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

by Nassim Nicholas Taleb

So we tried that thing called regime change in Iraq, and failed miserably. We tried that thing again in Libya, and there are now active slave markets in the place. But we satisfied the objective of “removing a dictator.” By the exact same reasoning, a doctor would inject a patient with “moderate” cancer cells to improve his cholesterol numbers, and proudly claim victory after the patient is dead, particularly if the postmortem shows remarkable cholesterol readings. But we know that doctors don’t inflict fatal “cures” upon patients, or don’t do it in such a crude way, and there is a clear reason for that. Doctors usually have some modicum of skin in the game, a vague understanding of complex systems, and more than a couple of millennia of incremental ethics determining their conduct.

No consequences (risks) for decision makers and strategists, but all the power - No power for citizens effected in middle east, but all the consequences. Without a corrective feedback mechanism mapping actions to consequences, destructive dispositions never improve

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 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.

Either way the process is painful. People with bureaucratic power may not be exposed to risks, but they do have the power to fight for their position.

When the bank, literally insolvent, was rescued by the taxpayer, he didn’t write any check—he invoked uncertainty as an excuse. Heads he wins, tails he shouts “Black Swan.” Nor did Rubin acknowledge that he transferred risk to taxpayers: Spanish grammar specialists, assistant schoolteachers, supervisors in tin can factories, vegetarian nutrition advisors, and clerks for assistant district attorneys were “stopping him out,” that is, taking his risks and paying for his losses. 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. It is not just bailouts: government interference in general tends to remove skin in the game.

Let the failed systems die

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.

Evolution can only happen if risk of extinction is present.

The agency problem (or principal-agent problem) also manifests itself in the misalignment of interests in transactions: a vendor in a one-shot transaction does not have his interests aligned to yours—and so can hide stuff from you. But disincentive is not enough: the fool is a real thing. Some people do not know their own interest—just consider addicts, workaholics, people trapped in a bad relationship, people who support large government, the press, book reviewers, or respectable bureaucrats, all of whom for some mysterious reason act against their own interest. So there is this other instance where filtering plays a role: fools of randomness are purged by reality so they stop harming others. Recall that it is at the foundation of evolution that systems get smart by elimination.

Exposures in real life, outside of games, are always too complicated to reduce to a well-defined “event” easy to describe in words. Outcomes in real life are not as in a baseball game, reduced to a binary win-or-lose outcome. Many exposures are highly nonlinear: you may be beneficially exposed to rain, but not to floods. The exact argument is flushed out in this author’s technical works. Take for now that forecasting, especially when done with “science,” is often the last refuge of the charlatan, and has been so since the beginning of times. Further, there is something called the inverse problem in mathematics, which is solved by—and only by—skin in the game. I will simplify for now as follows: it is harder for us to reverse-engineer than engineer; we see the result of evolutionary forces but cannot replicate them owing to their causal opacity. We can only run such processes forward. The very operation of Time (which we capitalize) and its irreversibility requires the filtering from skin in the game.

As the great game theorist Ariel Rubinstein holds: do your theories or mathematical representations, don’t tell people in the real world how to apply them. Let those with skin in the game select what they need.

Academia is a purely theoretical pursuit the produces some useful results, but shouldn't be trying to tell business how to apply theory to a problem

Now, even if regulations had a small net payoff for society, I would still prefer to be as free as possible, but assume my civil responsibility, face my fate, and pay the penalty if I harm others. This attitude is called deontic libertarianism (deontic comes from “duties”): by regulating you are robbing people of freedom. Some of us believe that freedom is one’s first most essential good. This includes the freedom to make mistakes (those that harm only you); it is sacred to the point that it must never be traded against economic or other benefits.

The key is civil responsibility. If some people contribute and but the majority detracts then there is no net benefit to collective organization.

Entrepreneurs are heroes in our society. They fail for the rest of us. But owing to funding and current venture capital mechanisms, many people mistaken for entrepreneurs fail to have true skin in the game in the sense that their aim is to either cash out by selling the company they helped create to someone else, or “go public” by issuing shares in the stock market. The true value of the company, what it makes, and its long-term survival are of small relevance to them. This is a pure financing scheme and we will exclude this class of people from our “entrepreneur” risk-taker class (this form of entrepreneurship is the equivalent of bringing great-looking and marketable children into the world with the sole aim of selling them at age four). We can easily identify them by their ability to write a convincing business plan.

A country should not tolerate fair-weather friends. There is something offensive in having a nationality without skin in the game, just to travel and pass borders, without the downside that comes with the passport.

Countries should compete for global citizenship, regardless of where people choose to reside. Barring completely lopsided incentives that make citizens costly for the state, any taxation and economic growth is better than none

“The Intellectual Yet Idiot,” presents the IYI who doesn’t know that having skin in the game makes you understand the world (which includes bicycle riding) better than lectures.

Learn by doing, not by hearing

Beware of the person who gives advice, telling you that a certain action on your part is “good for you” while it is also good for him, while the harm to you doesn’t directly affect him.

This is where you would hope PR comes in

Let us conjecture that the formation of moral values in society doesn’t come from the evolution of the consensus. No, it is the most intolerant person who imposes virtue on others precisely because of that intolerance. The same can apply to civil rights.

But things work both ways, the good and the bad. While some believe that the average Pole was complicit in the liquidation of Jews, the historian Peter Fritzsche, when asked, “Why didn’t the Poles in Warsaw help their Jewish neighbors more?,” responded that they generally did. But it took seven or eight Poles to help one Jew. It took only one Pole, acting as an informer, to turn in a dozen Jews. Even if such select anti-Semitism is contestable, we can easily imagine bad outcomes stemming from a minority of bad agents.

The question is: what would you like to be, a dog or a wolf? The original Aramaic version had a wild ass, instead of a wolf, showing off his freedom. But the wild ass ends up eaten by the lion. Freedom entails risks—real skin in the game. Freedom is never free. Whatever you do, just don’t be a dog claiming to be a wolf. In Harris’s sparrows, males develop secondary traits that correlate with their fighting ability. Darker color is associated with dominance. However, experimental darkening of lighter males does not raise their status, because their behavior is not altered. In fact these darker birds get killed—as the researcher Terry Burnham once told me: “birds know that you need to walk the walk.”

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 their nature to be wild animals.

The academic tenure system is meant to give people the security to express their opinions freely. However, tenure is given (in the ideological disciplines, such as the “humanities” and social science) to the submissive ones who play the game and have shown proofs of such domestication. It’s not working.

Given - not taken

The vulnerability of heads of households has been remarkably exploited in history. The samurai had to leave their families in Edo as hostages, thus guaranteeing to the authorities that they would not take positions against the rulers. The Romans and Huns partook of the practice of exchanging permanent “visitors,” the children of rulers on both sides, who grew up at the courts of the foreign nation in a form of gilded captivity. The Ottomans relied on janissaries, who were extracted as babies from Christian families and never married. Having no family (or no contact with their family), they were entirely devoted to the sultan. It is no secret that large corporations prefer people with families; those with downside risk are easier to own, particularly when they are choking under a large mortgage. And of course most fictional heroes such as Sherlock Holmes or James Bond don’t have the encumbrance of a family that can become a target of, say, evil professor Moriarty.

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

Attachments cannot be used to compromise ideals - they should either be avoided outright or remain fungible. On the other hand, who has more investment in the future of the world than a parent?

in my experience, people who collect honorary doctorates are typically hierarchy-conscious, and I abide by Cato’s injunction: he preferred to be asked why he didn’t have a statue rather than why he had one.

Visibly, deans and presidents of universities are far more vulnerable than independent persons, and animals know where weakness lies. By the minority rule, all it takes is a very small number of detractors using misplaced buzzwords of the type that makes people cringe (such as “racist”) to scare an entire institution.

So it appears that the church founders really wanted Christ to have skin in the game; he did actually suffer on the cross, sacrifice himself, and experience death. He was a risk taker. More crucially to our story, he sacrificed himself for the sake of others. A god stripped of humanity cannot have skin in the game in such a manner, cannot really suffer (or, if he does, such a redefinition of a god injected with a human nature would back up our argument). A god who didn’t really suffer on the cross would be like a magician who performed an illusion, not someone who actually bled after sliding an icepick between his carpal bones.

Would still make just as much sense for him to be mortal, or even a prophet. Maintaining omniscience and immortality diminishes the act of physical suffering.

The Intellectual Yet Idiot (IYI) is a product of modernity, hence has been proliferating since at least the mid-twentieth century, to reach a local supremum today, to the point that we have experienced a takeover by people without skin in the game. In most countries, the government’s role is between five and ten times what it was a century ago (expressed in percentage of gross domestic product).

Would people be better off dying in the street without government intervention? I would argue yes, but its generally accepted that government is daddy.

While rich people believe in one tax dollar one vote, more humanistic ones in one man one vote, Monsanto in one lobbyist one vote, the IYI believes in one Ivy League degree one vote, with some equivalence for foreign elite schools and PhDs, as these are needed in the club.

NNT is part of this club, despite his best efforts

he has mentioned quantum mechanics at least twice in the past five years in conversations that had nothing to do with physics.

A few definitions: Static inequality is a snapshot view of inequality; it does not reflect what will happen to you in the course of your life. Consider that about 10 percent of Americans will spend at least a year in the top 1 percent, and more than half of all Americans will spend a year in the top 10 percent.*3 This is visibly not the same for the more static—but nominally more equal—Europe. For instance, only 10 percent of the wealthiest five hundred American people or dynasties were so thirty years ago; more than 60 percent on the French list are heirs and a third of the richest Europeans were the richest centuries ago. In Florence, it was just revealed that things are even worse: the same handful of families have kept the wealth for five centuries. Dynamic (ergodic) inequality takes into account the entire future and past life. You do not create dynamic equality just by raising the level of those at the bottom, but rather by making the rich rotate—or by forcing people to incur the possibility of creating an opening. 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.*4 Our condition here is stronger than mere income mobility. Mobility means that someone can become rich. The no-absorbing-barrier condition means that someone who is rich should never be certain to stay rich. Now, even more mathematically, Dynamic equality is what restores ergodicity, making time and ensemble proba...

Let me explain ergodicity—something that we said is foreign to the intelligentsia. Chapter 19 at the back of the book goes into the details; it cancels most crucial psychological experiments related to probability and rationality. The intuition for now is as follows. Take a cross-sectional picture of the U.S. population. You have, say, a minority of millionaires in the one percent, some overweight, some tall, some humorous. You also have a high majority of people in the lower middle class, yoga instructors, baking experts, gardening consultants, spreadsheet theoreticians, dancing advisors, and piano repairpersons—plus of course the Spanish grammar specialist. Take the percentages of each income or wealth bracket (note that the inequality of income is typically flatter than that of wealth). 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.*5, *6 The exact opposite of perfect ergodicity is an absorbing state. The term absorption is derived from particles that, when they hit an obstacle, get absorbed or stick to it. 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 ...

Piketty’s theory about the increase in the return of capital in relation to labor is patently wrong, as anyone who has witnessed the rise of what is called the “knowledge economy” (or anyone who has had investments in general) knows.

But just spouting out these claims in a book you wrote is not having 'Skin in the Game'. It's actually exactly what this book is written in protest of.

As with all communist movements, it is often the bourgeois or clerical classes who are the early adopters of revolutionary theories.

For a rich person isolated from vertical socializing with the poor, the poor become something entirely theoretical, a textbook reference. As I mentioned in the past chapter, I have yet to see a bien pensant Cambridge don hanging out with Pakistani cab drivers or lifting weights with cockney speakers. The intelligentsia therefore feels entitled to deal with the poor as a construct; one they created. Thus they become convinced that they know what is best for them.

The more time you spend with other class, the more wealth evens out - regression to the mean.

Another comment for nitpickers. Rawls’s veil, discussed in Fooled by Randomness, assumes that a fair society is the one which you would select if there were some type of a lottery. Here we go further and discuss a dynamic structure, in other words, how such a society would move, as it obviously will not be static.

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 lot of collateral harm.

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.*2

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. Further, Someone with a high public presence who is controversial and takes risks for his opinion is less likely to be a bull***t vendor.*4

Karl Popper’s idea of science is an enterprise that produces claims that can be contradicted by eventual observations, not a series of verifiable ones: science is fundamentally disconfirmatory, not confirmatory.

The reason science works isn’t because there is a proper “scientific method” derived by some nerds in isolation, or some “standard” that passes a test similar to the eye exam of the Department of Motor Vehicles; rather it is because scientific ideas are Lindy-prone, that is, subjected to their own natural fragility. Ideas need to have skin in the game. You know an idea will fail if it is not useful, and can be therefore vulnerable to the falsification of time (and not that of naive falsificationism, that is, according to some government-printed black-and-white guideline). The longer an idea has been around without being falsified, the longer its future life expectancy. For if you read Paul Feyerabend’s account of the history of scientific discoveries, you can clearly see that anything goes in the process—but not with the test of time. That appears to be nonnegotiable.

Of these thirty-nine, I believe that fewer than ten are actually robust and transfer outside the narrowness of the experiment.

Throwing around speculative numbers and experimental result as hard evidence like a regular old 'academic'. Are the results of 'science' only good enough when they can be used to refute academia?

An observation about modernity. Change for the sake of change, as we see in architecture, food, and lifestyle, is frequently the opposite of progress. As I have explained in Antifragile, too high a rate of mutation prevents locking in the benefits of previous changes: evolution (and progress) requires some, but not too frequent, variation.

Now if I had to pick, I would overcome my sucker-proneness and take the butcher any minute. Even more: I would seek the butcher as a third option if my choice was between two doctors who looked like doctors. Why? Simply the one who doesn’t look the part, conditional on having made a (sort of) successful career in his profession, had to have much to overcome in terms of perception. And if we are lucky enough to have people who do not look the part, it is thanks to the presence of some skin in the game, the contact with reality that filters out incompetence, as reality is blind to looks.

It is intelligent to reinforce your qualification by mastering the appearance associated with the role. People too lazy to look like a safe bet often are not a safe bet. Surgeons should look like surgeons because their job is to get people to allow them to perform surgeries.

What can be phrased and expressed in a clear narrative that convinces suckers will be a sucker trap.

I also learned, in my early twenties, that the people you understand most easily were necessarily the bull***tters.

People who have always operated without skin in the game (or without their skin in the right game) seek the complicated and centralized, and avoid the simple like the plague. Practitioners, on the other hand, have opposite instincts, looking for the simplest heuristics. Some rules: People who are bred, selected, and compensated to find complicated solutions do not have an incentive to implement simplified ones. And it gets more complicated as the remedy has itself a skin-in-the-game problem. This is particularly acute in the meta-problem, when the solution is about solving this very problem.

Simply, the minute one is judged by others rather than by reality, things become warped as follows.

Russian Roulette allows you to make money five times out of six.

Ivy League universities are becoming in the eyes of the new Asian upper class the ultimate status luxury good. Harvard is like a Vuitton bag and a Cartier watch. It is a huge drag on the middle class, who have been plowing an increased share of their savings into educational institutions, transferring their money to bureaucrats, real estate developers, tenured professors of some discipline that would not otherwise exist (gender studies, comparative literature, or international economics), and other parasites. In the United States, we have a buildup of student loans that automatically transfer to these rent extractors. In a way it is no different from racketeering: one needs a decent university “name” to get ahead in life. But we have evidence that collectively society doesn’t advance with organized education, rather the reverse: the level of (formal) education in a country is the result of wealth.*2

Now, if I had a choice, I would have had some time-tested recipe (say a pizza with very fresh ingredients, or a juicy hamburger) in a lively place—for a twentieth of the price. But because the dinner partner could afford the expensive restaurant, we ended up the victims of some complicated experiments by a chef judged by some Michelin bureaucrat. It would fail the Lindy effect: food does better through minute variations from Sicilian grandmother to Sicilian grandmother. It hit me that the rich were natural targets; as the eponymous Thyestes shouts in Seneca’s tragedy, thieves do not enter impecunious homes, and one is more likely to be drinking poison in a golden cup than an ordinary one. Poison is drunk in golden cups (Venenum in auro bibitur). It is easy to scam people by getting them into complications—the poor are spared that type of scamming. This is the same complication we saw in Chapter 9 that makes academics sell the most possibly complicated solution when a simple one can do. Further, the rich start using “experts” and “consultants.” An entire industry meant to swindle you will swindle you: financial consultants, diet advisors, exercise experts, lifestyle engineers, sleeping councilors, breathing specialists, etc.

Very few people understand their own choices, and end up being manipulated by those who want to sell them something. In that sense, impoverishment might even be desirable. Looking at Saudi Arabia, which should progressively revert to the pre-oil level of poverty, I wonder if taking away some things from them—including the swarm of fawning foreigners coming to skin them—will make them better off.

If anything, being rich you need to hide your money if you want to have what I call friends. This may be known; what is less obvious is that you may also need to hide your erudition and learning. People can only be social friends if they don’t try to upstage or outsmart one another. Indeed, the classical art of conversation is to avoid any imbalance, as in Baldassare Castiglione’s Book of the Courtier: people need to be equal, at least for the purpose of the conversation, otherwise it fails. It has to be hierarchy-free and equal in contribution. You’d rather have dinner with your friends than with your professor, unless of course your professor understands “the art” of conversation.