Nassim Nicholas Taleb - Skin in the Game

Nassim Nicholas Taleb

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SKIN IN THE GAME

Hidden Asymmetries in Daily Life

INCERTO, an investigation of opacity, luck, uncertainty, probability, human error, risk, and decision making when we dont understand the world, expressed in the form of a personal essay with autobiographical sections, stories, parables, and philosophical, historical, and scientific discussions in non-overlapping volumes that can be accessed in any order.

FOOLED BY RANDOMNESS (2001, 2004), on how we tend to mistake luck for skills, how randomness does not look random, why there is no point talking about performance when it is easier to buy and sell than fry an egg, and the profound difference between dentists and speculators.

THE BLACK SWAN (2007, 2010), on how high-impact but rare events dominate history, how we retrospectively give ourselves the illusion of understanding them thanks to narratives, how they are impossible to estimate scientifically, how this makes some areasbut not otherstotally unpredictable and unforecastable, how confirmatory methods of knowledge dont work, and how thanks to Black Swanblind faux experts we are prone to building systems increasingly fragile to extreme events.

THE BED OF PROCRUSTES (Philosophical Aphorisms) (2010, 2016)

ANTIFRAGILE (2012), on how some things like disorder (hence volatility, time, chaos, variability, and stressors) while others dont, how we can classify things along the lines fragile-robust-antifragile, how we can identify (anti)fragility based on nonlinear response without having to know much about the history of the process (which solves most of the Black Swan problem), and why you are alive if and only if you love (some) volatility.

SKIN IN THE GAME (2018), this volume.

INCERTOS TECHNICAL COMPANION, consisting of academic-style papers, miscellaneous notes, and (very) technical remarks and developments.

Two men of courage:

Ron Paul,
a Roman among Greeks;

Ralph Nader,
Greco-Phoenician saint

This book, while standalone, is a continuation of the Incerto collection, which is a combination of a) practical discussions, b) philosophical tales, and c) scientific and analytical commentary on the problems of randomness, and how to live, eat, sleep, argue, fight, befriend, work, have fun, and make decisions under uncertainty. While accessible to a broad group of readers, dont be fooled: the Incerto is an essay, not a popularization of works done elsewhere in boring form (leaving aside the Incertos technical companion).

Skin in the Game is about four topics in one: a) uncertainty and the reliability of knowledge (both practical and scientific, assuming there is a difference), or in less polite words bull***t detection, b) symmetry in human affairs, that is, fairness, justice,

It is not just that skin in the game is necessary for fairness, commercial efficiency, and risk management: skin in the game is necessary to understand the world.

First, it is bull***t identification and filtering, that is, the difference between theory and practice, cosmetic and true expertise, and academia (in the bad sense of the word) and the real world. To emit a Yogiberrism, in academia there is no difference between academia and the real world; in the real world, there is.

Second, it is about the distortions of symmetry and reciprocity in life: 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. Just as you should treat others in the way youd like to be treated, you would like to share the responsibility for events without unfairness and inequity.

If you give an opinion, and someone follows it, you are morally obligated to be, yourself, exposed to its consequences. In case you are giving economic views:

Dont tell me what you think, just tell me whats in your portfolio.

Third, the book is about how much information one should practically share with others, what a used car salesman shouldor shouldnttell you about the vehicle on which you are about to spend a large segment of your savings.

Fourth, it is about rationality and the test of time. Rationality in the real world isnt about what makes sense to your New Yorker journalist or some psychologist using naive first-order models, but something vastly deeper and statistical, linked to your own survival.

Do not mistake skin in the game as defined here and used in this book for just an incentive problem, just having a share of the benefits (as it is commonly understood in finance). No. It is about symmetry, more like having a share of the harm, paying a penalty if something goes wrong. The very same idea ties together notions of incentives, used car buying, ethics, contract theory, learning (real life vs. academia), Kantian imperative, municipal power, risk science, contact between intellectuals and reality, the accountability of bureaucrats, probabilistic social justice, option theory, upright behavior, bull***t vendors, theology I stop for now.

A more correct (though more awkward) title of the book would have been: The Less Obvious Aspects of Skin in the Game: Those Hidden Asymmetries and Their Consequences. For I just dont like reading books that inform me of the obvious. I like to be surprised. So as a skin-in-the-game-style reciprocity, I will not not drive the reader into a dull college-lecture-type predictable journey, but rather into the type of adventure Id like to have.

Accordingly, the book is organized in the following manner. It doesnt take more than about sixty pages for the reader to get the importance, prevalence, and ubiquity of skin in the game (that is, symmetry) in most of its aspects. But never engage in detailed overexplanations of why something important is important: one debases a principle by endlessly justifying it.

The nondull route entails focusing on the second step: the surprising implicationsthose hidden asymmetries that do not immediately come to mindas well as the less obvious consequences, some of which are quite uncomfortable, and many unexpectedly helpful. Understanding the workings of skin in the game allows us to understand serious puzzles underlying the fine-grained matrix of reality.

For instance:

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 shouldnt 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 individualsand markets have little to do with the biases of participants? How is rationality survival and survival only? What is the foundational logic of risk bearing?