Skin in the Game: Hidden Asymmetries in Daily Life by Nassim Taleb

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Skin in the Game: Hidden Asymmetries in Daily Life

Taleb, Nassim Nicholas

Book 1: Introduction

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,

You do not want to win an argument. You want to win.

We are much better at doing than understanding.

The doer wins by doing, not convincing.

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. This axiom, perhaps even principle, is very powerful but is not followed too much by researchers. Revelation of preferences is best understood by the betrothed: a diamond, particularly when it is onerous to the buyer, is vastly more convincing a commitment (and much less reversible) than a verbal promise. As to forecasting, fuhgetaboud it: Forecasting (in words) bears no relation to speculation (in deeds).

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. A system with skin-in-the-game requirements holds together through the notion of a sacrifice in order to protect the collective or entities higher in the hierarchy that are required to survive. “Survival talks and BS walks.” Or as Fat Tony would put it: “Survival tawks and BS wawks.” In other words: What is rational is what allows the collective—entities meant to live for a long time—to survive.

Those who talk should do and only those who do should talk

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

Non-skin-in-the-game people don’t get simplicity.

If you do not take risks for your opinion, you are nothing.

I have no other definition of success than leading an honorable life. We intimated that it is dishonorable to let others die in your stead.

As a Spartan mother tells her departing son: “With it or on it,” meaning either return with your shield or don’t come back alive (the custom was to carry the dead body flat on it); only cowards throw away their shields to run faster.

Anything you do to optimize your work, cut some corners, or squeeze more “efficiency” out of it (and out of your life) will eventually make you dislike it. Artisans have their soul in the game.

Compendiaria res improbitas, virtusque tarda—the villainous takes the short road, virtue the longer one. In other words, cutting corners is dishonest.

Having an assistant (except for the strictly necessary) removes your soul from the game.

Assistance moves you one step away from authenticity.

The skills at making things diverge from those at selling things.

studying courage in textbooks doesn’t make you any more courageous than eating cow meat makes you bovine.

Seeing the psychologist Steven Pinker making pronouncements about things intellectual has a similar effect to encountering a drive-in Burger King while hiking in the middle of a national park.

Book 2: A First Look at Agency

Beware of the person who gives advice, telling you that a certain action on your part is “good for you” while it is also good for him, while the harm to you doesn’t directly affect him.

Laws come and go; ethics stay.

No person in a transaction should have certainty about the outcome while the other one has uncertainty.

Nietzsche got the point: Sympathy for all would be tyranny for thee, my good neighbor.

Putting Shiites, Christians, and Sunnis in one pot and asking them to sing “Kumbaya” around the campfire while holding hands in the name of unity and fraternity of mankind has failed.

I am, at the Fed level, libertarian; at the state level, Republican; at the local level, Democrat; and at the family and friends level, a socialist. If that saying doesn’t convince you of the fatuousness of left vs. right labels, nothing will.

The legal system and regulatory measures are likely to put the skin of the doctor in the wrong game.

A doctor is pushed by the system to transfer risk from himself to you, and from the present into the future, or from the immediate future into a more distant future.

Administrators everywhere on the planet, in all businesses and pursuits, and at all times in history, have been the plague.

Plenius aequo Iaudat venalis qui vult extrudere merces.—Horace

No amount of advertising will match the credibility of a genuine user.

Book 3: That Greatest Asymmetry

An honest person will never commit criminal acts, but a criminal will readily engage in legal acts.

They may hate McDonald’s, but they certainly hate uncertainty even more.

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

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

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.

Book 4: Wolves Among Dogs

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

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.

Freedom entails risks—real skin in the game. Freedom is never free.

There is a category of employees who aren’t slaves, but these represent a very small proportion of the pool. You can identify them as follows: they don’t give a f*** about their reputation, at least not their corporate reputation.

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.

People whose survival depends on qualitative “job assessments” by someone of higher rank in an organization cannot be trusted for critical decisions.

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.

Book 5: Being Alive Means Taking Certain Risks

life is sacrifice and risk taking, and nothing that doesn’t entail some moderate amount of the former, under the constraint of satisfying the latter, is close to what we can call life. If you do not undertake a risk of real harm, reparable or even potentially irreparable, from an adventure, it is not an adventure.

Scars signal skin in the game.

always do more than you talk. And precede talk with action. For it will always remain that action without talk supersedes talk without action.

Beware the slightly erudite who thinks he is an erudite, as well as the barber who decides to perform brain surgery.

he has never read Frédéric Dard, Libanius Antiochus, Michael Oakeshott, John Gray, Ammianus Marcellinus, Ibn Battuta, Saadia Gaon, or Joseph de Maistre;

True equality is equality in probability.

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.

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.

The problem is never the problem; it is how people handle it.

people flood their stories with numbers and graphs in the absence of solid or logical arguments. Further, people mistake empiricism for a flood of data. Just a little bit of significant data is needed when one is right, particularly when it is disconfirmatory empiricism, or counterexamples: only one data point (a single extreme deviation) is sufficient to show that Black Swans exist.

It is downright unethical to use public office for enrichment.

Effectively Lindy answers the age-old meta-questions: Who will judge the expert? Who will guard the guard? (Quis custodiet ipsos custodes?) Who will judge the judges? Well, survival will.

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.* 1 Fragility is the expert, hence time and survival.

Alfonso X of Spain, nicknamed El Sabio, “the wise,” had as a maxim: Burn old logs. Drink old wine. Read old books. Keep old friends.

You can define a free person precisely as someone whose fate is not centrally or directly dependent on peer assessment.

Contemporary peers are valuable collaborators, not final judges.*

Anything that smacks of competition destroys knowledge.

Someone with a high public presence who is controversial and takes risks for his opinion is less likely to be a bull*** t vendor.

If you hear advice from a grandmother or elders, odds are that it works 90 percent 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 behavioral scientists, odds are that it works at less than 10 percent, unless it is has also been covered by the grandmother and the classics, in which case why would you need a psychologist?* 5 Consider that a recent effort to replicate the hundred psychology papers in “prestigious” journals of 2008 found that, out of a hundred, only thirty-nine replicated. Of these thirty-nine, I believe that fewer than ten are actually robust and transfer outside the narrowness of the experiment. Similar defects have been found in medicine and neuroscience; more on those later. (I will discuss the point further in Chapters 18 and (mostly) 19, as well as why the warnings of your grandmother or interdicts aren’t “irrational”; most of what is called “irrational” comes from misunderstanding of probability.)

Book 6: Deeper into Agency

Now if I had to pick, I would overcome my sucker-proneness and take the butcher any minute. Even more: I would seek the butcher as a third option if my choice was between two doctors who looked like doctors. Why? Simply the one who doesn’t look the part, conditional on having made a (sort of) successful career in his profession, had to have much to overcome in terms of perception. And if we are lucky enough to have people who do not look the part, it is thanks to the presence of some skin in the game, the contact with reality that filters out incompetence, as reality is blind to looks.

In any activity, hidden details are only revealed via Lindy.

Never hire an academic unless his function is to partake of the rituals of writing papers or taking exams.

True intellect should not appear to be intellectual.

People who are bred, selected, and compensated to find complicated solutions do not have an incentive to implement simplified ones. And it gets more complicated as the remedy has itself a skin-in-the-game problem. This is particularly acute in the meta-problem, when the solution is about solving this very problem.

First, you show pictures of starving children to elicit sympathy and prevent further discussion—anyone who argues in the presence of dying children is a heartless a** hole. Second, you make it look like any critic of your method is arguing against saving the children. Third, you propose some scientific-looking technique that is lucrative to you and, should it cause a catastrophe or blight, insulates you from the long-term effects. Fourth, you enlist journalists and useful idiots, people who hate things that appear “unscientific” in their unscientific eyes. Fifth, you create a smear campaign to harm the reputations of researchers who, not having f*** you money, are very vulnerable to the slightest blemish to their reputations.

Recall that fragility is in the dosage: falling from the 20th floor is not in the same risk category as falling from your chair.

The minute one has evaluation forms, distortions occur.

Russian Roulette allows you to make money five times out of six.

In the United States, we have a buildup of student loans that automatically transfer to these rent extractors. In a way it is no different from racketeering: one needs a decent university “name” to get ahead in life. But we have evidence that collectively society doesn’t advance with organized education, rather the reverse: the level of (formal) education in a country is the result of wealth.* 2

REAL GYMS DON’T LOOK LIKE GYMS

By having recourse to complicated equipment that typically targets very few muscles, regular users will eventually be pear-shaping and growing weaker over time, with skills that do not transfer outside of the very machine that they trained on. The equipment may have some use in a hospital or a rehabilitation program, but that’s about it. On the other hand, the simpler barbell (a metal bar with two weights on both ends) is the only standard piece of equipment that gets you to recruit your entire body for exercises—and it is the simplest and cheapest to get. All you need to learn are the safety skills to move off the floor at your maximum while avoiding injury. Lindy again: weight lifters have known the phenomenology for at least two and a half millennia. All you need are shoes to run outside when you can (and perhaps some pants that don’t make you look ridiculous), and a barbell with weights. As I am writing these lines I am checking the brochure of a fancy hotel where I will be spending the next two days. The brochure was put together by some MBA: it is glossy, shows all the machines and the jars of the color-rich juices to “improve” your health. They even have a swimming pool; but no barbell. And if gyms should not look like gyms, exercise should not look like exercise. Most gains in physical strength come from working the tails of the distribution, close to your limit.

It hit me that the rich were natural targets; as the eponymous Thyestes shouts in Seneca’s tragedy, thieves do not enter impecunious homes, and one is more likely to be drinking poison in a golden cup than an ordinary one. Poison is drunk in golden cups (Venenum in auro bibitur).

An entire industry meant to swindle you will swindle you: financial consultants, diet advisors, exercise experts, lifestyle engineers, sleeping councilors, breathing specialists, etc. Hamburgers, to many of us, are vastly tastier than filet mignon because of the higher fat content, but people have been convinced that the latter is better because it is more expensive to produce. My idea of the good life is to not attend a gala dinner, one of those situations where you find yourself stuck seated for two hours between the wife of a Kansas City real estate developer (who just visited Nepal) and a Washington lobbyist (who just returned from a vacation in Bali).

So long as society is getting richer, someone will try to sell you something until the point of degradation of your well-being, and a bit beyond that.

Verbal threats reveal nothing beyond weakness and unreliability.

Journalism isn’t Lindy compatible. Information transmits organically by word of mouth, which circulates in a two-way manner.

Unreliable people carried less weight than reliable ones. You can’t fool people more than twice.*

there is a long-term advantage to being dependable.

And you never cure structural defects; the system corrects itself by collapsing.*

It is much more immoral to claim virtue without fully living with its direct consequences.

Simone Weil, while coming from the French Jewish upper class, spent a year in a car factory so the working class could be something other than an abstract construct for her.

If your private life conflicts with your intellectual opinion, it cancels your intellectual ideas, not your private life.

If your private actions do not generalize, then you cannot have general ideas.

simony and indulgences reincarnated themselves in lay society in the form of charity dinners (for some reason, black tie), of people feeling useful engaging in the otherwise selfish activity of running marathons—no longer selfish as it aims at saving other people’s kidneys (as if kidneys could not be saved by people writing checks to save kidneys), and of executives giving their names to buildings so they could be remembered as virtuous.

So true virtue lies mostly in also being nice to those who are neglected by others, the less obvious cases, those people the grand charity business tends to miss. Or people who have no friends and would like someone once in while to just call them for a chat or a cup of fresh roasted Italian-style coffee.

Courage is the only virtue you cannot fake.

Sticking up for truth when it is unpopular is far more of a virtue, because it costs you something—your reputation. If you are a journalist and act in a way that risks ostracism, you are virtuous. Some people only express their opinions as part of mob shaming, when it is safe to do so, and, in the bargain, think that they are displaying virtue. This is not virtue but vice, a mixture of bullying and cowardice.

when young people who “want to help mankind” come to me asking, “What should I do? I want to reduce poverty, save the world,” and similar noble aspirations at the macro-level, my suggestion is: 1) Never engage in virtue signaling; 2) Never engage in rent-seeking; 3) You must start a business. Put yourself on the line, start a business. Yes, take risk, and if you get rich (which is optional), spend your money generously on others. We need people to take (bounded) risks. The entire idea is to move the descendants of Homo sapiens away from the macro, away from abstract universal aims, away from the kind of social engineering that brings tail risks to society. Doing business will always help (because it brings about economic activity without large-scale risky changes in the economy); institutions (like the aid industry) may help, but they are equally likely to harm (I am being optimistic; I am certain that except for a few most do end up harming). Courage (risk taking) is the highest virtue. We need entrepreneurs.

Just amazing.

Book 8: Risk and Rationality

The floor of the Parthenon is curved in reality so we can see it as straight. The columns are in truth unevenly spaced, so we can see them lined up like a marching Russian division in a parade. Should one go lodge a complaint with the Greek Ministry of Tourism claiming that the columns are not vertical and that someone is taking advantage of our visual mechanisms?

Survival comes first, truth, understanding, and science later.

making some types of errors is the most rational thing to do, when the errors are of little cost, as they lead to discoveries.

There is a difference between beliefs that are decorative and different sorts of beliefs, those that map to action.

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

The only definition of rationality that I’ve found that is practically, empirically, and mathematically rigorous is the following: what is rational is that which allows for survival. Unlike modern theories by psychosophasters, it maps to the classical way of thinking. Anything that hinders one’s survival at an individual, collective, tribal, or general level is, to me, irrational.

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.

Rationality does not depend on explicit verbalistic explanatory factors; it is only what aids survival, what avoids ruin. Why? Clearly as we saw in the Lindy discussion: Not everything that happens happens for a reason, but everything that survives survives for a reason. Rationality is risk management, period.

Unless you are perfectly narcissistic and psychopathic—even then—your worst-case scenario is never limited to the loss of only your life.

the fragility of the system’s components (provided they are renewable and replaceable) is required to ensure the solidity of the system as a whole. If humans were immortals, they would go extinct from an accident, or from a gradual buildup of misfitness. But shorter shelf life for humans allows genetic changes across generations to be in sync with the variability of the environment.

Never compare a multiplicative, systemic, and fat-tailed risk to a non-multiplicative, idiosyncratic, and thin-tailed one.

Mediocristan risks are subjected to the Chernoff bound.

We close this chapter with a few summarizing lines. 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.

Epilogue

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No muscles without strength, friendship without trust, opinion without consequence, change without aesthetics, age without values, life without effort, water without thirst, food without nourishment, love without sacrifice, power without fairness, facts without rigor, statistics without logic, mathematics without proof, teaching without experience, politeness without warmth, values without embodiment, degrees without erudition, militarism without fortitude, progress without civilization, friendship without investment, virtue without risk, probability without ergodicity, wealth without exposure, complication without depth, fluency without content, decision without asymmetry, science without skepticism, religion without tolerance, and, most of all: nothing without skin in the game.