Skin in the Game

by Nassim Nicholas Taleb

  A country should not tolerate fair-weather friends. There is something offensive in having a nationality without skin in the game, just to travel and pass borders, without the downside that comes with the passport.

  My parents are French citizens, which would have made it easy for me to get naturalized a few decades ago. But it did not feel right; it even felt downright offensive. And unless I developed an emotional attachment to France via skin in the game, I couldn’t. It would have felt fake to see my bearded face on a French passport. The only passport I would have considered is the Greek (or Cypriot) one, as I feel some deep ancestral and socio-cultural bond to the Hellenistic world.

  But I came to the U.S., embraced the place, and took the passport as commitment: it became my identity, good or bad, tax or no tax. Many people made fun of my decision, as most of my income comes from overseas and, if I took official residence in, say, Cyprus or Malta, I would be making many more dollars. If wanted to lower taxes for myself, and I do, I am obligated to fight for it, for both myself and the collective, other taxpayers, and to not run away.

  Skin in the game.

  Heroes Were Not Library Rats

  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. Read the texts themselves: Seneca, Caesar, or Marcus Aurelius, when possible. Or read commentators on the classics who were doers themselves, such as Montaigne—people who at some point had some skin in the game, then retired to write books. Avoid the intermediary, when possible. Or fuhgetaboud the texts, just engage in acts of courage.

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

  By some mysterious mental mechanism, people fail to realize that the principal thing you can learn from a professor is how to be a professor—and the chief thing you can learn from, say, a life coach or inspirational speaker is how to become a life coach or inspirational speaker. So remember that the heroes of history were not classicists and library rats, those people who live vicariously in their texts. They were people of deeds and had to be endowed with the spirit of risk taking. To get into their psyches, you will need someone other than a career professor teaching stoicism.*7 They almost always don’t get it (actually, they never get it). In my experience, from a series of personal fights, many of these “classicists,” who know in intimate detail what people of courage such as Alexander, Cleopatra, Caesar, Hannibal, Julian, Leonidas, Zenobia ate for breakfast, can’t produce a shade of intellectual valor. Is it that academia (and journalism) is fundamentally the refuge of the stochastophobe tawker? That is, the voyeur who wants to watch but not take risks? It appears so. The most important chapter of the book, and conveniently the last one, “The Logic of Risk Taking,” shows how some central elements of risks, while obvious to practitioners, can be missed by theoreticians for more than two centuries!

  Soul in the Game and Some (Not Too Much) Protectionism

  Let us now apply these ideas to modern times. Recall the story of the architects separated from the real users. This extends to more general systemic effects, such as protectionism and globalism. Seen that way, the rise of some protectionism may have a strong rationale—and an economic one.

  I leave aside the argument that globalization leads to a Tower-of-Babel style cacophony, owing to the imbalance in the noise-signal ratio. The point here is that workers, people who do things, have each an artisan in them. For, contrary to what lobbyists paid by international large corporations are trying to make us believe, such protectionism does not even conflict with economic thinking, what is called neoclassical economics. It is not inconsistent with the mathematical axioms of economic decision making, on which economics lays its foundations, to behave in a way that does not maximize one’s narrowly defined dollar-denominated bottom line at the expense of other things. As I said earlier in the chapter, it is not irrational, according to economic theory, to leave money on the table because of your personal preference; the notion of incentives as limited to financial gain cannot otherwise explain the very existence of an economics academia that promotes the idea of self-interest.*8

  We may be better off in a narrowly defined accounting sense (in the aggregate) by exporting jobs. But that’s not what people may really want. I write because that’s what I am designed to do, just as a knife cuts because that’s what its mission is, Aristotle’s arête—and subcontracting my research and writing to China or Tunisia would (perhaps) increase my productivity, but deprive me of my identity.

  So people might want to do things. Just to do things, because they feel it is part of their identity. A shoemaker in Westchester County wants to be a shoemaker, to enjoy the fruits of his labor and the pride of seeing his merchandise in the stores, even if his so-called “economic” condition might benefit from letting a Chinese factory make the shoes and converting to another profession. Even if such a new system allows him to buy flat-screen TV sets, more cotton shirts, and cheaper bicycles, something is missing. It may be cruel to cheat people of their profession. People want to have their soul in the game.

  In that sense, decentralization and fragmentation, aside from stabilizing the system, improves people’s connection to their labor.

  Skin in the Ruling

  Let us close with a historical anecdote.

  Some might well ask: law is great, but what would you do with a corrupt or incompetent judge? He could make mistakes with impunity. He could be the weak link. Not quite, or at least not historically. A friend once showed me a Dutch painting representing the Judgment of Cambyses. The scene is from the story reported by Herodotus, concerning the corrupt Persian judge Sisamnes. He was flayed alive on the order of King Cambyses as a punishment for violating the rules of justice. The scene of the painting is Sisamnes’s son dispensing justice from his father’s chair, upholstered with the flayed skin as a reminder that justice comes with, literally, skin in the game.

  *1 “Do not do unto others what you would not have them do unto you” (Isocrates, Hillel the Elder, Mahabharata). “What is hateful to you, do not do to your fellow: this is the whole Torah; the rest is the explanation; go and learn.” Rabbi Hillel the Elder drawing on Leviticus 19:18. “Do nothing to others which if done to you would cause you pain. This is the essence of morality.”

  *2 A stance against violation of symmetry appears in the Parable of Unforgiving Servant in the New Testament (Matthew 12:21–31). A servant who has his huge debt waived by a compassionate lender subsequently punishes another servant who owed him a much smaller amount. Most commentators seem to miss that the true message is (dynamic) symmetry, not forgiveness.

  *3 This section is technical and can be skipped at first reading.

  *4 In fact, those who formalized the theory of rationality, such as the mathematician and game theorist Ken Binmore, more on whom later, insist that there has never been any rigorous and self-consistent theory of “rationality” that puts people in a straitjacket. You will not even find such claims in orthodox neoclassical economics. Most of what we read about the “rational” in the verbalistic literature doesn’t seem to partake of any rigor.

  *5 The Ralph Nader to whom I dedicate this book is the Ralph Nader who helped establish the legal mechanism to protect consumers and citizens from predators; less so the Ralph Nader who occasionally makes some calls to regulate.

  *6 There is actually an argument in favor of duels: they prevent conflicts from engaging broader sets of people, that is, wars, by confining the problem to those with direct skin in the game.

  *7 My understanding of Seneca, as expressed in Antifragile, is all about asymmetry (and optionality), both financial and emotional. As a risk taker, I get something impossible to convey to classicists, which makes it frustrating to see accounts of him that miss the essential.

  *8 For a long time, some Swiss cantons—dem
ocratically—banned the sale of property to foreigners, to prevent the disruptions from rich jet-setters without skin in the game in the place who come to bid up prices, and hurt new young buyers permanently priced out of the market. Is this silly, economically? Not at all, though some real estate developers would strongly disagree.

  Seven pages per sitting, seven pages annum is the perfect rate—Rereaders need rereviewers

  Now that we’ve outlined the main ideas, let us see how this discussion fits the rest of the Incerto project. Just as Eve came out of Adam’s ribs, so does each book of the Incerto emerge from the penultimate one’s ribs. The Black Swan was an occasional discussion in Fooled by Randomness; the concept of convexity to random events, the theme of Antifragile, was adumbrated in The Black Swan; and, finally, Skin in the Game was a segment of Antifragile under the banner: Thou shalt not become antifragile at the expense of others. Simply, asymmetry in risk bearing leads to imbalances and, potentially, to systemic ruin.

  The Bob Rubin trade connects to my business as a trader (as we saw, when these people make money, they keep the profits; when they lose, someone else bears the costs while they do their Black Swan invocation). Its manifestations are so ubiquitous that it has been the backbone of every book of the Incerto. 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. Given the number of people trying to get on the money-making bus, there is a progressive accumulation of Black Swan risks in such systems. Then, boom, the systemic blowup happens.*1

  THE ROAD

  We will be guided by what is most lively. The ethics side is straightforward, as part of the general Fat Tony–Isocrates asymmetry, and I have gone deeply into the matter thanks to a highly argumentative collaboration with the philosopher (and walking companion) Constantine Sandis. Tort law is equally straightforward, and I had thought it would occupy a large section of this volume, but it will thankfully be minimal. Why?

  Tort law is insipid to those who don’t have the temperament that takes one to law school. For, prompted by the fearless Ralph Nader, a coffee table in my study accumulated close to twenty volumes on contract law and torts. But I found the topic so dull that it was a Herculean task for me to read more than seven lines per sitting (which is the reason God mercifully invented social media and Twitter fights): unlike science and mathematics, law, while being very rigorous, doesn’t offer surprises. Law cannot be playful. The mere sight of these books reminds me of a lunch with a former member of the Federal Reserve Board, the kind of thing to which one should never be subjected more than once per lifetime. So I will dispatch the topic of torts in a few lines.

  As we intimated in the first paragraphs of the introduction, some nonsoporific topics (pagan theology, religious practices, complexity theory, ancient and medieval history, and, of course, probability and risk taking) match this author’s naturalistic filter. Simply: if you can’t put your soul into something, give it up and leave that stuff to someone else.

  Talking about soul in the game, I had to overcome some shame as follows. In the Paris episode of Hammurabi at the Louvre, when I stood in front of the imposing basalt stele (in the room with Koreans with selfie sticks), I felt uneasy not being able to read the stuff and having to rely on experts. What experts? This would have been fine if it was a cultural journey, but here I am professionally writing a book going very deep into that stuff! It felt like cheating not knowing the ancient text the way it was read and recited at the time. In addition, one of my episodic hobbies is Semitic philology, so I had no excuse. So I have been distracted by an obsession to learn enough Akkadian in order to recite Hammurabi’s law with Semitic phonetics, sort of having some soul in the game. It may have delayed the completion of this book, but, at least, when I mention Hammurabi, my conscience doesn’t make me feel I am faking anything.

  AN ENHANCED DETECTOR

  This book came after a deep—nonacademic—unplanned flirtation with mathematics. For after finishing Antifragile, I thought of retiring my pen for a while and settling into the comfortable life of a quarter university position, enjoying squid-ink pasta in bon vivant company, lifting weights with my blue-collar friends, and playing bridge in the afternoon, the kind of tranquil, worry-free life of the nineteenth-century gentry.

  What I didn’t forecast is that my dream of a tranquil life lasted only a few weeks. For I exhibited no skills whatsoever in retirement activities such as contract bridge, chess, lotto, visits to the pyramids in Mexico, etc. I once, by happenstance, tried to solve a mathematical brain teaser, and it lead to five years of compulsive, time-invasive mathematical practice, with the obsessive bouts that plague people inhabited with problems. As usual with these things, I didn’t do mathematics to solve a problem, just to satisfy a fixation. But I never expected the following effect. It made my bull***t detector so sensitive that listening to well-marketed nonsense (by verbalistic people, especially academics) had the same effect as being put in a room with instances of randomly occurring piercing and jarring sounds, the type that kill animals. I am never bothered by normal people; it is the bull***tter in the “intellectual” profession who bothers me. 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.

  It is under such an oversensitive bull***t detector that I have been writing this book.

  THE BOOK REVIEWERS

  And since we are talking about books, I close this introductory section with that one thing I’ve learned from my time in that business. Many book reviewers are intellectually honest and straightforward people, but the industry has a fundamental conflict with the public, even while appointing itself as representative of the general class of readers. For instance, when it comes to books written by risk takers, the general public (and some, but very few, book editors) can detect what is interesting to them in a certain account, something those in the fake space of word production (in other words, nondoers) chronically fail to get—and they cannot understand what it is that they don’t understand because they are not really part of active and transactional life.

  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. The convexity is implanted in Semitic vocabulary: mishnah, which in Hebrew refers to the pre-Talmudic compilation of oral tradition, means “doubling”; midrash itself may also be related to stamping and repeated grinding, and has a counterpart in the madrassa of the children of Ishmael.

  Books should be organized the way the reader reads, or wants to read, and according to how deep the author wants to go into a topic, not to make life easy for the critics to write reviews. Book reviewers are bad middlemen; they are currently in the process of being disintermediated just like taxi companies (what some call Uberized).

  How? There is, here again, a skin-in-the-game problem: a conflict of interest between professional reviewers who think they ought to decide how books should be written, and genuine readers who actually read books because they like to read books. For one, reviewers command an unchecked and arbitrary power over authors: someone has to have read the book to notice that a reviewer is full of baloney, so in the absence of skin in the game, reviewers such as Michiko Kakutani of The New York Times (now retired) or David Runciman, who writes for The Guardian, can go on forever without anyone knowing they are either fabricating or drunk (or, as I am certain, in the case of Kakutani, both). Book reviews are judged according to how plausible and well written they are, never in how they map to the book (unless of course the author makes them accountable for misrepr
esentations).*2

  Now, almost two decades after the first installment of the Incerto, I have established ways to interact directly with you, the reader.

  ORGANIZATION OF THE BOOK

  Book 1 was the introduction we just saw, with its three parts.

  Book 2, “A First Look at Agency,” is a deeper exposition of symmetry and agency in risk sharing, bridging commercial conflict of interest with general ethics. It also introduces us briefly to the notion of scaling and the difference between individual and collective, hence the limitations of globalism and universalism.

  Book 3, “That Greatest Asymmetry,” is about the minority rule by which a small segment of the population inflicts its preferences on the general population. The (short) appendix for Book 3 shows 1) how a collection of units doesn’t behave like a sum of units, but something with a mind of its own, and 2) the consequences of much of something called social “science.”

  Book 4, “Wolves Among Dogs,” deals with dependence and, let’s call a spade a spade, slavery in modern life: why employees exist because they have much more to lose than contractors. It also shows how, even if you are independent and have f*** you money, you are vulnerable if people you care about can be targeted by evil corporations and groups.