Skin in the Game

Home > Other > Skin in the Game > Page 17
Skin in the Game Page 17

by Nassim Nicholas Taleb


  *1 The “turtles all the way down” expression expresses an infinite regress problem, as follows. The logician Bertrand Russell was once told that the world sits on turtles. “And what do these turtles stand on?” he asked. “It’s turtles all the way down,” was the answer.

  *2 An observation about modernity. Change for the sake of change, as we see in architecture, food, and lifestyle, is frequently the opposite of progress. As I have explained in Antifragile, too high a rate of mutation prevents locking in the benefits of previous changes: evolution (and progress) requires some, but not too frequent, variation.

  *3 Prizes as a Curse: In fact, there is a long-held belief among traders that praise by journalists is a reverse indicator. I learned about it the hard way. In 1983, right before I became a trader, the computer giant IBM made the front cover of BusinessWeek, a U.S. magazine then influential, as the ultimate company. I naively rushed to buy the stock. I got shellacked. Then it hit me that, if anything, I should be shorting the company, to benefit from its decline. So I reversed the trade, and learned that collective praise by journos is at the least suspicious and, at best, a curse. IBM went into a decline that lasted a decade and a half; it almost went bust. Further, I learned to avoid honors and prizes partly because, given that they are awarded by the wrong judges, they are likely to hit you at the peak (you’d rather be ignored, or, better, disliked by the general media). A former trader who invests in the restaurant business, Brian Hinchcliffe, conveyed to me the following heuristic: Shops that get awards as “The Best” something (best atmosphere, best waiter service, best fermented yoghurt and other nonalcoholic beverages for visiting Sheikhs, etc.) close down before the awards ceremony. Empirically, if you want an author to cross a few generations, make sure he or she never gets that something called the Nobel Prize in Literature.

  *4 I am usually allergic to some public personalities, but not others. It took me a while to figure out how to draw the line explicitly. The difference is risk-taking and whether the person worries about his or her reputation.

  *5 In a technical note called “Meta-distribution of p-values” around the stochasticity of “p-values” and their hacking by researchers, I show that the statistical significance of these papers is at least one order of magnitude smaller than claimed.

  *6 Segnius homines bona quam mala sentiunt.

  *7 Nimium boni est, cui nihil est mali.

  *8 Non scabat caput praeter unges tuo, Ma biḣikkak illa ḋifrak.

  *9 xasfour bil ‘id aḣsan min xaṡra xalṡajra.

  *10 Nimium allercando veritas amittitur.

  *11 Fiducia pecunias amici.

  Literature doesn’t look like literature—Donaldo hiring practitioners—The glory of bureaucracy—Teach a professor how to deadlift—Looking the part

  LOOKING THE PART

  Say you had the choice between two surgeons of similar rank in the same department in some hospital. The first is highly refined in appearance; he wears silver-rimmed glasses, has a thin build, delicate hands, measured speech, and elegant gestures. His hair is silver and well combed. He is the person you would put in a movie if you needed to impersonate a surgeon. His office prominently boasts Ivy League diplomas, both for his undergraduate and medical schools.

  The second one looks like a butcher; he is overweight, with large hands, uncouth speech, and an unkempt appearance. His shirt is dangling from the back. No known tailor on the East Coast of the U.S. is capable of making his shirt button at the neck. He speaks unapologetically with a strong New Yawk accent, as if he wasn’t aware of it. He even has a gold tooth showing when he opens his mouth. The absence of diplomas on the wall hints at the lack of pride in his education: he perhaps went to some local college. In a movie, you would expect him to impersonate a retired bodyguard for a junior congressman, or a third-generation cook in a New Jersey cafeteria.

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

  When results come from dealing directly with reality rather than through the agency of commentators, image matters less, even if it correlates to skills. But image matters quite a bit when there is hierarchy and standardized “job evaluation.” Consider the chief executive officers of corporations: they don’t just look the part, they even look the same. And, worse, when you listen to them talk, they sound the same, down to the same vocabulary and metaphors. But that’s their job: as I will keep reminding the reader, counter to the common belief, executives are different from entrepreneurs and are supposed to look like actors.

  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.

  So it becomes no wonder that the job of chief executive of the country was once filled by a former actor, Ronald Reagan. Actually, the best actor is the one nobody realizes is an actor: a closer look at Barack Obama shows that he was even more of an actor: a fancy Ivy League education combined with a liberal reputation is compelling as an image builder.

  Much has been written about the millionaire next door: the person who is actually rich, on balance, but doesn’t look like the person you would expect to be rich, and vice versa. About every private banker is taught to not be fooled by the looks of the client and avoid chasing Ferrari owners at country clubs. As I am writing these lines, a neighbor in my ancestral village (and like almost everyone there, a remote relative), who led a modest but comfortable life, ate food he grew by himself, drank his own pastis (arak), that sort of thing, left an estate of a hundred million dollars, a hundred times what one would have expected him to leave.

  So the next time you randomly pick a novel, avoid the one with the author photo representing a pensive man with an ascot standing in front of wall-to-wall bookshelves.

  By the same reasoning, and flipping the arguments, skilled thieves at large should not look like thieves. Those who do are more likely to be in jail.

  Next, we will get deeper into the following:

  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 GREEN LUMBER FALLACY

  The idea of this chapter is Lindy-compatible. Don’t think that beautiful apples taste better, goes the Latin saying.*1 This is a subtler version of the common phrase “all that glitters is not gold”—something it has taken consumers half a century to figure out; even then, as they have been continuously fooled by the aesthetics of produce.

  An expert rule in my business is to never hire a well-dressed trader. But it goes beyond:

  Hire the successful trader, conditional on a solid track record, whose details you can understand the least.

  Not the most: the least. Why so?

  I’ve introduced this point in Antifragile, where I called it the green lumber fallacy. A fellow made a fortune in green lumber without knowing what appears to be essential details about the product he traded—he wasn’t aware that green lumber stood for freshly cut wood, not lumber that was painted green. Meanwhile, by contrast, the person who related the story went bankrupt while knowing every intimate detail about the green lumber. 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.

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

  Another aspect:

  What can be phrased and expressed in a clear narrative that convinces suckers will be a sucker trap.

  My friend Terry B., who taught an investment class, invited two speakers. One looked the part of the investment manager, down to a tee: tailored clothes, expensive watch, shiny shoes, and clarity of exposition. He also talked big, projecting the type of confidence you would desire in an executive. The second looked closer to our butcher-surgeon and was totally incomprehensible; he even gave the impression that he was confused. Now, when Terry asked the students which of the two they believed was more successful, they didn’t even get close. The first, not unexpectedly, was in the equivalent of the soup kitchen of that business; the second was at least a centimillionaire.

  The late Jimmy Powers, a die-hard New York Irishman with whom I worked in an investment bank early in my trading career, was successful in spite of being a college dropout, with the background of a minor Brooklyn street gangster. He would discuss our trading activities in meetings with such sentences as: “We did this and then did that, badaboom, badabing, and then it was all groovy,” to an audience of extremely befuddled executives who didn’t mind not understanding what he was talking about, so long as our department was profitable. Remarkably, after a while, I learned to effortlessly understand what Jimmy meant. I also learned, in my early twenties, that the people you understand most easily were necessarily the bull***tters.

  BEST-DRESSED BUSINESS PLAN

  Literature should not look like literature. The author Georges Simenon worked as a teenager in journalism as an assistant to the famous French writer Colette; she taught him to resist the idea of putting imperfect subjunctives and references to zephyrs, rhododendrons, and firmaments in his text—the kind of stuff one does when waxing literary. Simenon took this advice to the extreme: his style is similar to that of, say, Graham Greene; it is stripped to the core, and as a result, words do not stand in the way of conveying atmosphere—you feel wetness penetrating your shoes just reading his accounts of commissar Maigret spending endless hours in the Parisian rain; it is as if his central character is the background.

  Likewise, the illusion prevails that businesses work via business plans and science via funding. This is strictly not true: a business plan is a useful narrative for those who want to convince a sucker. It works because, as I said in Prologue 2, firms in the entrepreneurship business make most of their money packaging companies and selling them; it is not easy to sell without some strong narrative. But for a real business (as opposed to a fund-raising scheme), something that should survive on its own, business plans and funding work backward. At the time of writing, most big recent successes (Microsoft, Apple, Facebook, Google) were started by people with skin and soul in the game and grew organically—if they had recourse to funding, it was to expand or allow the managers to cash out; funding was not the prime source of creation. You don’t create a firm by creating a firm; nor do you do science by doing science.

  A BISHOP FOR HALLOWEEN

  Which brings me back to social science. I have in many instances quickly jotted down ideas on a piece of paper, along with mathematical proofs, and posted them somewhere, planning to get them published. No fluff or the ideas-free verbose circularity of social science papers. In some fake fields like economics, ritualistic and dominated by citation rings, I discovered that everything is in the presentation. So the criticism I’ve received has never been about the content, but rather the looks. There is a certain language one needs to learn through a long investment, and papers are just iterations around that language.

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

  Which brings us to the attributes of scientism. For it is not just some presentation that matters to these idiots. It is unnecessary complication.

  But there is a logic behind these academic complications and rituals. Did you ever wonder why a bishop is dressed for Halloween?

  Mediterranean societies are traditionally ones in which the highest-ranking person is the one with the most skin in the game. And if anything characterizes today’s America, it is economic risk taking, thanks to a happy transfer of martial values to business and commerce in Anglo-Saxon society—remarkably, traditional Arabic culture also puts the same emphasis on the honor of economic risk-taking. But history shows that there were—and still are—societies in which the intellectual was at the top. The Hindus held the Brahman to be first in the hierarchy, the Celts had the druids (so do their Druze possible-cousins), the Egyptians had their scribes, and the Chinese had for a relatively brief time the scholar. Let me add postwar France. 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.

  Even within the “normal” warrior-run or doer-run societies, the class of intellectuals is all about rituals: without pomp and ceremony, the intellectual is just a talker, that is, pretty much nothing. Consider the bishop in my parts, the Greek-Orthodox church: it’s a show of dignity. A bishop on rollerblades would no longer be a bishop. There is nothing wrong with the decorative if it remains what it is, decorative, as remains true today. However, science and business must not be decorative.

  * * *

  —

  Next, we examine the following points:

  Just as the slick fellow in a Ferrari looks richer than the rumpled centimillionaire, scientism looks more scientific than real science.

  True intellect should not appear to be intellectual.

  THE GORDIAN KNOT

  Never pay for complexity of presentation when all you need is results.

  Alexander the Magnus was once called to solve the following challenge in the Phrygian city of Gordium (as usual with Greek stories, in modern-day Turkey). When he entered Gordium, he found an old wagon, its yoke tied with a multitude of knots, all so tightly entangled that it was impossible to figure out how they were fastened. An oracle had declared that he who would untie the knot would rule all of what was then called “Asia,” that is, Asia Minor, the Levant, and the Middle East.

  After wrestling with the knot, the Magnus drew back from the lump of gnarled ropes, then made a proclamation that it didn’t matter for the prophecy how the tangle was to be unraveled. He then drew his sword and, with a single stroke, cut the knot in half.

  No “successful” academic could ever afford to follow such a policy. And no Intellectual Yet Idiot. It took medicine a long time to realize that when a patient shows up with a headache, it is much better to give him aspirin or recommend a good night’s sleep than do brain surgery, although the latter appears to be more “scientific.” But most “consultants” and others paid by the hour are not there yet.

  OVERINTELLECTUALIZATION OF LIFE

  The researchers Gerd Gigerenzer and Henry Brighton contrast the approaches of the “rationalistic” school (in quotation marks, as there is little that is rational in these rationalists) and that of the heuristic one, in the following example on how a baseball player catches the ball by Richard Dawkins:

  Richard Dawkins (…) argues that “He behaves as if he had solved a set of differential equations in predicting the trajectory of the ball. At some subconscious level, something functionally equivalent to the mathematical calculations is going on.”

  (…) Instead, experiments have shown that players rely on several heuristics. The gaze heuristic is the simplest one and works if the ball is already high up in the air: Fix your gaze on the ball, start running, and adjust
your running speed so that the angle of gaze remains constant.

  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. The baseball player has no clue about the exact heuristic, but he goes with it—otherwise he would lose the game to another, nonintellectualizing, competitor. 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. Solving equations in order to make a decision isn’t a skill we humans can aspire to have—it is computationally impossible. What we can rationally do is neutralize some harmful aspects of these heuristics, defang them so to speak.

  ANOTHER BUSINESS OF INTERVENTION

  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. Practitioners, on the other hand, have opposite instincts, looking for the simplest heuristics. Some rules:

  People who are bred, selected, and compensated to find complicated solutions do not have an incentive to implement simplified ones.

  And it gets more complicated as the remedy has itself a skin-in-the-game problem.

  This is particularly acute in the meta-problem, when the solution is about solving this very problem.

 

‹ Prev