Skin in the Game: Hidden Asymmetries in Daily Life

by Nassim Nicholas Taleb

Can democracy—by definition the majority—tolerate enemies? The question is as follows: “Would you agree to deny the freedom of speech to every political party that has in its charter the banning the freedom of speech?” Let’s go one step further: “Should a society that has elected to be tolerant be intolerant about intolerance?”

We can answer these points using the minority rule. Yes, an intolerant minority can control and destroy democracy. Actually, it will eventually destroy our world. So, we need to be more than intolerant with some intolerant minorities. Simply, they violate the Silver Rule. It is not permissible to use “American values” or “Western principles” in treating intolerant Salafism (which denies other peoples’ right to have their own religion). The West is currently in the process of committing suicide.

The market is like a large movie theater with a small door.

And the best way to detect a sucker is to see if his focus is on the size of the theater rather than that of the door. Stampedes happen in cinemas—say, when someone shouts “fire”—because those who want to be out do not want to stay in, exactly the same unconditionality we saw with kosher observance or panic selling. Science acts similarly. As we saw earlier, the minority rule is behind Karl Popper’s thinking. But Popper is too stern, so let us leave him for later and, for now, discuss the more entertaining and jovial Richard Feynman, the most irreverent and playful scientist of his day. His book of anecdotes, What Do You Care What Other People Think?, conveys the idea of the fundamental irreverence of science, which proceeds through a similar mechanism as the kosher asymmetry. How? Science isn’t the sum of what scientists think, but exactly as with markets, it is a procedure that is highly skewed. Once you debunk something, it is now wrong. Had science operated by majority consensus, we would be still stuck in the Middle Ages, and Einstein would have ended as he started, a patent clerk with fruitless side hobbies.

UNUS SED LEO: ONLY ONE BUT A LION 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.”fn5 This large payoff from stubborn courage is not limited to the military. “Never doubt that a small group of thoughtful citizens can change the w...

The average behavior of the market participant will not allow us to understand the general behavior of the market.

Understanding how the subparts of the brain (say, neurons) work will never allow us to understand how the brain works.

Understanding the genetic makeup of a unit will never allow us to understand the behavior of the unit itself.

Under the right market structure, a collection of idiots produces a well-functioning market.

It may be that 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. Leave people alone under a good structure and they will take care of things.

Even the church had its hippies—Coase does not need math—Avoid lawyers during Oktoberfest—The expat life ends one day—People who have been employees are signaling domestication

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).”

Someone who has been employed for a while is giving you strong evidence of submission.

FROM THE COMPANY MAN TO THE COMPANIES PERSON Even when an employee ceases to be an employee, he will remain diligent. The longer the person stays with a company, the more emotional investment they will have in staying, and, when leaving, are guaranteed in making an “honorable exit.”fn1 If employees lower your tail risk, you lower theirs as well. Or at least, that’s what they think you do.

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.

By the 1990s, however, people started to realize that working as a company man was safe … provided the company stayed around. But the technological revolution that took place in Silicon valley put traditional companies under financial threat. For instance, after the rise of Microsoft and the personal computer, IBM, which was the main farm for company men, had to lay off a proportion of its “lifers,” who then realized that the low-risk profile of their position wasn’t so low risk. These people couldn’t find a job elsewhere; they were of no use to anyone outside IBM. Even their sense of humor failed outside of the corporate culture. 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.

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

Aside from his 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.

Had economists, Coase or Shmoase, had any interest in the ancients, they would have discovered the risk-management strategy relied upon by Roman families who customarily had a slave for treasurer, the person responsible for the finances of the household and the estate. Why? Because you can inflict a much higher punishment on a slave than a free person or a freedman—and you do not need to rely on the mechanism of the law for that. You can be bankrupted by an irresponsible or dishonest steward who can divert your estate’s funds to Bithynia. A slave has more downside.

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 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.

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.

How to be a whistleblower—James Bond isn’t a Jesuit priest, but he is a bachelor—So are both Professor Moriarty and Sherlock Holmes—Total intelligence in the P.R. firm Ketchum—Putting the skin on terrorists

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

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

HOW TO PUT SKIN IN THE GAME OF SUICIDE BOMBERS Can someone punish a family for the crimes of an individual? The scriptures are self-contradictory—you can get both answers from the Old Testament. Exodus and Numbers show God as “visiting the iniquity of the fathers on the children to the third or fourth generation.” Deuteronomy makes a separation: “Fathers shall not be put to death because of their children, nor shall children be put to death because of their fathers. Each one shall be put to death for his own sin.” Even today the question isn’t fully settled, nor is the answer clear-cut. You are not responsible for the debts of your parents, but German taxpayers are still responsible for war reparations for crimes committed by their grandparents and great-grandparents. And even in ancient times, when debt was a burden that crossed generations, the answer wasn’t clear-cut: there was a balancing mechanism of periodic (literal) cleaning of the slate, with jubilee debt forgiveness. 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. Indirect responsibility isn’t part of the standard crime-and-punishment methodology of a civilized society, but confronting terrorists (who threaten innocents) isn’t standard either. For we have rarely in history faced a situation in which the perpetrator of a crime has a completely asymmetric payoff and upside from death itself.fn3

Hammurabi’s code actually makes such a provision, transferring liability across generations. For, on that same basalt stele surrounded by Korean selfie sticks, is written the following: “If the architect built a house and the house subsequently collapses, killing the firstborn son of the master, the firstborn son of the architect shall be put to death.” The individual as we understand it today did not exist as a standalone unit; the family did.

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. But I feel queasy about transferring a crime from one unit, an individual, to another, a collective. What I do not feel bad about is preventing the family of the perpetrators of terrorist acts from benefiting from those acts—many terrorist groups reward the families of suicide bombers, and this can be safely terminated without any ethical dilemma.

How to dress while reading Borges and Proust—There are many ways to convince with an ice pick—Councils of bickering bishops—Theosis—Why Trump will win (he actually did win)

Scars signal skin in the game. And People can detect the difference between front- and back-office operators.

take some Fat Tony wisdom: always do more than you talk. And precede talk with action. For it will always remain that action without talk supersedes talk without action. Otherwise you will resemble the person we expose in the next chapter (which hopefully will offend many “intellectuals”), the insidious disease of modern times: back-office people (that is, support staff) acting as front-office ones (business generators).

People who don’t have skin in the game—Lipid phobias—Teach a professor how to deadlift

WHERE TO FIND A COCONUT But the problem is the one-eyed following the blind: these self-described members of the “intelligentsia” can’t find a coconut on Coconut Island, meaning they aren’t intelligent enough to define intelligence, hence fall into circularities—their main skill is a capacity to pass exams written by people like them, or to write papers read by people like them. Some of us—not Fat Tony—have been blind to their serial incompetence. 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 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). The IYI seems ubiquitous in our lives but is still a small minority and is rarely seen outside specialized outlets, think tanks, the media, and university social science departments—most people have proper jobs and there are not many openings for the IYI, which explains how they can be so influential in spite of their low numbers. The IYI pathologizes others for doing things he doesn’t understand without ever realizing it is his understanding that may be limited. He thinks people should act according to their best interests and he knows their interests, particularly if they are “rednecks” or from the English non-crisp-vowel class who voted for Brexit. When plebeians do something that makes sense to themselves, but not to him, the IYI uses the term “uneducated.” What we generally call participation in the political process, he calls by two distinct designations: “democracy” when it fits the IYI, and “populism” when plebeians dare to vote in a way that contradicts IYI preferences. While rich people believe in one tax dollar one vote, more humanistic ones in one man one vote, Monsanto...

INTELLECTUAL YET PHILISTINE The IYI subscribes to The New Yorker, a journal designed so philistines can learn to fake a conversation about evolution, neurosomething, cognitive biases, and quantum mechanics. He never curses on social media. He speaks of “equality of races” and “economic equality,” but never goes out drinking with a minority cab driver (again, no real skin in the game, as, I will repeat until I am hoarse, the concept is fundamentally foreign to the IYI). The modern IYI has attended more than one TED talk in person or watched more than two TED talks on YouTube. Not only did he vote for Hillary Monsanto-Malmaison because she seemed electable or some such circular reasoning, but he holds that anyone who didn’t do so is mentally ill. The IYI mistakes the Near East (ancient Eastern Mediterranean) for the Middle East. The IYI has a copy of the first hardback edition of The Black Swan on his shelf, but mistakes absence of evidence for evidence of absence. He believes that GMOs are “science,” that their “technology” is in the same risk class as conventional breeding. Typically, the IYI get first-order logic right, but not second-order (or higher) effects, making him totally incompetent in complex domains. The IYI has been wrong, historically, about Stalinism, Maoism, GMOs, Iraq, Libya, Syria, lobotomies, urban planning, low carbohydrate diets, gym machines, behaviorism, trans-fats, Freudianism, portfolio theory, linear regression, HFCS (High-Fructose Corn Syrup), Ga...

NEVER GOTTEN DRUNK WITH RUSSIANS The IYI joins a club to get travel privileges; if he is a social scientist, he uses statistics without knowing how they are derived (like Steven Pinker and psycholophasters in general); when in the United Kingdom, he goes to literary festivals and eats cucumber sandwiches, taking small bites at a time; he drinks red wine with steak (never white); he used to believe that dietary fat was harmful and has now completely reversed himself (information in both cases is derived from the same source); he takes statins because his doctor told him to do so; he fails to understand ergodicity, and, when explained to him, he forgets about it soon after; he doesn’t use Yiddish words even when talking business; he studies grammar before speaking a language; he has a cousin who worked with someone who knows the Queen; he has never read Frédéric Dard, Libanius Antiochus, Michael Oakeshott, John Gray, Ammianus Marcellinus, Ibn Battuta, Saadia Gaon, or Joseph de Maistre; he has never gotten drunk with Russians; he never drinks to the point where he starts breaking glasses (or, preferably, chairs); he doesn’t even know the difference between Hecate and Hecuba (which ...

The static and the dynamic—How to go bankrupt and be loved by the many—Piketty’s equals

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.

Dynamic equality is what restores ergodicity, making time and ensemble probabilities substitutable.

COBBLER ENVIES COBBLER The reason regular people are not as acrimonious as the “intellectuals” and bureaucrats is because envy does not travel long distance or cross many social classes. Envy does not originate with the impoverished, concerned with the betterment of their condition, but with the clerical class. Simply, it looks like it was the university professors (who have “arrived”) and people who have permanent stability of income, in the form of tenure, governmental or academic, who bought heavily into Piketty’s argument. From conversations, I became convinced that people who counterfactual upwards (i.e., compare themselves to those richer) want to actively dispossess the rich. As with all communist movements, it is often the bourgeois or clerical classes who are the early adopters of revolutionary theories. So class envy doesn’t originate from a truck driver in South Alabama, but from a New York or Washington, D.C., Ivy League–educated IYI (say Paul Krugman or Joseph Stiglitz) with a sense of entitlement, upset some “less smart” persons are much richer.

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. And the expression Nobody is a prophet in his own land, making envy a geographical thing (mistakenly thought to originate with Jesus), originates from that passage in the Rhetoric. Aristotle himself was building on Hesiod: cobbler envies cobbler, carpenter envies carpenter. Later, Jean de La Bruyère wrote that jealousy is to be found within the same art, talent, and condition.fn10 So I doubt Piketty bothered to ask blue-collar Frenchmen what they want, as Michelle Lamont did (as we saw earlier in the chapter). I am certain that they would ask for better beer, a new dishwasher, or faster trains for their commute, not to bring down some rich businessman invisible to them. But, again, people can frame questions and portray enrichment as theft, as was done before the French Revolution, in which case the blue-collar class would ask, once again, for heads to roll.fn11

In the more rural past, envy was rather controlled; wealthy people were not as exposed to other persons of their class. They didn’t have the pressure to keep up with other wealthy persons and compete with them. The wealthy stayed within their region, surrounded by people who depended on them, say a lord on his property. Except for the occasional season in the cities, their social life was quite vertical. Their children played with the children of the servants. It was in mercantile urban environments that socializing within social classes took place. And, over time, with industrialization, the rich started moving to cities or suburbs surrounded by other people of similar—but not completely similar—condition. Hence they needed to keep up with each other, racing on a treadmill. 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.

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

Probability, statistics, and data science are principally logic fed by observations—and absence of observations. For many environments, the relevant data points are those in the extremes; these are rare by definition, and it suffices to focus on those few but big to get an idea of the story. If you want to show that a person has more than, say $10 million, all you need is to show the $50 million in his brokerage account, not, in addition, list every piece of furniture in his house, including the $500 painting in his study and the silver spoons in the pantry. 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. For instance, the science journalist Steven Pinker played that trick with his book The Better Angels of Our Nature, which claims a decline of violence in modern human history, and attributes this to modern institutions. My collaborator Pasquale Cirillo and I, when we put his “data” under scrutiny, found out that either he didn’t understand his own numbers (actually, he didn’t), or he had a story in mind and kept adding charts, not realizing that statistics isn’t about data but distillation, rigor, and avoiding being fooled by randomness—but no matter, the general public and his state-wor...

There is a vicious domain-dependence of expertise: the electrician, dentist, scholar of Portuguese irregular verbs, assistant colonoscopist, London cabby, and algebraic geometer are experts (plus or minus some local variations), while the journalist, State Department bureaucrat, clinical psychologist, management theorist, publishing executive, and macroeconomist are not. This allows us to answer the questions: Who is the real expert? Who decides who is and who is not an expert? Where is the meta-expert? Time is the expert. Or, rather, the temperamental and ruthless Lindy, as we see in the next chapter.

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

Let us use as shorthand “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. Only the nonperishable can be Lindy. When it comes to ideas, books, technologies, procedures, institutions, and political systems under Lindy, there is no intrinsic aging and perishability. A physical copy of War and Peace can age (particularly when the publisher cuts corners to save twenty cents on paper for a fifty-dollar book); the book itself as an idea doesn’t. Note that thanks to Lindy, no expert is the final expert anymore and we do not need meta-experts judging the expertise of experts one rank below them. We solve the “turtles all the way down” problem.fn1 Fragility is the expert, hence time and survival.