Skin in the Game: Hidden Asymmetries in Daily Life

by Nassim Nicholas Taleb

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

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.fn4

in such places as France, the state is chummy with large corporations and protects their executives and shareholders from experiencing such descent; it even encourages their ascent. And no downside for some means no upside for the rest.

Aristotle, in his Rhetoric, postulated that envy is something you are more likely to encounter in your own kin: lower classes are more likely to experience envy toward their cousins or the middle class than toward the very rich.

So I’ve discovered, with experience, that when you buy a thick book with tons of graphs and tables used to prove a point, you should be suspicious. It means something didn’t distill right! But for the general public and those untrained in statistics, such tables appear convincing—another way to substitute the true with the complicated.

It is downright unethical to use public office for enrichment. A good rule for society is to oblige those who start in public office to pledge never subsequently to earn from the private sector more than a set amount; the rest should go to the taxpayer.

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 lot of collateral harm.

There are two ways things handle time. First, there is aging and perishability: things die because they have a biological clock, what we call senescence. Second, there is hazard, the rate of accidents. What we witness in physical life is the combination of the two: when you are old and fragile, you don’t handle accidents very well.

On the other hand, animals that don’t really age, say turtles and crocodiles, seem to have a remaining life expectancy that stays constant for a long time. If a twenty-year-old crocodile has forty more years to live (owing to the perils of the habitat), a forty-year-old one will also have about forty years to live.

“Lindy proof,” “is Lindy,” or “Lindy compatible” (one can substitute for another) to show something that seems to belong to the class of things that have proven to have the following property: That which is “Lindy” is what ages in reverse, i.e., its life expectancy lengthens with time, conditional on survival.

The pre-Socratic thinker Periander of Corinth wrote, more than twenty-five hundred years ago: Use laws that are old but food that is fresh. Likewise, 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.

“The Romans judged their political system by asking not whether it made sense but whether it worked,”

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.

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.fn4

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.

When results come from dealing directly with reality rather than through the agency of commentators, image matters less, even if it correlates to skills. But image matters quite a bit when there is hierarchy and standardized “job evaluation.” Consider the chief executive officers of corporations: they don’t just look the part, they even look the same. And, worse, when you listen to them talk, they sound the same, down to the same vocabulary and metaphors. But that’s their job: as I will keep reminding the reader, counter to the common belief, executives are different from entrepreneurs and are supposed to look like actors.

In any type of activity or business divorced from the direct filter of skin in the game, the great majority of people know the jargon, play the part, and are intimate with the cosmetic details, but are clueless about the subject.

Just as the slick fellow in a Ferrari looks richer than the rumpled centimillionaire, scientism looks more scientific than real science. True intellect should not appear to be intellectual.

Never pay for complexity of presentation when all you need is results.

Richard Dawkins (…) argues that “He behaves as if he had solved a set of differential equations in predicting the trajectory of the ball. At some subconscious level, something functionally equivalent to the mathematical calculations is going on.” (…) Instead, experiments have shown that players rely on several heuristics. The gaze heuristic is the simplest one and works if the ball is already high up in the air: Fix your gaze on the ball, start running, and adjust your running speed so that the angle of gaze remains constant.

This error by the science writer Richard Dawkins generalizes to, simply, overintellectualizing humans in their responses to all manner of natural phenomena, rather than accepting the role of a collection of mental heuristics used for specific purposes.

religious “beliefs” are simply mental heuristics that solve a collection of problems—without the agent really knowing how.

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.

In other words, many problems in society come from the interventions of people who sell complicated solutions because that’s what their position and training invite them to do. There is absolutely no gain for someone in such a position to propose something simple: you are rewarded for perception, not results. Meanwhile, they pay no price for the side effects that grow nonlinearly with such complications.

There has been a problem of malnutrition and nutrient deficiency in many developing countries, which my collaborators Yaneer Bar-Yam and Joe Norman attribute to a simple and very straightforward transportation issue. Simply, we waste more than a third of our food supply, and the gains from simple improvement in distribution would far outweigh those from modification of supply. Simply consider that close to 80 or 85 percent of the cost of a tomato can be attributed to transportation, storage, and waste (unsold inventories), rather than the cost at the farmer level. So visibly our efforts should be on low-tech distribution.

Now the mere fact that an evaluation causes you to be judged not by the end results, but by some intermediary metric that invites you to look sophisticated, brings some distortions.

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.fn2

The heuristic here would be to use education in reverse: hire, conditional on an equal set of skills, the person with the least label-oriented education. It means that the person had to succeed in spite of the credentialization of his competitors and overcome more serious hurdles. In addition, people who didn’t go to Harvard are easier to deal with in real life.

You can tell if a discipline is BS if the degree depends severely on the prestige of the school granting it. I remember when I applied to MBA programs being told that anything outside the top ten or twenty would be a waste of time. On the other hand a degree in mathematics is much less dependent on the school (conditional on being above a certain level, so the heuristic would apply to the difference between top ten and top two thousand schools). The same applies to research papers. In math and physics, a result posted on the repository site arXiv (with a minimum hurdle) is fine. In low-quality fields like academic finance (where papers are usually some form of complicated storytelling), the “prestige” of the journal is the sole criterion.

users of these machines gain no strength beyond an initial phase. By having recourse to complicated equipment that typically targets very few muscles, regular users will eventually be pear-shaping and growing weaker over time, with skills that do not transfer outside of the very machine that they trained on. The equipment may have some use in a hospital or a rehabilitation program, but that’s about it.

All you need are shoes to run outside when you can (and perhaps some pants that don’t make you look ridiculous), and a barbell with weights.

When people get rich, they shed their skin-in-the-game-driven experiential mechanism. They lose control of their preferences, substituting constructed preferences for their own, complicating their lives unnecessarily, triggering their own misery. And these constructed preferences are of course the preferences of those who want to sell them something.

I once had dinner in a Michelin-starred restaurant with a fellow who insisted on eating there

The other customers seemed, as we say in Mediterranean languages, to have a cork plugged in their behind obstructing proper ventilation, causing the vapors to build on the inside of the gastrointestinal walls, leading to the irritable type of decorum you only notice in the educated semi-upper classes. I noted that, in addition to the plugged corks, all the men wore ties. Dinner consisted of a succession of complicated small things, with microscopic ingredients and contrasting tastes that forced you to concentrate as if you were taking some entrance exam. You were not eating, rather visiting some type of museum with an affected English major lecturing you on some artistic dimension you would have never considered on your own. There was so little that was familiar and so little that fit my taste buds: once something on the occasion tasted like something real, there was no chance to have more as we moved on to the next dish. Trudging through the dishes and listening to some bull***t by the sommelier about the paired wine, I was afraid of losing concentration. It costs a lot of energy to fake that you’re not bored. In fact, I discovered an optimization in the wrong place: the only thing I cared about, the bread, was not warm. It appears that this is not a Michelin requirement for three stars.

left the place starving. 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 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.

Same with real estate: most people, I am convinced, are happier in close quarters, in a real barrio-style neighborhood, where they can feel human warmth and company. But when they have big bucks they end up pressured to move into outsized, impersonal, and silent mansions, far away from neighbors. On late afternoons, the silence of these large galleries has a funereal feel to it, but without the soothing music. This is something historically rare: in the past, large mansions were teeming with servants, head-servants, butlers, cooks, assistants, maids, private tutors, impoverished cousins, horse grooms, even personal musicians. And nobody today will come to console you for having a mansion—few will realize that it is quite sad to be there on Sunday evening.

Prosperous people of the type who don’t look rich are certainly aware of the point—they live in comfortable quarters and instinctively know that a move will be a mental burden. Many still live in their original houses.

To put it another way: if wealth is giving you fewer options instead of more (and more varied) options, you’re doing it wrong.

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.

This reasoning shows that sophistication can, at some level, cause degradation, what economists call “negative utility.” This tells us something about wealth and the growth of gross domestic product in society; it shows the presence of an inverted U curve with a level beyond which you get incremental harm. It is detectable only if you get rid of constructed preferences.

The best enemy is the one you own by putting skin in his game and letting him know the exact rules that come with it. You keep him alive, with the knowledge

You will note that no explicit verbal threat was issued. Verbal threats reveal nothing beyond weakness and unreliability. Remember, once again, no verbal threats.

We used to live in small communities; our reputations were directly determined by what we did—we were watched. Today, anonymity brings out the a**hole in people. So I accidentally discovered a way to change the behavior of unethical and abusive persons without verbal threat. Take their pictures. Just the act of taking their pictures is similar to holding their lives in your hands and controlling their future behavior thanks to your silence.

Web-shaming is much more powerful than past reputational blots, and more of a tail risk.

The divergence is evident in that journos worry considerably more about the opinion of other journalists than the judgment of their readers.

Journalists are currently in the most insecure profession you can find: the majority live hand to mouth, and ostracism by their friends would be terminal. Thus they become easily prone to manipulation by lobbyists, as we saw with GMOs, the Syrian wars, etc. You say something unpopular in that profession about Brexit, GMOs, or Putin, and you become history. This is the opposite of business where me-tooism is penalized.