Skin in the Game: Hidden Asymmetries in Daily Life

by Nassim Nicholas Taleb

How is it that maximally intolerant minorities run the world and impose their taste on us? How does universalism destroy the very people it means to help? How is it that we have more slaves today than we did during Roman times? Why shouldn’t surgeons look like surgeons? Why did Christian theology keep insisting on a human side for Jesus Christ that is necessarily distinct from the divine? How do historians confuse us by reporting on war, not peace? How is it that cheap signaling (without anything to risk) fails equally in economic and religious environments? How do candidates for political office with obvious character flaws seem more real than bureaucrats with impeccable credentials? Why do we worship Hannibal? How do companies go bust the minute they have professional managers interested in doing good? How is paganism more symmetrical across populations? How should foreign affairs be conducted? Why should you never give money to organized charities unless they operate in a highly distributive manner (what is called Uberized in modern lingo)? Why do genes and languages spread differently? Why does the scale of communities matter (a community of fishermen turns from collaborative to adversarial once one moves the scale, that is the number of people involved, a notch)? Why does behavioral economics have nothing to do with the study of the behavior of individuals—and markets have little to do with the biases of participants? How is rationality survival and survival only? Wha...

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.

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.

Even today, monarchs derive their legitimacy from a social contract that requires physical risk-taking. The British Royal family made sure that one of its scions, Prince Andrew, took more risks than “commoners” during the Falkland war of 1982, his helicopter being in the front line. Why? Because noblesse oblige; the very status of a lord has been traditionally derived from protecting others, trading personal risk for prominence—and they happened to still remember that contract. You can’t be a lord if you aren’t a lord.

Some think that freeing ourselves from having warriors at the top means civilization and progress. It does not. Meanwhile, Bureaucracy is a construction by which a person is conveniently separated from the consequences of his or her actions. 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.

Now, if you are going to highlight only one single section from this book, here is the one. The interventionista case is central to our story because it shows how absence of skin in the game has both ethical and epistemological effects (i.e., related to knowledge). We saw that interventionistas don’t learn because they are not the victims of their mistakes, and, as we hinted at with pathemata mathemata: The same mechanism of transferring risk also impedes learning. More practically, 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. So learning isn’t quite what we teach inmates inside the high-security prisons called schools. In biology, learning is something that, through the filter of intergenerational selection, gets imprinted at the cellular level—skin in the game, I insist, is more filter than deterrence. Evolution can only happen if risk of extinction is present. Further, There is no evolution without skin in the game.

Returning to our interventionistas, we saw that people don’t learn so much from their—and other people’s—mistakes; rather it is the system that learns by selecting those less prone to a certain class of mistakes and eliminating others. Systems learn by removing parts, via negativa.fn4 Many bad pilots, as we mentioned, are currently in the bottom of the Atlantic, many dangerous bad drivers are in the local quiet cemetery with nice walkways bordered by trees. 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.

Silver Beats Gold We rapidly go through the rules to the right of Hammurabi. Leviticus is a sweetening of Hammurabi’s rule. The Golden Rule wants you to Treat others the way you would like them to treat you. The more robust Silver Rule says Do not treat others the way you would not like them to treat you. More robust? How? Why is the Silver Rule more robust? First, it tells you to mind your own business and not decide what is “good” for others. We know with much more clarity what is bad than what is good. The Silver Rule can be seen as the Negative Golden Rule, and as I am shown by my Calabrese (and Calabrese-speaking) barber every three weeks, via negativa (acting by removing) is more powerful and less error-prone than via positiva (acting by additionfn1).

“Deal with weaker states as you think it appropriate for stronger states to deal with you.” Nobody embodies the notion of symmetry better than Isocrates, who lived more than a century and made significant contributions when he was in his nineties. He even managed a rare dynamic version of the Golden Rule: “Conduct yourself toward your parents as you would have your children conduct themselves toward you.” We had to wait for the great baseball coach Yogi Berra to get another such dynamic rule for symmetric relations: “I go to other people’s funerals so they come to mine.”

The very idea behind the First Amendment of the Constitution of the United States is to establish a silver rule–style symmetry: you can practice your freedom of religion so long as you allow me to practice mine; you have the right to contradict me so long as I have the right to contradict you. Effectively, there is no democracy without such an unconditional symmetry in the rights to express yourself, and the gravest threat is the slippery slope in the attempts to limit speech on grounds that some of it may hurt some people’s feelings. Such restrictions do not necessarily come from the state itself, rather from the forceful establishment of an intellectual monoculture by an overactive thought police in the media and cultural life.

Universal behavior is great on paper, disastrous in practice.

Start by being nice to every person you meet. But if someone tries to exercise power over you, exercise power over him.

Avoid taking advice from someone who gives advice for a living, unless there is a penalty for their advice.

Skin in the game is about the real world, not appearances. As per Fat Tony’s motto: You do not want to win an argument. You want to win. Indeed you need to win whatever you are after: money, territory, the heart of a grammar specialist, or a (pink) convertible car. For focusing just on words puts one on a very dangerous slope, since We are much better at doing than understanding.

There is a difference between a charlatan and a genuinely skilled member of society, say that between a macrobull***ter political “scientist” and a plumber, or between a journalist and a mafia made man. The doer wins by doing, not convincing. Entire fields (say economics and other social sciences) become themselves charlatanic because of the absence of skin in the game connecting them back to earth (while the participants argue about “science”). Chapter 9 shows how they will develop elaborate rituals, titles, protocols, and formalities to hide this deficit. You may not know in your mind where you are going, but you know it by doing.

In that light—that of (causal) opacity and revelation of preferences—the Intelligence of Time under skin in the game even helps define rationality—the only definition of rationality I found that doesn’t fall apart under logical scrutiny. A practice may appear to be irrational to an overeducated and naive (but punctual) observer who works in the French Ministry of Planning, because we humans are not intelligent enough to understand it—but it has worked for a long time. Is it rational? We have no grounds to reject it. But we know what is patently irrational: what threatens the survival of the collective first, the individual second. And, from a statistical standpoint, going against nature (and its statistical significance) is irrational. In spite of the noise funded by pesticide and other technological companies, there is no known rigorous definition of rationality that makes rejection of the “natural” rational; to the contrary. By definition, what works cannot be irrational; about every single person I know who has chronically failed in business shares that mental block, the failure to realize that if something stupid works (and makes money), it cannot be stupid. A system with skin-in-the-game requirements holds together through the notion of a sacrifice in order to protect the collective or entities higher in the hierarchy that are required to survive. “Survival talks and BS walks.” Or as Fat Tony would put it: “Survival tawks and BS wawks.” In other words: What is rationa...

Skin in the Game, but Not All the Time Skin in the game is an overall necessity, but let us not get carried away in applying it to everything in sight in its every detail, particularly when consequences are contained. There is a difference between the interventionista of Prologue, Part 1 making pronouncements that cause thousands to be killed overseas, and a harmless opinion voiced by a person in a conversation, or a pronouncement by a fortune teller used for therapy rather than decision making. Our message is to focus on those who are professionally slanted, causing harm without being accountable for it, by the very structure of their own occupation. For the professionally asymmetric person is rare and has been so in history, and even in the present. He causes a lot of problems, but he is rare. For most people you run into in real life—bakers, cobblers, plumbers, taxi drivers, accountants, tax advisors, garbage collectors, dental cleaning assistants, carwash operators (not counting Spanish grammar specialists)—pay a price for their mistakes.

Those who talk should do and only those who do should talk

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. Let us get more practical about the side effect of modernism: as things get more technological, there is a growing separation between the maker and the user.

This explains the more severe problems of landscaping and architecture: architects today build to impress other architects, and we end up with strange—irreversible—structures that do not satisfy the well-being of their residents; it takes time and a lot of progressive tinkering for that. Or some specialist sitting in the ministry of urban planning who doesn’t live in the community will produce the equivalent of the tilted ledge—as an improvement, except at a much larger scale. Specialization, as I will keep insisting, comes with side effects, one of which is separating labor from the fruits of labor.

Things designed by people without skin in the game tend to grow in complication (before their final collapse).

There is absolutely no benefit for someone in such a position to propose something simple: when you are rewarded for perception, not results, you need to show sophistication. Anyone who has submitted a “scholarly” paper to a journal knows that you usually raise the odds of acceptance by making it more complicated than necessary. Further, there are side effects for problems that grow nonlinearly with such branching-out complications. Worse: Non-skin-in-the-game people don’t get simplicity.

I Am Dumb Without Skin in the Game Let us return to pathemata mathemata (learning through pain) and consider its reverse: learning through thrills and pleasure. People have two brains, one when there is skin in the game, one when there is none. Skin in the game can make boring things less boring. When you have skin in the game, dull things like checking the safety of the aircraft because you may be forced to be a passenger in it cease to be boring. If you are an investor in a company, doing ultra-boring things like reading the footnotes of a financial statement (where the real information is to be found) becomes, well, almost not boring.

regulate.fn5 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.

IV. SOUL IN THE GAME Finally and centrally, skin in the game is about honor as an existential commitment, and risk taking (a certain class of risks) as a separation between man and machine and (some may hate it) a ranking of humans. If you do not take risks for your opinion, you are nothing. And I will keep mentioning that I have no other definition of success than leading an honorable life. We intimated that it is dishonorable to let others die in your stead. Honor implies that there are some actions you would categorically never do, regardless of the material rewards. She accepts no Faustian bargain, would not sell her body for $500; it also means she wouldn’t do it for a million, nor a billion, nor a trillion. And it is not just a via negativa stance, honor means that there are things you would do unconditionally, regardless of the consequences. Consider duels, which have robbed us of the great Russian poet Pushkin, the French mathematician Galois, and, of course, many more, at a young age (and, in the case of Galois, a very young age): people incurred a significant probability of death just to save face. Living as a coward was simply no option, and death was vastly preferable, even if, as in the case of Galois, one invented a new and momentous branch of mathematics while still a teenager.fn6 As a Spartan mother tells her departing son: “With it or on it,” meaning either return with your shield or don’t come back alive (the custom was to carry the dead body flat on it);...

Artisans Anything you do to optimize your work, cut some corners, or squeeze more “efficiency” out of it (and out of your life) will eventually make you dislike it. Artisans have their soul in the game. Primo, artisans do things for existential reasons first, financial and commercial ones later. Their decision making is never fully financial, but it remains financial. Secundo, they have some type of “art” in their profession; they stay away from most aspects of industrialization; they combine art and business. Tertio, they put some soul in their work: they would not sell something defective or even of compromised quality because it hurts their pride. Finally, they have sacred taboos, things they would not do even if it markedly increased profitability. Compendiaria res improbitas, virtusque tarda—the villainous takes the short road, virtue the longer one. In other words, cutting corners is dishonest.

Now, something very practical. One of the best pieces of advice I have ever received was the recommendation by a very successful (and happy) older entrepreneur, Yossi Vardi, to have no assistant. The mere presence of an assistant suspends your natural filtering—and its absence forces you to do only things you enjoy, and progressively steer your life that way. (By assistant here I exclude someone hired for a specific task, such as grading papers, helping with accounting, or watering plants; just some guardian angel overseeing all your activities). This is a via negativa approach: you want maximal free time, not maximal activity, and you can assess your own “success” according to such metric. Otherwise, you end up assisting your assistants, or being forced to “explain” how to do things, which requires more mental effort than doing the thing itself. In fact, beyond my writing and research life, this has proved to be great financial advice as I am freer, more nimble, and have a very high benchmark for doing something, while my peers have their days filled with unnecessary “meetings” and unnecessary correspondence. Having an assistant (except for the strictly necessary) removes your soul from the game.

A Caveat with Entrepreneurs 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. Companies beyond the entrepreneur stage start to rot. One of the reasons corporations have the mortality of cancer patients is the assignment of time-defined duties. Once you change assignment—or, better, company—you can now say about the deep Bob Rubin–style risks that emerge: “It’s not my problem anymore.” The same happens when you sell out, so remember that: The skills at making things diverge from those at selling things.

learning is rooted in repetition and convexity, meaning that the reading of a single text twice is more profitable than reading two different things once, provided of course that said text has some depth of content.

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.

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

Laws come and go; ethics stay.

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. The question we will reexamine later, after deeper discussion of complexity theory, is whether it is possible to be both ethical and universalist. In theory, yes, but, sadly, not in practice. For whenever the “we” becomes too large a club, things degrade, and each one starts fighting for his own interest. The abstract is way too abstract for us. This is the main reason I advocate political systems that start with the municipality, and work their way up (ironically, as in Switzerland, those “Swiss”), rather than the reverse, which has failed with larger states. Being somewhat tribal is not a bad thing—and we have to work in a fractal way in the organized harmonious relations between tribes, rather than merge all tribes in one large soup. In that sense, an American-style federalism is the ideal system.

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.

I am, at the Fed level, libertarian; at the state level, Republican; at the local level, Democrat; and at the family and friends level, a socialist.

It is provided by the Rhodian Law that where merchandise is thrown overboard for the purpose of lightening a ship, what has been lost for the benefit of all must be made up by the contribution of all.

The rule we discuss in this chapter is the minority rule, the mother of all asymmetries. It suffices for an intransigent minority—a certain type of intransigent minority—with significant skin in the game (or, better, soul in the game) to reach a minutely small level, say 3 or 4 percent of the total population, for the entire population to have to submit to their preferences. Further, an optical illusion comes with the dominance of the minority: a naive observer (who looks at the standard average) would be under the impression that the choices and preferences are those of the majority. If it seems absurd, it is because our scientific intuitions aren’t calibrated for this. (Fughedabout scientific and academic intuitions and snap judgments; they don’t work, and your standard intellectualization fails with complex systems, though your grandmothers’ wisdom doesn’t.)

Among other things, many other things, the minority rule will show us how all it takes is a small number of intolerant, virtuous people with skin in the game, in the form of courage, for society to function properly.

An honest person will never commit criminal acts, but a criminal will readily engage in legal acts.

Let us call such minority an intransigent group, and the majority a flexible one. And their relationship rests on an asymmetry in choices.

Another example: do not think that the spread of automatic shifting cars is necessarily due to a majority preference; it could just be because those who can drive manual shifts can always drive automatic, but the reverse is not true.

Rory wrote to me about the beer-wine asymmetry and the choices made for parties: “Once you have 10 percent or more women at a party, you cannot serve only beer. But most men will drink wine. So you only need one set of glasses if you serve only wine—the universal donor, to use the language of blood groups.”

This strategy of seeking the optimal among not necessarily great options might have been played by the Khazars when they were looking to choose between Islam, Judaism, and Christianity. Legend has it that three high-ranking delegations (bishops, rabbis, and sheikhs) came to make the sales pitch. The Khazar lords asked the Christians: if you were forced to chose between Judaism and Islam, which one would you pick? Judaism, they replied. Then the lords asked the Muslims: which of the two, Christianity or Judaism? Judaism, the Muslims said. Judaism it was; and the tribe converted.

LINGUA FRANCA If a meeting is taking place in Germany in the Teutonic-looking conference room of a corporation that is sufficiently international or European, and one of the persons in the room doesn’t speak German, the entire meeting will be run in … English, the brand of inelegant English used in corporations across the world. That way they can equally offend their Teutonic ancestors and the English language. It all started with the asymmetric rule that those who are nonnative in English know (bad) English, but the reverse—English speakers knowing other languages—is less likely. French was supposed to be the language of diplomacy, as civil servants coming from aristocratic backgrounds used it, while their more vulgar compatriots involved in commerce relied on English. In the rivalry between the two languages, English won as commerce grew to dominate modern life; the victory has nothing ...

A French Canadian friend from Montreal, Jean-Louis Rheault, bemoaning the loss of the French language among French Canadians outside narrowly provincial areas, commented as follows: “In Canada, when we say bilingual, it is English-speaking, and when we say French-speaking it becomes bilingual.”

Genes follow majority rule; languages minority rule. Languages travel; genes less so.

This shows us the recent mistake of building racial theories on language, dividing people into “Aryans” and “Semites,” based on linguistic considerations. While the subject was central to the German Nazis, the practice continues today in one form or another, often benign. For the great irony is that Northern European supremacists (“Aryan”), while anti-Semitic, used the classical Greeks to give themselves a pedigree and a link to a glorious civilization, but didn’t realize that the Greeks and their Mediterranean “Semitic” neighbors were actually genetically close to one another. It has been recently shown that both ancient Greeks and Bronze Age Levantines share an Anatolian origin. It just happened that the languages diverged.

my heuristic is that the more pagan, the more brilliant one’s mind, and the higher one’s ability to handle nuances and ambiguity. Purely monotheistic religions such as Protestant Christianity, Salafi Islam, or fundamentalist atheism accommodate literalist and mediocre minds that cannot handle ambiguity.fn4

Outcomes are paradoxically more stable under the minority rule—the variance of the results is lower and the rule is more likely to emerge independently across separate populations. What emerges from the minority rule is more likely to be black-and-white, binary rules.