Skin in the Game: Hidden Asymmetries in Daily Life

by Nassim Nicholas Taleb

Alexander said that it was preferable to have an army of sheep led by a lion than an army of lions led by a sheep. Alexander (or whoever produced this probably apocryphal saying) understood the value of the active, intolerant, and courageous minority. Hannibal terrorized Rome for a decade and a half with a tiny army of mercenaries, winning twenty-two battles against the Romans, battles in which he was outnumbered each time. He was inspired by a version of this maxim. For, at the battle of Cannae, he remarked to Gisco, who was concerned that the Carthaginians were outnumbered by the Romans: “There is one thing that’s more wonderful than their numbers … in all that vast number there is not one man called Gisgo.”

“Never doubt that a small group of thoughtful citizens can change the world. Indeed, it is the only thing that ever has,” wrote Margaret Mead. Revolutions are unarguably driven by an obsessive minority. And the entire growth of society, whether economic or moral, comes from a small number of people.

we summarize this chapter and link it to hidden asymmetries, the subtitle of the book. Society doesn’t evolve by consensus, voting, majority, committees, verbose meetings, academic conferences, tea and cucumber sandwiches, or polling; only a few people suffice to disproportionately move the needle. All one needs is an asymmetric rule somewhere—and someone with soul in the game. And asymmetry is present in about everything.fn6

You can examine markets as markets and individuals as individuals, but markets are not sums of average individuals

The psychological experiments on individuals showing “biases” do not allow us to automatically understand aggregates or collective behavior, nor do they enlighten us about the behavior of groups.

The underlying structure of reality matters much more than the participants, something policymakers fail to understand. Under the right market structure, a collection of idiots produces a well-functioning market.

It may be that some idiosyncratic behavior on the part of the individual (deemed at first glance “irrational”) may be necessary for efficient functioning at the collective level. More critically for the “rationalist” crowd, Individuals don’t need to know where they are going; markets do.

Why were they banned? They were, simply, totally free. They were financially free, and secure, not because of their means but because of their lack of wants. Ironically, by being beggars, they had the equivalent of f*** you money, which we can more easily get by being at the lowest rung than by joining the income-dependent classes. Complete freedom is the last thing you want if you have an organized religion to run. Total freedom for your employees is also a very, very bad thing if you have a firm to run,

every organization wants a certain number of people associated with it to be deprived of a certain share of their freedom. How do you own these people? First, by conditioning and psychological manipulation; second, by tweaking them to have some skin in the game, forcing them to have something significant to lose if they disobey authority—something hard to do with gyrovague beggars who flout their scorn for material possessions.

So employees exist because they have significant skin in the game—and the risk is shared with them, enough risk for it to be a deterrent and a penalty for acts of undependability, such as failing to show up on time. You are buying dependability.

There is a trader’s expression: “Never buy when you can rent the three Fs: what you Float, what you Fly, and what you … (that something else).” Yet many people own

boats and planes, and end up stuck with that something else.

Someone who has been employed for a while is giving you strong evidence of submission. Evidence of submission is displayed by the employee’s going through years depriving himself of his personal freedom for nine hours every day, his ritualistic and punctual arrival at an office, his denying himself his own schedule, and his not having beaten up anyone on the way back home after a bad day. He is an obedient, housebroken dog.

A company man is someone who feels that he has something huge to lose if he doesn’t behave as a company man—that is, he has skin in the game.

If the company man is, sort of, gone, he has been replaced by the companies person. For people are no longer owned by a company but by something worse: the idea that they need to be employable. The employable person is embedded in an industry, with fear of upsetting not just their employer, but other potential employers.fn2

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

theorem, Coase was the first to shed light on why firms exist. For him, contracts can be too costly to negotiate due to transaction costs; the solution is to incorporate your business and hire employees with clear job descriptions because you can’t afford legal and organizational bills for every transaction. A free market is a place where forces act to determine specialization, and information travels via price point; but within a firm these market forces are lifted because they cost more to run than the benefits they bring. So market forces will cause the firm to aim for the optimal ratio of employees and outside contractors.

Slave ownership by companies has traditionally taken very curious forms. The best slave is someone you overpay and who knows it, terrified of losing his status.

FREEDOM IS NEVER FREE In the famous tale by Ahiqar, later picked up by Aesop (then again by La Fontaine), the dog boasts to the wolf all the contraptions of comfort and luxury he has, almost prompting the wolf to enlist. Until the wolf asks the dog about his collar and is terrified when he understands its use. “Of all your meals, I want nothing.” He ran away and is still running.fn3

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.

Another aspect of the dog vs. wolf dilemma: the feeling of false stability. A dog’s life may appear smooth and secure, but in the absence of an owner, a dog does not survive. Most people prefer to adopt puppies, not grown-up dogs; in many countries, unwanted dogs are euthanized. A wolf is trained to survive. Employees abandoned by their employers, as we saw in the IBM story, cannot bounce back.

There is a category of employees who aren’t slaves, but these represent a very small proportion of the pool. You can identify them as follows: they don’t give a f*** about their reputation, at least not their corporate reputation.

the people you meet when riding high are also those you meet when riding low,

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

Being higher up in life only works under some conditions. You would think that the head of the CIA would be the most powerful person in America, but it turned out that the venerated David Petraeus was more vulnerable than a truck driver. The fellow couldn’t even have an extramarital relationship. You can risk people’s lives, but you remain a slave. The entire structure of the civil service is organized that way.

Putin has the equivalent of f***you money, projecting a visible “I don’t care,” which in turn brings him more followers and more support. In such a confrontation Putin looks and acts as a free citizen confronting slaves who need committees, approval, and who of course feel like they have to fit their decisions to an immediate rating.

It is much easier to do business with the owner of the business than some employee who is likely to lose his job next year; likewise it is easier to trust the word of an autocrat than a fragile elected official.

Historically, the autocrat was both freer and—as in the special case of traditional monarchs in small principalities—in some cases had skin in the game in improving the place, more so than an elected official whose objective function is to show paper gains. This is not the case in modern times, as dictators, aware that their time might be limited, indulge in pillaging the place and transferring assets to their Swiss bank accounts—as in the case of the Saudi Royal family.

People whose survival depends on qualitative “job assessments” by someone of higher rank in an organization cannot be trusted for critical decisions. Although employees are reliable by design, it remains the case that they cannot be trusted in making decisions, hard decisions, anything that entails serious tradeoffs. Nor can they face emergencies unless they are in the emergency business, say, firefighters.

We saw the effect with the Vietnam War. Most people (sort of) believed that certain courses of action were absurd, but it was easier to continue than to stop—particularly since one can always spin a story explaining why continuing is better than stopping (the backfitting story of sour grapes now known as cognitive dissonance).

Instead of invading Iraq or blowing up “Jihadi John” and other individual terrorists, thus causing a multiplication of these agents, it would have been better to focus on the source of the problems: Wahhabi/Salafi education and the promotion of intolerant beliefs according to which a Shiite or an Ezidi or a Christian are deviant people. But, to repeat, this is not a decision that can be made by a collection of bureaucrats with a job description.

Society likes saints and moral heroes to be celibate so they do not have family pressures that may force them into the dilemma of needing to compromise their sense of ethics to feed their children. The entire human race, something rather abstract, becomes their family.

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.

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

However, the answer is clear in the case of terrorism. The rule should be: You kill my family with supposed impunity; I will make yours pay some indirect price for it.

The unusual nuisance with jihadi terrorism is that we are totally defenseless in front of a deluded person willing to kill scores of innocents without any true downside, that is, no skin in the game.

The only way we have left to control suicide-terrorists would be precisely to convince them that blowing themselves up is not the worst-case scenario for them, nor the end scenario at all. Making their families and loved ones bear a financial burden—just as Germans still pay for war crimes—would immediately add consequences to their actions. The penalty needs to be properly calibrated to be a true disincentive, without imparting any sense of heroism or martyrdom to the

families in question.

life is sacrifice and risk taking, and nothing that doesn’t entail some moderate amount of the former, under the constraint of satisfying the latter, is close to what we can call life. If you do not undertake a risk of real harm, reparable or even potentially irreparable, from an adventure, it is not an adventure.

When I saw Donald Trump in the Republican primary standing next to other candidates, I became certain he was going to win that stage of the process, no matter what he said or did. Actually, it was because he had visible deficiencies. Why? Because he was real, and the public—composed of people who usually take risks, not the lifeless non-risk-taking analysts we will present in the next chapter—would vote anytime for someone who actually bled after putting an icepick in his hand rather than someone who did not.

always do more than you talk. And precede talk with action. For it will always remain that action without talk supersedes talk without action.

What we saw worldwide from 2014 to 2018, from India to the U.K. to the U.S., was a rebellion against the inner circle of no-skin-in-the-game policymaking “clerks” and journalists-insiders, that class of paternalistic semi-intellectual experts with some Ivy League, Oxford-Cambridge or similar label-driven education who are telling the rest of us 1) what to do, 2) what to eat, 3) how to speak, 4) how to think, and … 5) whom to vote for.

With psychology studies replicating less than 40 percent of the time, dietary advice reversing after thirty years of dietary fat phobia, macroeconomics and financial economics (while trapped in an intricate Gargantuan patch of words) scientifically worse than astrology (this is what the reader of the Incerto has known since Fooled by Randomness), the reappointment of Bernanke (in 2010) who was less than clueless about financial risk as the Federal Reserve boss, and pharmaceutical trials replicating at best only a third of the time, people are perfectly entitled to rely on their own ancestral instincts and to listen to their grandmothers (or to Montaigne and such filtered classical knowledge), who have a better track record than these policymaking goons.

The first is the inequality people tolerate, such as one’s understanding compared to that of people deemed heroes, say, Einstein, Michelangelo, or the recluse mathematician Grisha Perelman, in comparison to whom one has no difficulty acknowledging a large surplus.

The second is the inequality people find intolerable because the subject appears to be just a person like you, except that he has been playing the system, and getting himself into rent-seeking, acquiring privileges that are not warranted—and

did a systematic interview of blue-collar Americans and found a resentment of high-paid professionals but, unexpectedly, not of the rich.

In this chapter, I will propose that what people resent—or should resent—is the person at the top who has no skin in the game, that is, because he doesn’t bear his allotted risk,

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.

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 spent a year in the top 10 percent.fn3 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.