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Skin in the Game by Nassim Nicholas Taleb

This is the 5th book in Nassim Nicholas Taleb's Incerto series. I didn't find this book as good as Antifragile, The Black Swan and Fooled by Randomness but it still had some very good and relevant concepts. The overall idea of the book was about how too many people in the world, including a lot of the people running it, don't have any skin in the game, or in other words, they have everything to gain but don't have anything to lose.

Nassim Nicholas Taleb gives several examples from history, current events and from his own life experiences as well where he witnessed it. One example is from The Code of Hammaruabi from 1754 Mesopotomia that had several laws written that deal with punishments for matters of contract. One code that Nassim mentioned was that if a builder builds a house and that house collapses on a family and the son dies then the son of the builder would be put to death. This code is considered very extreme today and I agree the punishment is a too harsh but this is an example of skin in the game. I think it would be pretty reasonable to assume that the builder of that house did everything in that house to make sure it was stable enough to live in.

An example not too long ago of people not having skin in the game was the 2008 Mortgage Crisis. Nassim mentions what he calls the "Bob Rubin Trade" which is based on the former Secretary of the United States Treasury under Bill Clinton who became a Director for Citibank following his treasury secretary role. He ended up collecting $120,000,000 in compensation from Citibank during his tenure as director until in 2008 the bank needed to be bailed out by the taxpayers. Taleb mentions that Bob Rubin didn't have to pay any of that $120,000,000 back and he just claimed "Black Swan" which means no one saw it coming. So he got all the upside of receiving a very lavish sum of money and when things went wrong at the bank he didn't receive any downside from it. Currently as I write this, this practice hasn't stopped. The major airlines bought back billions of their stock through the mid 2010's to 2020 and then when the coronavirus put a lock down on the US economy the airlines ran into cash flow problems. They were close to going bankrupt but as I write this the US government issued somewhere between $40-50B even though they shouldn't have been buying back so much stock to begin with and they should have been saving a lot of that capital for an event like the coronavirus.


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.

Via negativa – acting by removing. Via positiva - acting by addition.

Let us flush out the idea of agency, well-known and studied by insurance companies. Simply, you now a lot more about your health than any insurer would. So you have an incentive to get an insurance policy when you detect an illness before someone else knows about it. By getting insured when it fits you, not when you are healthy, you end up costing the system more than you put into it, hence causing a raise in [premium] paid by all sorts of innocent people (including, again, the Spanish grammar specialists). Insurance companies have filters such as high deductibles and other methods to eliminate such imbalances.

You may not know in your mind where you are going, but you know it by doing.

People’s “explanations” for what they do are just words, stories they tell themselves, not the business of proper science. What they do, on the other hand, is tangible and measurable and that’s what we should focus on.

I personally know rich horrible forecasters and poor “good” forecasters. Because what matters in life isn’t how frequently one is “right” about outcomes, but how much one makes when one is right. Being wrong, when it is not costly, doesn’t count – in a way that’s similar to trial-and-error mechanisms of research.

Outcomes in real life are not as in a baseball game, reduced to a binary win-or-lose outcome.

What has survived has revealed its robustness to Black Swan events and removing skin in the game disrupts such selection mechanisms. Without skin in the game, we fail to get the Intelligence of Time (and by which 1) time removes the fragile and keeps the robust, and 2) the life expectancy of the nonfragile lengthens with time). Ideas have, indirectly, skin in the game, and populations that harbor them do as well.

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.

Some “overestimation” of tail risk is not irrational by any metric, as it is more than required overall for survival.

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

A confession. When I don’t have skin in the game, I am usually dumb. My knowledge of technical matters, such as risk and probability, did not initially come from books. It did not come from lofty philosophizing and scientific hunger. It did not even come from curiosity. It came from the thrills and hormonal flush one gets while taking risks in the markets.

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.

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 negative 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.

Entrepreneurs are heroes in our society. They fail for the rest of us.

Products or companies that bear the owner’s name convey very valuable messages. They are shouting that they have something to lose.

By some mysterious mental mechanism, people fail to realize that the principal thing you can learn from a professor is how to be a professor – and the chief thing you can learn from, say, a life coach or inspirational speaker is how to become a life coach or inspirational speaker. So remember that the heroes of history were not classicists and library rates, those people who live vicariously in their texts. They were people of deeds and had to be endowed with the spirit of risk taking.

Salespeople are experts in the art of psychological manipulation, making the client trade, often against his own interest, all the while being happy about it and loving them and their company, all the while being happy about it and loving them and their company. One of the top salesmen at the firm, a man with huge charisma who came to work in a chauffeured Rolls Royce, was once asked whether customers didn’t get upset when they got the short end of the stick. “Rip them off, don’t tick them off” was his answer. He also added, “Remember that every day a new customer is born.”

Much of the work of investment banks in my day was to play on regulations, find loopholes in the laws. And, counter intuitively, the more regulations, the easier it was to make money.

“If a man knowingly offers for sales wine that is spoiling, ought he to tell his customers,” the world is getting closer to the position of transparency, not necessarily via regulations as much as thanks to tort laws, and one’s ability to sue for harm in the event a seller deceives him or her. Recall that tort laws put some of the seller’s skin back into the game – which is why they are reviled, hated by corporations.

It may not be ethically required, but the most effective, shame-free policy is maximal transparency, even transparency of intentions.

In the U.S. and Europe, “organic” food companies are selling more and more products precisely because of the minority rule, and because ordinary and unlabeled food may be seen by some to contain pesticides, herbicides, and transgenic genetically modified organisms, or GMOs, with, according to them, unknown risks. (What we call GMOs in this context means transgenic food, entailing the transfer of genes from a foreign organism or species that would not have occurred in nature)… Labeling something “organic” is a way to say that it contains no transgenic GMOs.

We can say that markets aren’t the sum of market participants, but price changes reflect the activities of the most motivated buyer and seller. Yes, the most motivated rules. Indeed this is something that only traders seem to understand: why a price can drop by ten percent because of a single seller. All you need is a stubborn seller. Markets react in a way that is disproportional to the impetus. The overall stock markets currently represent more than thirty trillion dollars, but a single order in 2008, only fifty billion, that is, less than two-tenths of a percent of the total, triggered a drop of close to 10 percent, causing losses of around three trillion dollars. As retold in Antifragile, it was an order activated by the Parisian bank Societe Generale, which discovered a hidden acquisition by a rogue trader and wanted to reverse the purchase. Why did the market react so disproportionately? Because the order was one way-stubborn: they had to sell and there was no way to convince the management otherwise. My personal adage is: the market is like a large movie theater with a small door.
Understanding the genetic makeup of a unit will never allow us to understand the behavior of the unit itself.

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.

Slave ownership by companies has traditionally taken very curious forms. The best slave is someone you overpay and who knows it, terrified of losing his status. Multinational companies created the expat category, a sort of diplomat with a higher standard of living who represents the firm far away and runs its business there. All large corporations had (and some still have) employees with expat status and, in spite of its costs, it is an extremely effective strategy. Why? Because the further from headquarters an employee is located, the more autonomous his unit, the more you want him to be a slave so he does nothing strange on his own… 95% of the employee’s mind will be on company politics… which is exactly what the company wants.

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. The more you have to lose, the more fragile you are.
10% of the wealthiest 500 American people or dynasties were so thirty years ago; more than 60% on the French list are heirs and a third of the richest Europeans were the richest countries centuries ago. In Florence, it was just revelated that things are even worse: the same handful of families have kept the wealth for five centuries.

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.

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, 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.

There are two ways things handle time. First, there is again 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. These accidents don’t have to be external, like falling from a ladder or being attacked by a bear; they can also be internal, from random malfunctioning of your organs or circulation.

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.

We know by instinct that brain surgery is not more “scientific” than aspirin, any more than flying the forty or so miles between JFK and Newark airports represent “efficiency,” although there is more technology involved. But we don’t easily translate this to other domains and remain victims of scientism, which is to science what a Ponzi scheme is to investment, or what advertisement or propaganda are to genuine scientific communication.

Russian Roulette allows you to make money five times out of six. This has bankrupted banks, as banks lose less than one in one hundred quarters, but they lose more than they ever made. My declared approach was to try to make money infrequently. I tore the evaluation form in front of the big boss and they left me alone. 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.

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.

In real life, belief is an instrument to do things, not the end product. This is similar to vision: the purpose of your eyes is to orient you in the best possible way, and get you out of trouble when needed, or help you find prey at a distance. Your eyes are not sensors designed to capture the electromagnetic spectrum. Their job description is not to produce the most accurate scientific representation of reality; rather the most useful one for survival.

The axiom of revelation of preferences (originating with Paul Samuelson, or possibly the Semitic gods), as you recall, states the following: you will not have an idea about what people really think, what predicts people’s actions, merely by asking them – they themselves don’t necessarily know. What matters, in the end, is what they pay for goods, not what they say they “think” about them, or the various possible reasons they give you or themselves for that. If you think about it, you will see that this is a reformulation of skin in the game. Even psychologists get it; in their experiments, their procedures require that actual dollars be spent for a test to be “scientific.” The subjects are given a monetary amount and they watch how the subject formulates choices by examining how they spend the money.

I have shown in Antifragile, that making some types of errors is the most rational thing to do, when the errors are of little cost, as they lead to discoveries. For instance, most medical “discoveries” are accidental to something else. An error-free world would have no penicillin, no chemotherapy… almost no drugs, and most probably no humans.​
Recall that 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.

How much you truly “believe” in something can be manifested only through what you are willing to risk for it.

Rationality does not depend on explicit verbalistic explanatory factors; it is only what aids survival, what avoids ruin.​
When you read material by finance professors, finance gurus, or your local bank making investment recommendations based on the long-term returns of the market, beware. Even if their forecasts were true (they aren’t), no individual can get the same returns as the market unless he has infinite pockets and no uncle points. This is conflating to ensemble probability and time probability. If the investor has to eventually reduce his exposure because of losses, or because of retirement, or because he got divorced to marry his neighbor’s wife, or because he suddenly developed a heroin addiction after his hospitalization for appendicitis, or because he changed his mind about life, his returns will be divorced from those of the market, period.

Anyone who has survived in the risk-taking business more than a few years has some version of our by no familiar principle that “in order to succeed, you must first survive.” My own has been: “never cross a river if it is on average four feet deep.” I effectively organized all my life around the point that sequence matters and the presence of ruin disqualifies cost-benefit analyses; but it never hit me that the flaw in decision theory was so deep.

Smoking a single cigarette is extremely benign, so a cost-benefit analysis would deem it irrational to give up so much pleasure for so little risk! But it is the act of smoking that kills, at a certain number of packs per year, or tens of thousands of cigarettes – in other words, repeated serial exposure. But things are even worse: in real life, every single bit or risk you take adds up to reduce your life expectancy. If you climb mountains and ride a motorcycle and hang around the mob and fly your own small plane and drink absinthe, and smoke cigarettes, and play parkour on Thursday night, your life expectancy is considerably reduced, although no single action will have a meaningful effect.

Let us return to Warren Buffett. He did not make his billions by cost-benefit analysis; rather, he did so simply by establishing a high filter, then picking opportunities that pass such a threshold. “The difference between successful people and really successful people is that really successful people say no to almost everything,” he said. Likewise our wiring might be adapted to “say no” to tail risk. For there are a zillion ways to make money without taking tail risk.

One may be risk loving yet completely averse to ruin. The central asymmetry of life is: In a strategy that entails ruin, benefits never offset risks of ruin. Further: Ruin and other changes in condition are different animals. Every single risk you take adds up to reduce your life expectancy. Finally: Rationality is avoidance of systemic ruin.

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