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, responsibility, and reciprocity, c) information sharing in transactions, and d) rationality in complex systems and in the real world. That these four cannot be disentangled is something that is obvious when one has…skin in the game.
If you inflict risk on others, and they are harmed, you need to pay some price for it.
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: Don’t tell me what you “think,” just tell me what’s in your portfolio.
Rationality in the real world isn’t 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.
It is about symmetry, more like having a share of the harm, paying a penalty if something goes wrong.
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.
But, to this author, skin in the game is mostly about justice, honor, and sacrifice, things that are existential for humans.
The knowledge we get by tinkering, via trial and error, experience, and the workings of time, in other words, contact with the earth, is vastly superior to that obtained through reasoning, something self-serving institutions have been very busy hiding from us.
They can’t get the idea that, empirically, complex systems do not have obvious one-dimensional cause-and-effect mechanisms, and that under opacity, you do not mess with such a system. An extension of this defect: they compare the actions of the “dictator” to those of the prime minister of Norway or Sweden, not to those of the local alternative.
And when a blowup happens, they invoke uncertainty, something called a Black Swan (a high-impact unexpected event), after a book by a (very) stubborn fellow, not realizing that one should not mess with a system if the results are fraught with uncertainty, or, more generally, should avoid engaging in an action with a big downside if one has no idea of the outcomes.
In general, when you hear someone invoking abstract modernistic notions, you can assume that they got some education (but not enough, or in the wrong discipline) and have too little accountability.
This idea of skin in the game is woven into history: historically, all warlords and warmongers were warriors themselves, and, with a few curious exceptions, societies were run by risk takers, not risk transferors.
Even today, monarchs derive their legitimacy from a social contract that requires physical risk-taking. The British Royal family made sure that one of its scions, Prince Andrew, took more risks than “commoners” during the Falkland war of 1982, his helicopter being in the front line. Why? Because noblesse oblige; the very status of a lord has been traditionally derived from protecting others, trading personal risk for prominence—and they happened to still remember that contract. You can’t be a lord if you aren’t a lord.
Some think that freeing ourselves from having warriors at the top means civilization and progress. It does not.
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 macrobull***t than microbull***t.
The Bob Rubin trade? Robert Rubin, a former Secretary of the United States Treasury, one of those who sign their names on the banknote you just used to pay for coffee, collected more than $120 million in compensation from Citibank in the decade preceding the banking crash of 2008. When the bank, literally insolvent, was rescued by the taxpayer, he didn’t write any check—he invoked uncertainty as an excuse. Heads he wins, tails he shouts “Black Swan.”
It is not just bailouts: government interference in general tends to remove skin in the game.
In the decentralized hedge fund space, on the other hand, owner-operators have at least half of their net worth in the funds, making them relatively more exposed than any of their customers, and they personally go down with the ship.
We saw that interventionistas don’t learn because they are not the victims of their mistakes, and, as we hinted at with pathemata mathemata: The same mechanism of transferring risk also impedes learning. More practically, You will never fully convince someone that he is wrong; only reality can.
Evolution can only happen if risk of extinction is present. Further, There is no evolution without skin in the game. This last point is quite obvious, but I keep seeing academics with no skin in the game defend evolution while at the same time rejecting skin in the game and risk sharing. They refuse the notion of design by a creator who knows everything, while, at the same time, want to impose human design as if they knew all the consequences.
In general, the more people worship the sacrosanct state (or, equivalently, large corporations), the more they hate skin in the game.
Systems learn by removing parts, via negativa.
Many bad pilots, as we mentioned, are currently in the bottom of the Atlantic, many dangerous bad drivers are in the local quiet cemetery with nice walkways bordered by trees. Transportation didn’t get safer just because people learn from errors, but because the system does. The experience of the system is different from that of individuals; it is grounded in filtering. To summarize so far, Skin in the game keeps human hubris in check.
Via negativa: the principle that we know what is wrong with more clarity than what is right, and that knowledge grows by subtraction. Also, it is easier to know that something is wrong than to find the fix. Actions that remove are more robust than those that add because addition may have unseen, complicated feedback loops.
It contains 282 laws and is deemed to be the first codification of our rule extant. The code has one central theme: it establishes symmetries between people in a transaction, so nobody can transfer hidden tail risk, or Bob Rubin–style risks.
Hammurabi’s best known injunction is as follows: “If a builder builds a house and the house collapses and causes the death of the owner of the house—the builder shall be put to death.”
Likewise, you do not need to amputate the leg of the reckless doctor who cut the wrong leg: the tort system, through courts, not regulation, thanks to the efforts of Ralph Nader, will impose some penalty, enough to protect consumers and citizens from powerful institutions. Clearly the legal system might produce some irritants (particularly with torts) and has its class of rent-seekers, but we are vastly better off complaining about lawyers than complaining about not having them.
The more robust Silver Rule says Do not treat others the way you would not like them to treat you.
We know with much more clarity what is bad than what is good. The Silver Rule can be seen as the Negative Golden Rule, and as I am shown by my Calabrese (and Calabrese-speaking) barber every three weeks, via negativa (acting by removing) is more powerful and less error-prone than via positiva (acting by addition*1).
“Deal with weaker states as you think it appropriate for stronger states to deal with you.”
More effective, of course, is the reverse direction, to treat one’s children the way one wished to be treated by one’s parents.
The very idea behind the First Amendment of the Constitution of the United States is to establish a silver rule–style symmetry: you can practice your freedom of religion so long as you allow me to practice mine; you have the right to contradict me so long as I have the right to contradict you.
Effectively, there is no democracy without such an unconditional symmetry in the rights to express yourself, and the gravest threat is the slippery slope in the attempts to limit speech on grounds that some of it may hurt some people’s feelings. Such restrictions do not necessarily come from the state itself, rather from the forceful establishment of an intellectual monoculture by an overactive thought police in the media and cultural life.
Formulation shmormulation, fughedaboud Kant as it gets too complicated and things that get complicated have a problem.
As we will belabor ad nauseam in this book, we are local and practical animals, sensitive to scale. The small is not the large; the tangible is not the abstract; the emotional is not the logical.
We should focus on our immediate environment; we need simple practical rules.
(As we saw, modernity likes the abstract over the particular; social justice warriors have been accused of “treating people as categories, not individuals.”)
In fact, the deep message of this book is the danger of universalism taken two or three steps too far—conflating the micro and the macro. Likewise the crux of the idea of The Black Swan was Platonification, missing central but hidden elements of a thing in the process of transforming it into an abstract construct, then causing a blowup.
In New Jersey, symmetry can simply mean, in Fat Tony’s terms: don’t give crap, don’t take crap. His more practical approach is Start by being nice to every person you meet. But if someone tries to exercise power over you, exercise power over him.
Avoid taking advice from someone who gives advice for a living, unless there is a penalty for their advice.
But disincentive is not enough: the fool is a real thing. Some people do not know their own interest—just consider addicts, workaholics, people trapped in a bad relationship, people who support large government, the press, book reviewers, or respectable bureaucrats, all of whom for some mysterious reason act against their own interest. So there is this other instance where filtering plays a role: 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.
We are much better at doing than understanding.
The doer wins by doing, not convincing. Entire fields (say economics and other social sciences) become themselves charlatanic because of the absence of skin in the game connecting them back to earth (while the participants argue about “science”).
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.
Further, there is something called the inverse problem in mathematics, which is solved by—and only by—skin in the game. I will simplify for now as follows: it is harder for us to reverse-engineer than engineer; we see the result of evolutionary forces but cannot replicate them owing to their causal opacity.
Without skin in the game, we fail to get the Intelligence of Time (a manifestation of the Lindy effect, which will get an entire chapter, 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.
A practice may appear to be irrational to an overeducated and naive (but punctual) observer who works in the French Ministry of Planning, because we humans are not intelligent enough to understand it—but it has worked for a long time. Is it rational? We have no grounds to reject it. But we know what is patently irrational: what threatens the survival of the collective first, the individual second. And, from a statistical standpoint, going against nature (and its statistical significance) is irrational.
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.
What is rational is what allows the collective—entities meant to live for a long time—to survive.
Skin in the game is an overall necessity, but let us not get carried away in applying it to everything in sight in its every detail, particularly when consequences are contained. There is a difference between the interventionista of Prologue, Part 1 making pronouncements that cause thousands to be killed overseas, and a harmless opinion voiced by a person in a conversation, or a pronouncement by a fortune teller used for therapy rather than decision making.
For most people you run into in real life—bakers, cobblers, plumbers, taxi drivers, accountants, tax advisors, garbage collectors, dental cleaning assistants, carwash operators (not counting Spanish grammar specialists)—pay a price for their mistakes.
Intellectualism is the belief that one can separate an action from the results of such action, that one can separate theory from practice, and that one can always fix a complex system by hierarchical approaches, that is, in a (ceremonial) top-down manner.
Using mathematics when it’s not needed is not science but scientism. Replacing your well-functioning hand with something more technological, say, an artificial one, is not more scientific. Replacing the “natural,” that is age-old, processes that have survived trillions of high-dimensional stressors with something in a “peer-reviewed” journal that may not survive replication or statistical scrutiny is neither science nor good practice.
So this book continues a long tradition of skeptical-inquiry-cum-practical-solutions—the readers of the Incerto might be familiar with the schools of skeptics (covered in The Black Swan), in particular the twenty-two-century-old diatribe by Sextus Empiricus Against the Professors. The rule is: Those who talk should do and only those who do should talk with some dispensation for self-standing activities such as mathematics, rigorous philosophy, poetry, and art, ones that do not make explicit claims of fitting reality.
Those who give lectures to large audiences notice that they—and other speakers—are uncomfortable on the stage. The reason, it took me a decade to figure out, is that the stage light beaming into our eyes hinders our concentration.
This explains the more severe problems of landscaping and architecture: architects today build to impress other architects, and we end up with strange—irreversible—structures that do not satisfy the well-being of their residents; it takes time and a lot of progressive tinkering for that.
Things designed by people without skin in the game tend to grow in complication (before their final collapse).
There is absolutely no benefit for someone in such a position to propose something simple: when you are rewarded for perception, not results, you need to show sophistication. Anyone who has submitted a “scholarly” paper to a journal knows that you usually raise the odds of acceptance by making it more complicated than necessary.
Non-skin-in-the-game people don’t get simplicity.
When there was risk on the line, suddenly a second brain in me manifested itself, and the probabilities of intricate sequences became suddenly effortless to analyze and map. When there is fire, you will run faster than in any competition.
Given that regulations are additive, we soon end up tangled in complicated rules that choke enterprise. They also choke life.
When people transact, they almost always prefer to agree (as part of the contract) on a Commonwealth (or formerly British-ruled) venue as a forum in the event of a dispute: Hong Kong and Singapore are the favorites in Asia, London and New York in the West.
This doesn’t mean one should never regulate at all. Some systemic effects may require regulation (say hidden tail risks of environmental ruins that show up too late). If you can’t effectively sue, regulate.
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. We intimated that it is dishonorable to let others die in your stead.
People who are not morally independent tend to fit ethics to their profession (with a minimum of spinning), rather than find a profession that fits their ethics.
Primo, artisans do things for existential reasons first, financial and commercial ones later.
Compendiaria res improbitas, virtusque tarda—the villainous takes the short road, virtue the longer one. In other words, cutting corners is dishonest.
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 negativa approach: you want maximal free time, not maximal activity, and you can assess your own “success” according to such metric.
Entrepreneurs are heroes in our society. They fail for the rest of us. But owing to funding and current venture capital mechanisms, many people mistaken for entrepreneurs fail to have true skin in the game in the sense that their aim is to either cash out by selling the company they helped create to someone else, or “go public” by issuing shares in the stock market.
If you want to study classical values such as courage or learn about stoicism, don’t necessarily look for classicists. One is never a career academic without a reason.
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.
The most skilled traders are often wealthy, but not the wealthiest; many traders trade out of passion and aren't interested in running a business. To become a billionaire, one needs an appetite for meetings, discussions with lawyers and regulators, that type of thing.
Whenever there is a mismatch between a bonus period (yearly) and the statistical occurrence of a blowup (every, say, ten years) the agent has an incentive to play the Bob Rubin risk-transfer game.
Simply: if you can’t put your soul into something, give it up and leave that stuff to someone else.
Nor can book reviewers—by the very definition of their function—judge books that one rereads. For those familiar with the idea of nonlinear effects from Antifragile, learning is rooted in repetition and convexity, meaning that the reading of a single text twice is more profitable than reading two different things once, provided of course that said text has some depth of content.
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.
No person in a transaction should have certainty about the outcome while the other one has uncertainty.
For the exclusion of the “Swiss” from our ethical realm is not trivial. Things don’t “scale” and generalize, which is why I have trouble with intellectuals talking about abstract notions. A country is not a large city, a city is not a large family, and, sorry, the world is not a large village.
Today’s Roma people (aka Gypsies) have tons of strict rules of behavior toward Gypsies, and others toward the unclean non-Gypsies called payos.
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.
Now can one make medicine less asymmetric? Not directly; the solution, as I have argued in Antifragile and more technically elsewhere, is for the patient to avoid treatment when he or she is mildly ill, but use medicine for the “tail events,” that is, for rarely encountered severe conditions. The problem is that the mildly ill represent a much larger pool of people than the severely ill—and are people who are expected to live longer and consume drugs for longer—hence pharmaceutical companies have an incentive to focus on them. (Dead people, I am told, stop taking drugs.)
The rule we discuss in this chapter is the minority rule, the mother of all asymmetries. It suffices for an intransigent minority—a certain type of intransigent minority—with significant skin in the game (or, better, soul in the game) to reach a minutely small level, say 3 or 4 percent of the total population, for the entire population to have to submit to their preferences. Further, an optical illusion comes with the dominance of the minority: a naive observer (who looks at the standard average) would be under the impression that the choices and preferences are those of the majority.
A strange idea hit me. The kosher population represents less than three tenths of a percent of the residents of the United States. Yet, it appears that almost all drinks are kosher. Why? Simply because going full kosher allows the producers, grocers, and restaurants to not have to distinguish between kosher and nonkosher for liquids, with special markers, separate aisles, separate inventories, different stocking sub-facilities. And the simple rule that changes the total is as follows: A kosher (or halal) eater will never eat nonkosher (or nonhalal) food, but a nonkosher eater isn’t banned from eating kosher.
It happens in our first example that making lemonade compliant with kosher laws doesn’t change the price by much—it is a matter of avoiding some standard additives. But if the manufacturing of kosher lemonade costs substantially more, then the rule will be weakened in some nonlinear proportion to the difference in costs.
Consider that transgenic-GMO eaters will eat non-GMOs, but not the reverse. So it may suffice to have a tiny percentage—say, no more than 5 percent—of an evenly spatially distributed population of non-genetically modified eaters for the entire population to have to eat non-GMO food.
Another example: do not think that the spread of automatic shifting cars is necessarily due to a majority preference; it could just be because those who can drive manual shifts can always drive automatic, but the reverse is not true.
Pizza is the same story: it is a commonly accepted food, and, outside a gathering of pseudo-leftist caviar eaters, nobody will be blamed for ordering it.
Rory wrote to me about the beer-wine asymmetry and the choices made for parties: “Once you have 10 percent or more women at a party, you cannot serve only beer. But most men will drink wine. So you only need one set of glasses if you serve only wine—the universal donor, to use the language of blood groups.”
There have been many Islams, the final accretion quite different from the earlier ones. For Islam itself is ending up being taken over (in the Sunni branch) by purists simply because they are more intolerant than the rest: the Wahhabis (aka Salafis), founders of Saudi Arabia, destroyed the shrines in most parts of what is now their country during the nineteenth century. They went on to impose the maximally intolerant rule in a manner that was later imitated by ISIS. Every single accretion of Salafism seems to exist to accommodate the most intolerant of its branches.
From past episodes, it looks like all it takes is a few (motivated) activists for the banning of some books, or the blacklisting of some people. The great philosopher and logician Bertrand Russell lost his job at the City University of New York owing to a letter by an angry—and stubborn—mother who did not wish to have her daughter in the same room as the fellow with a dissolute lifestyle and unruly ideas.
While some believe that the average Pole was complicit in the liquidation of Jews, the historian Peter Fritzsche, when asked, “Why didn’t the Poles in Warsaw help their Jewish neighbors more?,” responded that they generally did. But it took seven or eight Poles to help one Jew. It took only one Pole, acting as an informer, to turn in a dozen Jews. Even if such select anti-Semitism is contestable, we can easily imagine bad outcomes stemming from a minority of bad agents.
Yes, 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. Simply, they violate the Silver Rule. It is not permissible to use “American values” or “Western principles” in treating intolerant Salafism (which denies other peoples’ right to have their own religion). The West is currently in the process of committing suicide.
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.
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.
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.
Revolutions are unarguably 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, tea and cucumber sandwiches, or polling; only a few people suffice to disproportionately 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.
But 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 paychecks are lazy…but they would never let you down at times like these. So 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.
By being employees they signal a certain type of domestication. Someone who has been employed for a while is giving you strong evidence of submission. Evidence of submission is displayed by the employee’s going through years depriving himself of his personal freedom for nine hours every day, his ritualistic and punctual arrival at an office, his denying himself his own schedule, and his not having beaten up anyone on the way back home after a bad day. He is an obedient, housebroken dog.
If employees lower your tail risk, you lower theirs as well. Or at least, that’s what they think you do.
A company man is someone who feels that he has something huge to lose if he doesn’t behave as a company man—that is, he has skin in the game.
For 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.
Perhaps, by definition, an employable person is the one you will never find in a history book, because these people are designed to never leave their mark on the course of events. They are, by design, uninteresting to historians.
For him, 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.
The best slave is someone you overpay and who knows it, terrified of losing his status.
Another aspect of the dog vs. wolf dilemma: the feeling of false stability. A dog’s life may appear smooth and secure, but in the absence of an owner, a dog does not survive. Most people prefer to adopt puppies, not grown-up dogs; in many countries, unwanted dogs are euthanized. A wolf is trained to survive. Employees abandoned by their employers, as we saw in the IBM story, cannot bounce back.
Traders who made money, I realized, could get so disruptive that they needed to be kept away from the rest of the employees. That’s the price you pay for turning individuals into profit centers, meaning no other criterion mattered.
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.
Ironically the highest status, that of a free man, is usually indicated by voluntarily adopting the mores of the lowest class.
Consider that 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 matters isn’t what a person has or doesn’t have; it is what he or she is afraid of losing.
Watching Putin made me realize that domesticated (and sterilized) animals don’t stand a chance against a wild predator. Not a single one. Fughedabout military capabilities: it is the trigger that counts.
People whose survival depends on qualitative “job assessments” by someone of higher rank in an organization cannot be trusted for critical decisions.
Even worse, the Wahhabis have accelerated their brainwashing of East and West Asians with their madrassas, thanks to high oil revenues. Instead of invading Iraq or blowing up “Jihadi John” and other individual terrorists, thus causing a multiplication of these agents, it would have been better to focus on the source of the problems: Wahhabi/Salafi education and the promotion of intolerant beliefs according to which a Shiite or an Ezidi or a Christian are deviant people. But, to repeat, this is not a decision that can be made by a collection of bureaucrats with a job description.
Universal suffrage did not change the story by much: until recently, the pool of elected people in so-called democracies was limited to a club of upper class people who cared much, much less about the press. But with more social mobility, ironically, more people could access the pool of politicians—and lose their jobs. And progressively, as with corporations, you start gathering people with minimal courage—and selected because they don’t have courage, as with a regular corporation.
It is no secret that large corporations prefer people with families; those with downside risk are easier to own, particularly when they are choking under a large mortgage.
To make ethical choices you cannot have dilemmas between the particular (friends, family) and the general.
Financial independence is another way to solve ethical dilemmas, but such independence is hard to ascertain: many seemingly independent people aren’t particularly so. While, in Aristotle’s days, a person of independent means was free to follow his conscience, this is no longer as common in modern days.
Intellectual and ethical freedom requires the absence of the skin of others in one’s game, which is why the free are so rare.
By the minority rule, all it takes is a very small number of detractors using misplaced buzzwords of the type that makes people cringe (such as “racist”) to scare an entire institution. Institutions are employees—vulnerable, reputation-conscious employees.
Did any of your business-smart, streetwise, or academically gifted peers in high school declare that their dream was to become the world’s expert in smearing whistleblowers? Or even work as a lobbyist or public relations expert? These jobs are indicative of necessary failure in other things.
To be free of conflict you need to have no friends.
The only way we have left to control suicide-terrorists would be precisely to convince them that blowing themselves up is not the worst-case scenario for them, nor the end scenario at all. Making their families and loved ones bear a financial burden—just as Germans still pay for war crimes—would immediately add consequences to their actions. The penalty needs to be properly calibrated to be a true disincentive, without imparting any sense of heroism or martyrdom to the families in question.
But something struck me at the end of the party. David was standing by the coat check using a handkerchief to sop up drops of blood coming out of his hand. So the fellow was really making an icepick go through his hand—with all the risks that entailed. He suddenly became another person in my eyes. He was now real. He took risks. He had skin in the game.
So it appears that the church founders really wanted Christ to have skin in the game; he did actually suffer on the cross, sacrifice himself, and experience death. He was a risk taker. More crucially to our story, he sacrificed himself for the sake of others. A god stripped of humanity cannot have skin in the game in such a manner, cannot really suffer (or, if he does, such a redefinition of a god injected with a human nature would back up our argument).
Because, to repeat, 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.
I have a tendency to watch television with the sound off. When I saw Donald Trump in the Republican primary standing next to other candidates, I became certain he was going to win that stage of the process, no matter what he said or did. Actually, it was because he had visible deficiencies. Why? Because he was real, and the public—composed of people who usually take risks, not the lifeless non-risk-taking analysts we will present in the next chapter—would vote anytime for someone who actually bled after putting an icepick in his hand rather than someone who did not.
Scars signal skin in the game.
Before we end, take some Fat Tony wisdom: always do more than you talk. And precede talk with action. For it will always remain that action without talk supersedes talk without action.
With psychology studies replicating less than 40 percent of the time, dietary advice reversing after thirty years of dietary fat phobia, macroeconomics and financial economics (while trapped in an intricate Gargantuan patch of words) scientifically worse than astrology (this is what the reader of the Incerto has known since Fooled by Randomness), the reappointment of Bernanke (in 2010) who was less than clueless about financial risk as the Federal Reserve boss, and pharmaceutical trials replicating at best only a third of the time, people are perfectly entitled to rely on their own ancestral instincts and to listen to their grandmothers (or to Montaigne and such filtered classical knowledge), who have a better track record than these policymaking goons.
The Intellectual Yet Idiot (IYI) is a product of modernity, hence has been proliferating since at least the mid-twentieth century, to reach a local supremum today, to the point that we have experienced a takeover by people without skin in the game.
The IYI seems ubiquitous in our lives but is still a small minority and is rarely seen outside specialized outlets, think tanks, the media, and university social science departments—most people have proper jobs and there are not many openings for the IYI, which explains how they can be so influential in spite of their low numbers.
The IYI pathologizes others for doing things he doesn’t understand without ever realizing it is his understanding that may be limited. He thinks people should act according to their best interests and he knows their interests, particularly if they are “rednecks” or from the English non-crisp-vowel class who voted for Brexit.
They are what Nietzsche called Bildungsphilisters—educated philistines. Beware the slightly erudite who thinks he is an erudite, as well as the barber who decides to perform brain surgery. The IYI also fails to naturally detect sophistry.
The IYI subscribes to The New Yorker, a journal designed so philistines can learn to fake a conversation about evolution, neurosomething, cognitive biases, and quantum mechanics. He never curses on social media. He speaks of “equality of races” and “economic equality,” but never goes out drinking with a minority cab driver (again, no real skin in the game, as, I will repeat until I am hoarse, the concept is fundamentally foreign to the IYI).
Typically, the IYI get first-order logic right, but not second-order (or higher) effects, making him totally incompetent in complex domains.
The IYI likes to use buzzwords from philosophy of science when discussing unrelated phenomena; he goes two or three levels too theoretical for a given problem.
In this chapter, I will propose that what people resent—or should resent—is the person at the top who has no skin in the game, that is, because he doesn’t bear his allotted risk, he is immune to the possibility of falling from his pedestal, exiting his income or wealth bracket, and waiting in line outside the soup kitchen.
In addition, someone without skin in the game—say, a corporate executive with upside and no financial downside (the type to speak clearly in meetings)—is paid according to some metrics that do not necessarily reflect the health of his company; these he can manipulate, hide risks, get the bonus, then retire (or go do the same thing at another company) and blame his successor for subsequent results.
True equality is equality in probability.
Consider that about 10 percent of Americans will spend at least a year in the top 1 percent, and more than half of all Americans will spend a year in the top 10 percent.*3 This is visibly not the same for the more static—but nominally more equal—Europe.
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.
You will notice that where the state is large, people at the top tend to have little downward mobility—in such places as France, the state is chummy with large corporations and protects their executives and shareholders from experiencing such descent; it even encourages their ascent.
Piketty’s theory about the increase in the return of capital in relation to labor is patently wrong, as anyone who has witnessed the rise of what is called the “knowledge economy” (or anyone who has had investments in general) knows.
Any form of control of the wealth process—typically instigated by bureaucrats—tends to lock people with privileges in their state of entitlement. So the solution is to allow the system to destroy the strong, something that works best in the United States.
Envy does not originate with the impoverished, concerned with the betterment of their condition, but with the clerical class. Simply, it looks like it was the university professors (who have “arrived”) and people who have permanent stability of income, in the form of tenure, governmental or academic, who bought heavily into Piketty’s argument. From conversations, I became convinced that people who counterfactual upwards (i.e., compare themselves to those richer) want to actively dispossess the rich. As with all communist movements, it is often the bourgeois or clerical classes who are the early adopters of revolutionary theories. So class envy doesn’t originate from a truck driver in South Alabama, but from a New York or Washington, D.C., Ivy League–educated IYI (say Paul Krugman or Joseph Stiglitz) with a sense of entitlement, upset some “less smart” persons are much richer.
So I doubt Piketty bothered to ask blue-collar Frenchmen what they want, as Michelle Lamont did (as we saw earlier in the chapter). I am certain that they would ask for better beer, a new dishwasher, or faster trains for their commute, not to bring down some rich businessman invisible to them. But, again, people can frame questions and portray enrichment as theft, as was done before the French Revolution, in which case the blue-collar class would ask, once again, for heads to roll.
For a rich person isolated from vertical socializing with the poor, the poor become something entirely theoretical, a textbook reference. As I mentioned in the past chapter, I have yet to see a bien pensant Cambridge don hanging out with Pakistani cab drivers or lifting weights with cockney speakers. The intelligentsia therefore feels entitled to deal with the poor as a construct; one they created. Thus they become convinced that they know what is best for them.
So I’ve discovered, with experience, that when you buy a thick book with tons of graphs and tables used to prove a point, you should be suspicious. It means something didn’t distill right! But for the general public and those untrained in statistics, such tables appear convincing—another way to substitute the true with the complicated.
Rich people in public office have shown some evidence of lack of total incompetence—success may come from randomness, of course, but we at least have a hint of some skill in the real world, some evidence that the person has dealt with reality.
A good rule for society is to oblige those who start in public office to pledge never subsequently to earn from the private sector more than a set amount; the rest should go to the taxpayer. This will ensure sincerity in, literally, “service”—where employees are supposedly underpaid because of their emotional reward from serving society.
A civil servant can make rules that are friendly to an industry such as banking—and then go off to J.P. Morgan and recoup a multiple of the difference between his or her current salary and the market rate. (Regulators, you may recall, have an incentive to make rules as complex as possible so their expertise can later be hired at a higher price.)
Thirty-nine percent of Americans will spend a year in the top 5 percent of the income distribution, 56 percent will find themselves in the top 10 percent, and 73 percent will spend a year in the top 20 percent.
That which is fragile has an asymmetric response to volatility and other stressors, that is, will experience more harm than benefit from it.
For time operates through skin in the game. Things that have survived are hinting to us ex post that they have some robustness—conditional on their being exposed to harm. For without skin in the game, via exposure to reality, the mechanism of fragility is disrupted: things may survive for no reason for a while, at some scale, then ultimately collapse, causing a lot of collateral harm.
Let us use as shorthand “Lindy proof,” “is Lindy,” or “Lindy compatible” (one can substitute for another) to show something that seems to belong to the class of things that have proven to have the following property: That which is “Lindy” is what ages in reverse, i.e., its life expectancy lengthens with time, conditional on survival.
Likewise, 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.
“The Romans judged their political system by asking not whether it made sense but whether it worked,” which is why, while dedicating this book, I called Ron Paul a Roman among Greeks.
You can define a free person precisely as someone whose fate is not centrally or directly dependent on peer assessment.
If you say something crazy you will be deemed crazy. But if you create a collection of, say, twenty people who set up an academy and say crazy things accepted by the collective, you now have “peer-reviewing” and can start a department in a university.
Academia has a tendency, when unchecked (from lack of skin in the game), to evolve into a ritualistic self-referential publishing game.
Showing off is reasonable; it is human. As long as the substance exceeds the showoff, you are fine. Stay human, take as much as you can, under the condition that you give more than you take.
One should give more weight to research that, while being rigorous, contradicts other peers, particularly if it entails costs and reputational harm for its author.
Someone with a high public presence who is controversial and takes risks for his opinion is less likely to be a bull***t vendor.
Force people who want to do “research” to do it on their own time, that is, to derive their income from other sources. Sacrifice is necessary. It may seem absurd to brainwashed contemporaries, but Antifragile documents the outsized historical contributions of the nonprofessional, or, rather, the non-meretricious.
Karl Popper’s idea of science is an enterprise that produces claims that can be contradicted by eventual observations, not a series of verifiable ones: science is fundamentally disconfirmatory, not confirmatory.
For things to survive, they necessarily need to fare well in the risk dimension, that is, be good at not dying. By the Lindy effect, if an idea has skin in the game, it is not in the truth game, but in the harm game. An idea survives if it is a good risk manager, that is, not only doesn’t harm its holders, but favors their survival—this also applies to superstitions that have crossed centuries because they led to some protective actions.
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.
While our knowledge of physics was not available to the ancients, human nature was. So everything that holds in social science and psychology has to be Lindy-proof, that is, have an antecedent in the classics; otherwise it will not replicate or not generalize beyond the experiment.
The Paradox of progress, and the paradox of choice: There is a familiar story of a New York banker vacationing in Greece, who, from talking to a fisherman and scrutinizing the fisherman’s business, comes up with a scheme to help the fisherman make it a big business. The fisherman asked him what the benefits were; the banker answered that he could make a pile of money in New York and come back to vacation in Greece; something that seemed ludicrous to the fisherman, who was already there doing the kind of things bankers do when they go on vacation in Greece. The story was well known in antiquity, under a more elegant form, as retold by Montaigne (my translation): When King Pyrrhus tried to cross into Italy, Cynéas, his wise adviser, tried to make him feel the vanity of such action. “To what end are you going into such enterprise?” he asked. Pyrrhus answered, “To make myself the master of Italy.” Cynéas: “And so?” Pyrrhus: “To get to Gaul, then Spain.” Cynéas: “Then?” Pyrrhus: “To conquer Africa, then…come rest at ease.” Cynéas: “But you are already there; why take more risks?” Montaigne then cites the well-known passage in Lucretius’ De Rerum Natura (V, 1431) on how human nature knows no upper bound, as if to punish itself.
Now there may be some correlation between looks and skills (someone who looks athletic is likely to be athletic), but, conditional on having had some success in spite of not looking the part, it is potent, even crucial, information.
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.
The fallacy is that what one may need to know in the real world does not necessarily match what one can perceive through intellect: it doesn’t mean that details are not relevant, only that those we tend (IYI-style) to believe are important can distract us from more central attributes of the price mechanism.
I also learned, in my early twenties, that the people you understand most easily were necessarily the bull***tters.
Which brings us to the attributes of scientism. For it is not just some presentation that matters to these idiots. It is unnecessary complication.
You can notice a remarkable similarity to the way these intellectuals held power and separated themselves from the rest: through complex, extremely elaborate rituals, mysteries that stay within the caste, and an overriding focus on the cosmetic.
Just as the slick fellow in a Ferrari looks richer than the rumpled centimillionaire, scientism looks more scientific than real science.
This error by the science writer Richard Dawkins generalizes to, simply, overintellectualizing humans in their responses to all manner of natural phenomena, rather than accepting the role of a collection of mental heuristics used for specific purposes.
Likewise, as we will see in Chapter 18, religious “beliefs” are simply mental heuristics that solve a collection of problems—without the agent really knowing how.
People who have always operated without skin in the game (or without their skin in the right game) seek the complicated and centralized, and avoid the simple like the plague.
People who are bred, selected, and compensated to find complicated solutions do not have an incentive to implement simplified ones.
In other words, many problems in society come from the interventions of people who sell complicated solutions because that’s what their position and training invite them to do. There is absolutely no gain for someone in such a position to propose something simple: you are rewarded for perception, not results.
I realized soon after that, owing to the minority rule, there was no point continuing. As I said in Book 3, GMOs lost simply because a minority of intelligent and intransigent people stood against them.
You can tell if a discipline is BS if the degree depends severely on the prestige of the school granting it. I remember when I applied to MBA programs being told that anything outside the top ten or twenty would be a waste of time. On the other hand a degree in mathematics is much less dependent on the school (conditional on being above a certain level, so the heuristic would apply to the difference between top ten and top two thousand schools).
When people get rich, they shed their skin-in-the-game-driven experiential mechanism. They lose control of their preferences, substituting constructed preferences for their own, complicating their lives unnecessarily, triggering their own misery.
Same with real estate: most people, I am convinced, are happier in close quarters, in a real barrio-style neighborhood, where they can feel human warmth and company.
As Vauvenargues, the French moralist, figured out, small is preferable owing to what we would call in today’s terms scale properties. Some things can be, simply, too large for your heart. Rome, he wrote, was easy to love by its denizens when it was a small village, harder when it became a large empire.
To put it another way: if wealth is giving you fewer options instead of more (and more varied) options, you’re doing it wrong.
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, one can generalize and define a community as a space within which many rules of competition and hierarchy are lifted, where the collective prevails over one’s interest.
This reasoning shows that sophistication can, at some level, cause degradation, what economists call “negative utility.” This tells us something about wealth and the growth of gross domestic product in society; it shows the presence of an inverted U curve with a level beyond which you get incremental harm. It is detectable only if you get rid of constructed preferences.
In fact, what Captain Mark Weisenborn, Pasquale Cirillo, and I discovered, when we tried doing a systematic study of violence (debunking the confabulatory thesis by Steven Pinker that we mentioned earlier, holding that violence has dropped), was that war numbers have been historically inflated…by both sides.
We used to live in small communities; our reputations were directly determined by what we did—we were watched. Today, anonymity brings out the a**hole in people. So I accidentally discovered a way to change the behavior of unethical and abusive persons without verbal threat. Take their pictures.
It turned out that I presented my version of the precautionary principle during the conversation, worth restating here. It asserts that one does not need complex models as a justification to avoid a certain action. If we don’t understand something and it has a systemic effect, just avoid it.
Further, skin in the game creates diversity, not monoculture. Economic insecurity worsens the condition. Journalists are currently in the most insecure profession you can find: the majority live hand to mouth, and ostracism by their friends would be terminal. Thus they become easily prone to manipulation by lobbyists, as we saw with GMOs, the Syrian wars, etc. You say something unpopular in that profession about Brexit, GMOs, or Putin, and you become history. This is the opposite of business where me-tooism is penalized.
The mark of a charlatan—say the writer and pseudo-rationalist Sam Harris—is to defend his position or attack a critic by focusing on some specific statement (“look at what he said”) rather than blasting his exact position (“look at what he means” or, more broadly, “look at what he stands for”)—for the latter requires an extensive grasp of the proposed idea. Note that the same applies to the interpretation of religious texts, often extracted from their broader circumstances.
By contrast with Sontag, I have met a few people who live their public ideas. Ralph Nader, for instance, leads the life of a monk, identical to a member of a monastery in the sixteenth century. And the secular saint 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.
People on the ground, those with skin in the game, are not too interested in geopolitics or grand abstract principles, but rather in having bread on the table, beer (or, for some, nonalcoholic fermented beverages such as yoghurt drinks) in the refrigerator, and good weather at outdoor family picnics. Also they don’t want to be humiliated in their human contact with others.
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.
If you understand nothing about the problem (like D.C. pundits) and have no skin in the game, then everything is seen through the prism of geopolitics. For these ignorant pundits, it is all Iran vs. Saudi Arabia, the U.S. vs. Russia, Mars vs. Saturn.
It turned out that I had squarely made the error that I warn against, of mistaking the lurid for the empirical: there are very, very few predators compared to what one can call collaborative animals.
History is largely peace punctuated by wars, rather than wars punctuated by peace. The problem is that we 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.
We are fed a steady diet of histories of wars, fewer histories of peace. As a trader, I was trained to look for the first question people forget to ask: who wrote these books? Well, historians, international affairs scholars, and policy experts did.
In the five centuries preceding the unification of Italy, there was supposed to be “a lot of warfare” ravaging the place. Therefore, many of these scholars insist, unification “brought peace.” But more than six hundred thousand Italians died in the Great War, during the “period of stability,” almost one order of magnitude higher than all the cumulative fatalities in the five hundred years preceding it.
Journalism is about “events,” not absence of events, and many historians and policy scholars are glorified journalists with high fact-checking standards who allow themselves to be a little boring in order to be taken seriously.
Reading a history book, without putting its events in perspective, offers a similar bias to reading an account of life in New York seen from an emergency room at Bellevue Hospital.
As the reader will know by now, I have myself lived through the worst part of the civil war in Lebanon. Except for areas near the Green Line, it didn’t feel like war. But those reading about it in history books will not understand my experience.
My lifetime motto is that mathematicians think in (well, precisely defined and mapped) objects and relations, jurists and legal thinkers in constructs, logicians in maximally abstract operators, and…fools in words.
So when we look at religion, and, to some extent, ancestral superstitions, we should consider what purpose they serve, rather than focusing on the notion of “belief,” epistemic belief in its strict scientific definition. In science, belief is literal belief; it is right or wrong, never metaphorical. In real life, belief is an instrument to do things, not the end product.
Survival comes first, truth, understanding, and science later.
The rationality of an action can be judged only in terms of evolutionary considerations.
Beliefs are…cheap talk. There may be some type of a translation mechanism too hard for us to understand, with distortions at the level of the thought process that are actually necessary for things to work.
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.
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.
Superstitions can be vectors for risk management rules. We have as potent information that people who have them have survived; to repeat, never discount anything that allows you to survive. For instance, Jared Diamond discusses the “constructive paranoia” of residents of Papua New Guinea, whose superstitions prevent them from sleeping under dead trees. Whether it is superstition or something else, some deep scientific understanding of probability that is stopping you, it doesn’t matter, so long as you don’t sleep under dead trees.
How much you truly “believe” in something can be manifested only through what you are willing to risk for it.
“Rationality” was forged during the post-enlightenment period, at a time when we thought that understanding the world was around the corner. It assumes absence of randomness, or a simplified random structure of our world. Also, of course, no interactions with the world.
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.
The fact to consider is not that beliefs have survived a long time—the Catholic church as an administration is close to twenty-four centuries old (it is largely the continuation of the Roman Republic). The point is that people who have religion—a certain religion—have survived.
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.
But it remains the case that whatever their purpose, kashrut laws survived several millennia not because of their “rationality” but because the populations that followed them survived. It most certainly brought cohesion: people who eat together hang together.
Rationality does not depend on explicit verbalistic explanatory factors; it is only what aids survival, what avoids ruin.
Not everything that happens happens for a reason, but everything that survives survives for a reason.
For, in the quarter millennia since an initial formulation of decision making under uncertainty by the mathematician Jacob Bernoulli, one that has since become standard, almost all people involved in the field have made the severe mistake of missing the effect of the difference between ensemble and time.
To take stock: a situation is deemed non-ergodic when observed past probabilities do not apply to future processes. There is a “stop” somewhere, an absorbing barrier that prevents people with skin in the game from emerging from it—and to which the system will invariably tend. Let us call these situations “ruin,” as there is no reversibility away from the condition.
In my war with the Monsanto machine, the advocates of genetically modified organisms (transgenics) kept countering me with benefit analyses (which were often bogus and doctored up), not tail risk analyses for repeated exposures.
The flaw in psychology papers is to believe that the subject doesn’t take any other tail risks anywhere outside the experiment and, crucially, will never again take any risk at all.
practice, it is done by threshold, for ease of execution, not complicated rules: you start betting aggressively whenever you have a profit, never when you have a deficit, as if a switch was turned on or off. This method is practiced by probably every single trader who has survived.
Unless you are perfectly narcissistic and psychopathic—even then—your worst-case scenario is never limited to the loss of only your life.
Even worse, as I have shown in Antifragile, 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.
I can exercise courage to save a collection of kids from drowning, at the risk of my own life, and it would also correspond to a form of prudence. Were I to die, I would be sacrificing a lower layer in Figure 6 for the sake of a higher one.
Courage is when you sacrifice your own well-being for the sake of the survival of a layer higher than yours.
“The difference between successful people and really successful people is that really successful people say no to almost everything,” he said.
I make the case for risk loving, for systematic “convex” tinkering, and for taking a lot of risks that don’t have tail risks but offer tail profits.
Risk and ruin are different tings.
The Chernoff bound can be explained as follows. The probability that the number of people who drown in their bathtubs in the United States doubles next year—assuming no changes in population or bathtubs—is one per several trillions lifetimes of the universe. This cannot be said about the doubling of the number of people killed by terrorism over the same period.
One may be risk loving yet completely averse to ruin.
Rationality is avoidance of systemic ruin.
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,