Skin in the Game

 

Skin in The Game

By Nassim Nicholas Taleb

 

Preview

Taleb explains that for improved efficiencies at work, for a reduction in inequity, for creating systems which are antifragile, and last but not the least, to understand the way the world works, we must have skin in the game. Expanding on his already published work on uncertainty in the Incerto series, Taleb reveals a number of hidden and built-in asymmetries in our everyday life which cause an unjust and an unfair society.

About the Author

Nassim Nicholas Taleb is a Lebanese American statistician and risk analyst. His main focus of work is randomness and probability, and he advocates a system which thrives in risk. His main works include Fooled by Randomness, The Black Swan, The Bed of Procrustes, and Antifragile. These books along with Skin in the Game make up his philosophical work on uncertainty in five volumes referred as Incerto.

 

The Big Idea: Look for skin in the game to assess risk

Everyone talks about the importance of having a balanced life. However, how do we go about having it? By having balanced interactions with other people of course.

Are these interactions symmetrical? Does one party have more to lose than the other? Does one party have nothing to lose at all? How can one be more critical of the risks he or she is exposed to?

Ascertaining whether one has enough skin in the game is crucial to assess the kind of risk one is exposed to. Moreover, as it turns out, in many situations, the kind of risks one is taking, is an indicator of bona-fide intentions and actions.

The next time you go to a doctor for medical advice, ask yourself if the doctor has got anything to lose if things go wrong. The answer to this question will help you ascertain the symmetry involved in the interaction, and thus, inform you about the risk you are exposing yourself to.

In this quid, you will learn:

·        Why a minority is more powerful than a majority

·        How Islam became the fastest growing religion in the world

·        Why corporate employees are slaves

  

For most of our history, we venerated people who had skin in the game. Laws were symmetrical

Pathemata Mathemata, or guide your learning through pain, was the famous Greek maxim. In ancient times, it was honorable to have skin in the game. Kings and warlords were very often themselves on the field of battle, leading from the front. When going to war, they had their skin in the game. They could get killed! Having their life on the line earned them respect. People venerated warlords like Hannibal and Caesar.

Contrast this with today's warlords, the politicians who decide these matters. These people are happy to press a button to launch a drone attack or a missile. Their chances of getting killed in war are practically zero. They have no skin in the game.

Why is it important to have skin in the game? Quite simply, if you are not a victim of your own actions, or if you do not share the risks of your deeds, then what you deem to be an act, is an asymmetrical one, and hence, you are not the best person to perform it.

Hammurabi's ancient code of 282 laws was a codified system which enforced symmetry. Consider the example of one of its laws, which said that a building contractor, whose built house collapses and kills the house owner, shall be put to death. This law is an example of a symmetrical code. If you do something which is wrong, you will suffer from consequences which are comparable to the sufferings of those whom you did wrong.

What you say doesn’t matter, what you do does. If you don’t have skin in the game, your opinion doesn’t count

Without being exposed to the consequences of one's actions and advise, one truly cannot be considered as an advisor worth following. Consider the example of stock market analysts. These people are constantly on the tv channels giving advice on what kind of stocks to buy. The question to ask them is if they are buying those stocks themselves. Some people may consider this as an act which can benefit them unfairly. However, the knowledge of their portfolio gives an indication of their skin in the game. Do they really believe what they are saying, and do they follow their own advice?

Imagine a Doctor prescribing you medicines which turn out to be harmful to you. Does he have skin in the game? What happens to him if his prescription is wrong? With today's tort laws, it turns out that doctors indeed have their skin in the game. They can lose big time financially and professionally if they are deemed negligent.

Contrast this with bankers. Bankers who advise people on financing, or mergers, or acquisitions, or any other aspect. Do they really have skin in the game? What would happen if their advice goes kaput? Would they lose personally? The answer is no. They would not lose anything except maybe a job, which they would be able to find at some other place. Bankers are used to playing with other people's money with no skin in the game altogether, and thus, are not to be trusted.

  

 

The minority makes up the rules

Do you think that democracy is the rule of the majority? Do you think that there is strength in numbers, enough to dictate terms? Commercial or otherwise?

Here is a factoid for you. Nearly all the meat sold in Britain is Halal! Why would that be when the Muslim population of Britain is not more than 4%? The answer is because the minority can exercise its preferences over the majority by being intolerant.

While the majority of the British population would not mind eating halal meat, the 4% Muslim population ONLY eats halal and nothing else. Hence, to achieve efficiencies, it is rational to sell only halal, because all sections of the population can eat it!

When Islam first spread to Egypt which was populated by the Copts, it was in minority, restricted to the immigrant rulers. However, a few intolerant and straightforward rules resulted in its rapid growth over a few hundred years. If a non-Muslim man or woman marries a Muslim man or woman, he or she must convert to Islam, if a child is born to parents either of whom is a Muslim, the child is a Muslim, one cannot give up Islam if one is a Muslim. With these laws in place, what was necessary for the rapid rise of Islam was just a small proportion of interfaith marriages.

How do you think the moral codes of our cultures are built? In Politics, a common minimum programme is built on the basis of non-negotiable terms, which are generally dictated by the minority. Similarly, a moral code is also built by non-negotiable sensitivities. These are generally held by people who are far more intolerant than the people who do not really bother about these things too much—the majority.

Surprisingly, several big businesses have not been able to grasp this idea and keep pursuing useless strategies to modify consumer behavior. For example, Big Agriculture companies like Monsanto keep harping over the absence of any harmful effects in eating genetically modified foods. They have failed to realize that the majority is quite flexible and doesn’t have any problem in eating GM food. It is the minority which prefers organic or non-GM food which refuses to eat their products. Hence, a large-scale change in consumer behavior is not possible, because if only one person in a family of five doesn’t eat GM foods, the entire family will eat what the intolerant member wants to.

Employment in jobs is a form of systemic slavery

Having a good and a well-paying job is a virtue in today's world. While the fact of the matter is that large-scale organized employment is nothing but slavery, employees fail to see the obvious. The organizations make it hard for employees to leave this system by making them feel as if they have something to lose if they leave their jobs.

Big Companies talk about culture and value system. These are nothing but ways and means along with the regularity of a paycheque which keep the employees loyal. The longer one serves in an organization, the more emotionally invested he or she is, and the more difficult it is to quit a job.

However, is employment really such a bad thing? After all, it helps us pay our bills, and lead a comfortable life. Well, it is a trade-off between freedom and slavery, which involves a regular payout, but demands obedience six days a week, and sometimes even on Sundays. It is riskier for organizations to hire freelancers or independent contractors. 

Why? Simply because they are independent and can choose to refuse an assignment or work on their own terms. Hence, a company chooses a more expensive but stable option: that of an employee to carry out work without question and instills in him or her a sense of belongingness by the regularity of a salary and corporate culture.

 

Success is an indicator of capability only in professions which involve having skin in the game

As explained earlier, a doctor has skin in the game by the possibility of professional and financial ruin, if he or she is not competent. Therefore, if one had to choose between two doctors, both successful in their own right, but one who looks the part, that is, dresses elegantly, wears thin spectacles, and is soft-spoken, and another who looks and talks like a ruffian; Always choose the ruffian. Simply, if the ruffian was not good, people would not have consulted with him, and hence, he would not be successful.

Contrast this with professionals like Bankers, or even politicians. These people have nothing to lose if their advice or actions go wrong. Bankers transfer risk to the public in extreme scenarios (Public bailouts), and politicians simply fight another election if they fail to implement.  In both these professions, one's perception matters. What one's image is, how one comes across. These things matter much more than being capable. Hence to be counted as successful, these people must look the part, more than they need to be competent.

For example, Warren Harding is now considered to be one of the worst American Presidents ever. His tenure was marked by blatant acts of incompetence and corruption. However, when he was a candidate up for elections, he looked the part more than any other candidate. He talked like a President and walked like one. Though he was termed as "Presidential," the only thing was, that he was not capable like one.

Successful and rich entrepreneurs are admired while rich executives are resented

Switzerland had recently proposed a law which sought to cap the salaries of corporate executives. Though the referendum rejected it, the very fact that such a law was proposed, serves as a mirror of what society thinks.

While some people believe that the poor, or the middle class, resent all people who are successful and rich. This is not the case. It is evident that we admire and respect entrepreneurs and people whom we believe are self-made. We believe that such people rose up and became successful while having their skin in the game. Rags to riches story! Someone you can look up to and aspire to become. Their being rich and successful attracts a fan following.

The same does not hold with rich executives like senior bankers. They garner the most resentment from the poor, because they are perceived to represent success without having skin in the game. After all, they were always in a secure state by way of a regular pay cheque, or by way of working in a big company.

Take the case of Donald Trump's success in the American Presidential elections. His critics and opposers thought that by highlighting his personal failures in business, they would be able to undermine his capability in the eyes of the public. However, Trump's failures and his subsequent successes made him far more real and self-made in the public's eyes, than Hillary Clinton, something which worked in his favor and helped him become the President of the United States.

  

To achieve true equality, it is not sufficient to just raise the standards of the lower strata, the rich must be subject to the risk of sliding down themselves

Economists would have you believe that the share of the wealth of the top one percent of the population has increased leading to higher inequality, and therefore it is necessary to dispossess and redistribute wealth, in order to raise the standards of the poor. However, their estimates and advice are flawed.

Firstly, to prove that there has been any change in inequality, one must show that the top one percent people are the same, that is, there has been no change in the people who comprise the top 1%. Secondly, by just focusing on raising the standards of the poor, the economists fail to provide for treating the real cause of sustained inequality, which is that the truly rich are more or less locked into that position. They are not exposed to risks which can make them slide down the ladder and make openings for the people below to rise and take their place.

An interesting thing to note is, that in the United States only 10 % of the five hundred wealthiest people were also there in the said list three decades ago, while in France (said to be more equal), the said number is about 60%! Thus, the United States is far better than France and indeed many other countries in terms of equality of risk and opportunity.

Final Summary

We hope you enjoyed this quid on Skin in The Game. Taleb highlights the asymmetries that exist in our lives and in the way the world works. Our actions should be dictated by the risk we are exposed to. In every interaction, we should assess the skin in the game of each participant, and act accordingly. As a thumb rule, people who have more to lose are more trustworthy than those who do not.