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 is how police interrogations of suspects used to be run: beam a light on the suspect, and wait for him to start “singing.”) But in the thick of the lecture, speakers can’t identify what is wrong, so they attribute the loss of concentration to, simply, being on the stage. So the practice continues. Why? Because those who lecture to large audiences don’t work on lighting and light engineers don’t lecture to large audiences.
Another small example of top-down progress: Metro North, the railroad between New York City and its northern suburbs, renovated its trains, in a total overhaul. Trains look more modern, neater, have brighter colors, and even have such amenities as power plugs for your computer (that nobody uses). But on the edge, by the wall, there used to be a flat ledge where one can put the morning cup of coffee: it is hard to read a book while holding a coffee cup. The designer (who either doesn’t ride trains or rides trains but doesn’t drink coffee while reading), thinking it is an aesthetic improvement, made the ledge slightly tilted, so it is impossible to put the cup on it.
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. Or some specialist sitting in the ministry of urban planning who doesn’t live in the community will produce the equivalent of the tilted ledge—as an improvement, except at a much larger scale.
Specialization, as I will keep insisting, comes with side effects, one of which is separating labor from the fruits of labor.
Simplicity
Now skin in the game brings simplicity—the disarming simplicity of things properly done. People who see complicated solutions do not have an incentive to implement simplified ones. As we saw, a bureaucratized system will increase in complication from the interventionism of people who sell complicated solutions because that’s what their position and training invite them to do.
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. Further, there are side effects for problems that grow nonlinearly with such branching-out complications. Worse:
Non-skin-in-the-game people don’t get simplicity.
I Am Dumb Without Skin in the Game
Let us return to pathemata mathemata (learning through pain) and consider its reverse: learning through thrills and pleasure. People have two brains, one when there is skin in the game, one when there is none. Skin in the game can make boring things less boring. When you have skin in the game, dull things like checking the safety of the aircraft because you may be forced to be a passenger in it cease to be boring. If you are an investor in a company, doing ultra-boring things like reading the footnotes of a financial statement (where the real information is to be found) becomes, well, almost not boring.
But there is an even more vital dimension. Many addicts who normally have a dull intellect and the mental nimbleness of a cauliflower—or a foreign policy expert—are capable of the most ingenious tricks to procure their drugs. When they undergo rehab, they are often told that should they spend half the mental energy trying to make money as they did procuring drugs, they are guaranteed to become millionaires. But, to no avail. Without the addiction, their miraculous powers go away. It was like a magical potion that gave remarkable powers to those seeking it, but not those drinking it.
A confession. When I don’t have skin in the game, I am usually dumb. My knowledge of technical matters, such as risk and probability, did not initially come from books. It did not come from lofty philosophizing and scientific hunger. It did not even come from curiosity. It came from the thrills and hormonal flush one gets while taking risks in the markets. I never thought mathematics was something interesting to me until, when I was at Wharton, a friend told me about the financial options I described earlier (and their generalization, complex derivatives). I immediately decided to make a career in them. It was a combination of financial trading and complicated probability. The field was new and uncharted. I knew in my guts there were mistakes in the theories that used the conventional bell curve and ignored the impact of the tails (extreme events). I knew in my guts that academics had not the slightest clue about the risks. So, to find errors in the estimation of these probabilistic securities, I had to study probability, which mysteriously and instantly became fun, even gripping.
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. When you ski downhill some movements become effortless. Then I became dumb again when there was no real action. Furthermore, as traders the mathematics we used fit our problem like a glove, unlike academics with a theory looking for some application—in some cases we had to invent models out of thin air and could not afford the wrong equations. Applying math to practical problems was another business altogether; it meant a deep understanding of the problem before writing the equations.
But if you muster the strength to weight-lift a car to save a child, above your current abilities, the strength gained will stay after things calm down. So, unlike the drug addict who loses his resourcefulness, what you learn from the intensity and the focus you had when under the influence of risk stays with you. You may lose the sharpness, but nobody can take away what you’ve learned. This is the principal reason I am now fighting the conventional educational system, made by dweebs for dweebs. Many kids would learn to love mathematics if they had some investment in it, and, more crucially, they would build an instinct to spot its misapplications.
Regulations vs. Legal Systems
There are two ways to make citizens safe from large predators, say, big powerful corporations. The first one is to enact regulations—but these, aside from restricting individual freedoms, lead to another predation, this time by the state, its agents, and their cronies. More critically, people with good lawyers can game regulations (or, as we will see, make it known that they hire former regulators, and overpay for them, which signals a prospective bribe to those currently in office). And of course regulations, once in, stay in, and even when they are proven absurd, politicians are afraid of repealing them, under pressure from those benefiting from them. Given that regulations are additive, we soon end up tangled in complicated rules that choke enterprise. They also choke life.
For there are always parasites benefiting from regulation, situations where the businessperson uses government to derive profits, often through protective regulations and franchises. The mechanism is called regulatory recapture, as it cancels the effect of what a regulation was meant to do.
The other solution is to put skin in the game in transactions, in the form of legal liability, and the possibility of an efficient lawsuit. The Anglo-Saxon world has traditionally had a predilection for the legal approach instead of the regulatory one: if you harm me, I can sue you. This has led to the very sophisticated, adaptive, and balanced common law, built bottom-up, via trial and error. 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. Common law is about the spirit while regulation, owing to its rigidity
, is all about the letter.
If a big corporation pollutes your neighborhood, you can get together with your neighbors and sue the hell out of it. Some greedy lawyer will have the paperwork ready. The enemies of the corporation will be glad to help. And the potential costs of the settlement would be enough of a deterrent for the corporation to behave.
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.*5
Now, even if regulations had a small net payoff for society, I would still prefer to be as free as possible, but assume my civil responsibility, face my fate, and pay the penalty if I harm others. This attitude is called deontic libertarianism (deontic comes from “duties”): by regulating you are robbing people of freedom. Some of us believe that freedom is one’s first most essential good. This includes the freedom to make mistakes (those that harm only you); it is sacred to the point that it must never be traded against economic or other benefits.
IV. SOUL IN THE GAME
Finally and centrally, skin in the game is about honor as an existential commitment, and risk taking (a certain class of risks) as a separation between man and machine and (some may hate it) a ranking of humans.
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.
Honor implies that there are some actions you would categorically never do, regardless of the material rewards. She accepts no Faustian bargain, would not sell her body for $500; it also means she wouldn’t do it for a million, nor a billion, nor a trillion. And it is not just a via negativa stance, honor means that there are things you would do unconditionally, regardless of the consequences. Consider duels, which have robbed us of the great Russian poet Pushkin, the French mathematician Galois, and, of course, many more, at a young age (and, in the case of Galois, a very young age): people incurred a significant probability of death just to save face. Living as a coward was simply no option, and death was vastly preferable, even if, as in the case of Galois, one invented a new and momentous branch of mathematics while still a teenager.*6 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.
If you want to consider how modernity has destroyed some of the foundations of human values, contrast the above unconditionals with modernistic accommodations: people who, say, work for disgusting lobbies (representing the interests of, say, Saudi Arabia in Washington) or knowingly play the usual unethical academic game, come to grips with their condition by producing arguments such as “I have children to put through college.” 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.
Now there is another dimension of honor: engaging in actions going beyond mere skin in the game to put oneself at risk for others, have your skin in other people’s game; sacrifice something significant for the sake of the collective.
However, there are activities in which one is imbued with a sense of pride and honor without grand-scale sacrifice: artisanal ones.
Artisans
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.
Primo, artisans do things for existential reasons first, financial and commercial ones later. Their decision making is never fully financial, but it remains financial. Secundo, they have some type of “art” in their profession; they stay away from most aspects of industrialization; they combine art and business. Tertio, they put some soul in their work: they would not sell something defective or even of compromised quality because it hurts their pride. Finally, they have sacred taboos, things they would not do even if it markedly increased profitability.
Compendiaria res improbitas, virtusque tarda—the villainous takes the short road, virtue the longer one. In other words, cutting corners is dishonest.
Let me illustrate with my own profession. It is easy to see that a writer is effectively an artisan: book sales are not the end motive, only a secondary target (even then). You preserve some sanctity of the product with strong prohibitions. For instance, in the early 2000s, the writer Fay Weldon was paid by the jewelry chain Bulgari to advertise their brand by weaving recommendations for their great products into the plot of her novel. A nightmare ensued; there was a generalized feeling of disgust on the part of the literary community.
I also recall in the 1980s some people trying to give away books for free, but with advertisements in the midst of the text, as with magazines. The project failed.
Nor do we industrialize writing. You would be disappointed if I hired a group of writers to “help” as it would be more efficient. Some authors, such as Jerzy Kosinski, have tried to write books by subcontracting sections, leading to a complete ostracism after the discovery. Few of those writers-cum-contractors have seen their work survive. But there are exceptions, such as Alexandre Dumas père who was said to run a workshop of ghostwriters (forty-five), which allowed him to scale his production up to one hundred and fifty novels, with the joke that he read some of his own books. But in general, output is not scalable (even if the sales of a book are). Dumas may be the exception that confirms the rule.
Now, something very practical. 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. Otherwise, you end up assisting your assistants, or being forced to “explain” how to do things, which requires more mental effort than doing the thing itself. In fact, beyond my writing and research life, this has proved to be great financial advice as I am freer, more nimble, and have a very high benchmark for doing something, while my peers have their days filled with unnecessary “meetings” and unnecessary correspondence.
Having an assistant (except for the strictly necessary) removes your soul from the game.
Think of the effect of using a handheld translator on your next trip to Mexico in place of acquiring a robust vocabulary in Spanish by contact with locals. Assistance moves you one step away from authenticity.
Academics can be artisans. Even those economists who, misunderstanding Adam Smith, claim that humans are here to “seek maximization” of their income, express these ideas for free, and boast to not be into lowly commercial profit seeking, not seeing the contradiction.
A Caveat with Entrepreneurs
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. The true value of the company, what it makes, and its long-term survival are of small relevance to them. This is a pure financing scheme and we will exclude this class of people from our “entrepreneur” risk-taker class (this form of entrepreneurship is the equivalent of bringing great-looking and
marketable children into the world with the sole aim of selling them at age four). We can easily identify them by their ability to write a convincing business plan.
Companies beyond the entrepreneur stage start to rot. One of the reasons corporations have the mortality of cancer patients is the assignment of time-defined duties. Once you change assignment—or, better, company—you can now say about the deep Bob Rubin–style risks that emerge: “It’s not my problem anymore.” The same happens when you sell out, so remember that:
The skills at making things diverge from those at selling things.
Arrogant Will Do
Products or companies that bear the owner’s name convey very valuable messages. They are shouting that they have something to lose. Eponymy indicates both a commitment to the company and a confidence in the product. A friend of mine, Paul Wilmott, is often called an egomaniac for having his name on a mathematical finance technical journal (Wil–mott), which at the time of writing is undoubtedly the best. “Egomaniac” is good for the product. But if you can’t get “egomaniac,” “arrogant” will do.
Citizenship de Plaisance
Many well-to-do people who come to live in the United States avoid becoming citizens while living here indefinitely. They have a permanent residence permit as a free option, as it is a right, but not an obligation, for they can return it with a simple procedure. You ask them why they don’t take the oath in front of a judge, then throw a cocktail party at a waterfront country club. The typical answer is: taxes. Once you become a U.S. citizen, you will have to pay taxes on your worldwide income, even if you live overseas. And it is not easily reversible, so you lose the optionality. But other Western countries, such as France and the United Kingdom, allow their citizens considerable exemptions if they reside in some tax haven. This invites a collection of people to “buy” a citizenship via investments and minimum residence, get the passport, then go live somewhere tax-free.
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