Goktug Yilmaz's Reviews > Skin in the Game: The Hidden Asymmetries in Daily Life

Skin in the game

3 Keys:
- The central asymmetry of life is: In a strategy that entails ruin, benefits never offset risks of ruin.
- Take all risks, that doesn’t have a chance for ruin. But has a chance of profits.
- The mechanism of transferring risk impedes learning.

Rules:
- Golden Rule (symmetry): Treat others the way you would like them to treat you.
- Silver Rule (negative golden rule): Do not do to others what you would not like them to do to you.
- Principle of Charity: Exercise symmetry in intellectual debates; represent the argument of the opponent as accurately as you would like yours to be represented.

Morality:
- Code of Hammurabi central theme: It establishes symmetries between people in a transaction, so nobody can transfer hidden tail risk.
- If you have the rewards, you must also get some of the risks, not let others pay the price of your mistakes. If you inflict risk on others, and they are harmed, you need to pay some price for it. You should share the responsibility for events without unfairness and inequity.
- If you give an opinion, and someone follows it, you are morally obligated to be, exposed to its consequences.
- The principle of intervention, like that of healers, is first do no harm. Those who don’t take risks should never be involved in making decisions.
- We have always been crazy but weren’t skilled enough to destroy the world. Now we can.

History:
- Historically, all warlords and warmongers were warriors themselves, and, with a few curious exceptions, societies were run by risk takers, not risk transferors.
- Prominent people took risks—considerably more risks than ordinary citizens. The Roman emperor Julian the Apostate, died on the battlefield fighting in the never-ending war on the Persian frontier—while emperor.

Learning:
- Interventionistas don’t learn because they are not the victims of their mistakes.
- Evolution can only happen if risk of extinction is present.
- People don’t learn so much from their and other people’s mistakes; the system learns by selecting those less prone to a certain class of mistakes and eliminating others. Bad pilots, are under the ocean, dangerous drivers are in the cemetery. Transportation didn’t get safer just because people learn from errors, but because the system does.
- 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.
- Those who talk should do and only those who do should talk.
- What you learn from the intensity and the focus you had when under the influence of risk stays with you.
- Too high a rate of mutation prevents locking in the benefits of previous changes; evolution requires some, but not too frequent variation.

Assistance:
- 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. You want maximal free time, not maximal activity. 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. Having an assistant (unless necessary) removes your soul from the game. Assistance moves you one step away from authenticity.

Entrepreneurship:
- Entrepreneurs are heroes in our society. They fail for the rest of us. Because of VC mechanisms, many people mistaken for entrepreneurs fail to have true skin in the game because their aim is to cash out by selling the company they created to someone else. 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. We can easily identify them by their ability to write a convincing business plan. (This is the equivalent of bringing great-looking and marketable children into the world with the sole aim of selling them at age four)
- Products or companies that bear the owner’s name convey the message: “They have something to lose. Commitment to the company.”

Products:
- Things designed by people without skin in the game tend to grow in complication (before their final collapse).
- Artisans have their soul in the game.
- Anything you do to optimize your work, cut some corners, or squeeze more “efficiency” out of it will eventually make you dislike it.

Minority vs Majority Rule:
- Minority Rule: An asymmetry by which the behavior of the total is dictated by the preferences of a minority. Smokers can be in smoke-free areas but nonsmokers cannot be in smoking ones, so nonsmokers will prevail, not because they are initially a majority, but because they are asymmetric. Languages, ethics, and religions spread by minority rule. Most intolerant wins.
- 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.
- Genes follow majority rule; languages minority rule. Languages travel; genes less so.
- Formation of moral values and civil rights in society doesn’t come from the evolution of the consensus, it is the most intolerant person who imposes virtue on others precisely because of that intolerance.
- The minority rule produces low-variance in outcomes.
- 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. They violate the Silver Rule.
- “Never doubt that a small group of thoughtful citizens can change the world. Indeed, it is the only thing that ever has” Margaret Mead
- Revolutions are driven by an obsessive minority and the entire growth of society, whether economic or moral, comes from a small number of people.
- Society doesn’t evolve by consensus, voting, majority, committees, verbose meetings, academic conferences, or polling; only a few people 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.
- Science is a minority rule: a few will run it, others are just back-office clerks.

Markets & Trading:
- Markets aren’t the sum of market participants, but price changes reflect the activities of the most motivated buyer and seller. A price can drop by 10% because of a single stubborn seller.
- The market is like a large movie theatre with a small door. And the best way to detect a sucker is to see if his focus is on the size of the theatre rather than that of the door.
- The average behavior of the market participant will not allow us to understand the general behavior of the market.
- You can examine markets as markets and individuals as individuals, but markets are not sums of average individuals
- Zero-Intelligence-Markets: 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.
- 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.
- Agents increase their risks as they are winning, but contract after losses, a technique called “playing with the house money.” You start betting aggressively whenever you have a profit, never when you have a deficit, as if a switch was turned on or off.

Slavery, Employees vs Contractors:
- People who are employees for a living don’t behave so opportunistically. Contractors are exceedingly free; as risk-takers, they fear mostly the law. But employees have a reputation to protect. And they can be fired.
- Employees are expensive. You have to pay them even when you’ve got nothing for them to do. You lose your flexibility. Talent for talent, they cost a lot more. Lovers of pay checks are lazy, but they would never let you down on time of needs.
- 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.
- Someone employed for a while is giving you evidence of submission. Evidence of submission is displayed by the employee’s going through years depriving himself of his personal freedom for 9 hours every day. He is an obedient, housebroken dog.
- 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.
- 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.
- The best slave is someone you overpay and who knows it, terrified of losing his status.

Decisions:
- People whose survival depends on qualitative “job assessments” by someone of higher rank in an organization cannot be trusted for critical decisions.
- Employees are reliable by design, but they cannot be trusted in making decisions, anything that entails serious tradeoffs. Nor can they face emergencies unless they are in the emergency business. Employee has a simple objective: fulfill the tasks that his or her supervisor deems necessary, or satisfy some gameable metric.

Freedom:
- Freedom entails risks—real skin in the game. Freedom is never free.
- 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.
- You can define a free person precisely as someone whose fate is not centrally or directly dependent on peer assessment.

Lindy Effect:
- When a technology, idea, corporation, or anything nonperishable has an increase in life expectancy with every additional day of survival—unlike perishable items. So a book that has been a hundred years in print is likely to stay in print another hundred years—provided its sales remain healthy.
- Time is equivalent to disorder, and resistance to the ravages of time, that is, what we gloriously call survival, is the ability to handle disorder.
- That which is fragile has an asymmetric response to volatility and other stressors. It will experience more harm than benefit from time.
- In probability, volatility and time are the same. Fragility idea, the only effective judge of things is time.
- That which is “Lindy” is what ages in reverse. 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.
- Fragility is the expert, hence time and survival.
- In any activity, hidden details are only revealed via Lindy.
- If you hear advice from a grandmother or elders, odds are that it works 90% of the time. On the other hand, in part because of scientism and academic prostitution, in part because the world is hard, if you read anything by psychologists and behavioural scientists, odds are that it works at less than 10%, unless it is has also been covered by the grandmother and the classics, in which case why would you need a psychologist?
- When the beard is black, heed the reasoning, but ignore the conclusion. When the beard is gray, consider both reasoning and conclusion. When the beard is white, skip the reasoning, but mind the conclusion.

Rationality & Survival:
- Rationality resides in what you do, not in what you think or in what you “believe”, and rationality is about survival.
- Survival comes first, truth, understanding, and science later. You do not need science to survive, but you must survive to do science. As your grandmother would have said, better safe than sorry.
- First, live; then philosophize, Warren Buffett truism “to make money you must first survive.
- I have a finite shelf life, humanity should have an infinite duration. I am renewable, not humanity or the ecosystem.
- You often get better results making “errors,” as when you aim slightly away from the target when shooting. Making some types of errors is the most rational thing to do, when the errors are of little cost, as they lead to discoveries.
- Skin in the game means that you do not pay attention to what people say, only to what they do, and to how much of their necks they are putting on the line. Let survival work its wonders.
- When you consider beliefs in evolutionary terms, do not look at how they compete with each other, but consider the survival of the populations that have them.
- Not everything that happens happens for a reason, but everything that survives survives for a reason.
- Rationality is risk management in order to succeed, you must first survive.
- Sequence matters and the presence of ruin disqualifies cost-benefit analyses.
- Ruin: no reversibility away from the condition. The central problem is that if there is a possibility of ruin, cost-benefit analyses are no longer possible.
- Russian roulette: Expected return is not computable.
- Every single risk you take adds up to reduce your life expectancy.
- Rationality is avoidance of systemic ruin.
- Reality doesn’t care about winning arguments: survival is what matters.
- One may be risk loving yet completely averse to ruin.
- Love risk, systematic “convex” tinkering, and taking a lot of risks that don’t have tail risks but offer tail profits. Volatile things are not necessarily risky, and stable things are not necessarily safe.
- Small injuries will be beneficial, never larger ones, those that have irreversible effects.
- Never compare a multiplicative, systemic, and fat-tailed risk to a non-multiplicative, idiosyncratic, and thin-tailed one.

Illusion:
- True intellect should not appear to be intellectual.
- Things that looks sophisticated and scientific is usually scientism, not science.
- If a successful person doesn’t look the part, they had much to overcome in terms of perception. Thanks to the presence of some skin in the game, the contact with reality filters out incompetence, as reality is blind to looks.
- 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.
- An expert rule in my business is to never hire a well-dressed trader. But it goes beyond: Hire the successful trader, conditional on a solid track record, whose details you can understand the least.
- The illusion prevails that businesses work via business plans and science via funding. This is strictly not true: a business plan is a useful narrative for those who want to convince a sucker. It works because, firms in the entrepreneurship business make most of their money packaging companies and selling them; it is not easy to sell without some strong narrative. Most big recent successes (Microsoft, Apple, Facebook, Google) were started by people with skin and soul in the game and grew organically—if they had recourse to funding, it was to expand, funding was not the prime source of creation. You don’t create a firm by creating a firm; nor do you do science by doing science.

World workings:
- Collectively society doesn’t advance with organized education: the level of education in a country is the result of wealth.
- Negative Utility: Sophistication can, at some level, cause degradation.
- No peace proceeds from bureaucratic ink. If you want peace, make people trade, as they have done for millennia. They will be eventually forced to work something out.
- We are largely collaborative—except when institutions get in the way.
- If the “law of the jungle” means anything, it means collaboration for the most part, with a few perceptional distortions caused by our otherwise well-functioning risk-management intuitions. Even predators end up in some type of arrangement with their prey.
- History is largely peace punctuated by wars. Humans are prone to the availability heuristic, by which the salient is mistaken for the statistical, and the conspicuous and emotional effect of an event makes us think it is occurring more regularly than in reality.
- Courage is when you sacrifice your own well-being for the sake of the survival of a layer higher than yours.
- You will never fully convince someone that he is wrong; only reality can.
- Decentralization and fragmentation, aside from stabilizing the system, improves people’s connection to their labor.
- All the other presidents except Putin need to be elected, can come under fire by their party, and have to calibrate every single statement with how it could be misinterpreted the least by the press. On the other hand, Putin has the equivalent of FU 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.
- No downside for some means no upside for the rest.
- 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.
- 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 that he owes his life to your benevolence.
- You never cure structural defects; the system corrects itself by collapsing.
- The more you have to lose, the more fragile you are.
- Scars signal skin in the game. And People can detect the difference between front- and back-office operators.

Lies of Systems:
- Most things that we believe were “invented” by universities were actually discovered by tinkering and later legitimized by some type of formalization. The knowledge we get by tinkering, via trial and error is vastly superior to that obtained through reasoning, something self-serving institutions have been very busy hiding from us.
- Bureaucracy is a construction by which a person is conveniently separated from the consequences of his or her actions.
- Decentralization is based on the simple notion that it is easier to macrobullshit than microbullshit. Decentralization reduces large structural asymmetries.
- If we don’t 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.
- English “manners” were imposed on the middle class as a way of domesticating them, along with instilling in them the fear of breaking rules and violating social norms.
- What can be phrased and expressed in a clear narrative that convinces suckers will be a sucker trap.

Tips:
- Today, anonymity brings out the asshole in people. 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. They don’t know what you can do with it, and will live in a state of uncertainty.
- Avoid taking advice from someone who gives advice for a living, unless there is a penalty for their advice.