average of sixty years in the lower middle class, ten years in the upper middle class, twenty years in the blue-collar class, and perhaps one single year in the one percent.

An absorbing barrier is like a trap, once in, you can’t get out, good or bad. A person gets rich by some process, then, having arrived, he stays rich. And if someone enters the lower middle class (from above), he will never have the chance to exit from it and become rich should he want to, of course—hence will be justified to resent the rich.

soon wrote two articles (one in collaboration with Raphael Douady, another with Andrea Fontanari and Pasquale Cirillo, published in Physica A: Statistical Mechanics and Applications

Talent inequality papers

We’ve made a big deal out of Piketty here because the widespread enthusiasm for his book was representative of the behavior of that class of people who love to theorize and engage in false solidarity with the oppressed, while consolidating their privileges.

Recall the scaling problem, the idea that people’s ethical rules are not universal; they vary according to whether someone is “Swiss,” that is, an outsider or not.

data is not necessarily rigor.

Traders, when they make profits, have short communications; when they lose they drown you in details, theories, and charts.

that when you buy a thick book

with tons of graphs and tables used to prove a point, you should be suspicious. It

another way to substitute the true with the complicated.

had a rough time explaining that having rich people in a public office is very different from having public people become rich—again, it is the dynamics, the sequence, that matters.

It

is downright unethical to use public office for enrichment.

technical comment (for nitpickers): what we can call here imperfect ergodicity means that each one of us has long-term, ergodic probabilities that have some variation among individuals: your probability of ending in the one percent may be higher than mine; nevertheless no state will have a probability of 0 for me, and no state will have a transition probability of 1 for you.

Lindy is a deli in New York, now a tourist trap, that proudly claims to be famous for its cheesecake, but in fact has been known for fifty or so years by physicists and mathematicians thanks to the heuristic that developed there. Actors who hung out there gossiping about other actors discovered that Broadway shows that lasted for, say, one hundred days, had a future life expectancy of a hundred more. For those that lasted two hundred days, two hundred more. The heuristic became known as the Lindy effect.

time is equivalent to disorder, and resistance to the ravages of time, that is, what we gloriously call survival, is the ability to handle disorder.

That which is fragile has an asymmetric response to volatility and other stressors, that is, will experience more harm than benefit from it.

In probability, volatility and time are the same. The idea of fragility helped put some rigor around the notion that the only effective judge of things is time—by things we mean ideas, people, intellectual productions, car models, scientific theories, books, etc.

Effectively Lindy answers the age-old meta-questions: Who will judge the expert? Who will guard the guard? (Quis custodiet ipsos custodes?) Who will judge the judges? Well, survival will.

For time operates through skin in the game. Things that have survived are hinting to us ex post that they have some robustness—conditional on their being exposed to harm. For without skin in the game, via exposure to reality, the mechanism of fragility is disrupted: things may survive for no

reason for a while, at some scale, then ultimately collapse, causing a l...

That which is “Lindy” is what ages in reverse, i.e., its life expectancy lengthens with time, conditional on survival.

Alfonso X of Spain, nicknamed El Sabio, “the wise,”

had as a maxim: Burn old logs. Drink old wine. Read old books. Keep old friends.

You can define a free person precisely as someone whose fate is not centrally or directly dependent on peer assessment.

Being reviewed or assessed by others matters if and only if one is subjected to the judgment of future—not just present—others.

And recall that, a free person does not need to win arguments—just win.

Contemporary peers are valuable collaborators, not final judges.

Academia has a tendency, when unchecked (from lack of skin in the game), to evolve into a ritualistic self-referential publishing game.

The most convincing statements are those in which one stands to lose, ones in which one has maximal skin in the game; the most unconvincing ones are those in which one patently (but unknowingly) tries to enhance one’s status without making a tangible contribution (like, as we saw, in the great majority of

academic papers that say nothing and take no risks).

One should give more weight to research that, while being rigorous, contradicts other peers, particularly if it entails costs and reputational harm for its author.

Someone with a high public presence who is controversial and takes risks for his opinion is less likely to be a bull***t vendor.

(There is this illusion that just as businessmen are motivated and rewarded by profits, scientists should be motivated and rewarded by honors and recognition. That’s not how it works. Remember, science is a minority rule: a few will run it, others are just back-office clerks.)