Skin in the Game

by Nassim Nicholas Taleb

  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. Meanwhile, they pay no price for the side effects that grow nonlinearly with such complications.

  This also holds true when it comes to solutions that are profitable to technologists.

  GOLD AND RICE

  Now, indeed, we know by instinct that brain surgery is not more “scientific” than aspirin, any more than flying the forty or so miles between JFK and Newark airports represent “efficiency,” although there is more technology involved. But we don’t easily translate this to other domains and remain victims of scientism, which is to science what a Ponzi scheme is to investment, or what advertisement or propaganda are to genuine scientific communication. You magnify the cosmetic attributes.

  Recall the genetic modifications of Book 3 (and the smear campaign of Chapter 4). Let us consider the story of the genetically modified Golden Rice. There has been a problem of malnutrition and nutrient deficiency in many developing countries, which my collaborators Yaneer Bar-Yam and Joe Norman attribute to a simple and very straightforward transportation issue. Simply, we waste more than a third of our food supply, and the gains from simple improvement in distribution would far outweigh those from modification of supply. Simply consider that close to 80 or 85 percent of the cost of a tomato can be attributed to transportation, storage, and waste (unsold inventories), rather than the cost at the farmer level. So visibly our efforts should be on low-tech distribution.

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

  The technique in question consists in genetically modifying rice to have the grains include vitamins. My colleagues and I made an effort to show the following, which is a criticism of the method in general. First, transgenics, that is the type of genetic modifications thus obtained, was not analytically in the same category as the crossbreeding of plants and animals that have characterized human activities since husbandry—say, potatoes or mandarin oranges. We skipped complexity classes, and the effects on the environment are not foreseeable—nobody studied the interactions. Recall that fragility is in the dosage: falling from the 20th floor is not in the same risk category as falling from your chair. We even showed that there was a patent increase in systemic risk. Second, there was no proper risk study, and the statistical methods in the papers in support of the argument were flawed. Third, we invoked the principle of simplicity, which was called antiscience. Why don’t we give these people rice and vitamins separately? After all, we don’t have genetically modified coffee that has milk with it. Fourth, we were able to show that GMOs brought a bevy of hidden risk to the environment, because of the higher use of pesticide, which kills the microbiome (that is, the bacteria and other life in the soil).

  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.

  THE COMPENSATION

  Simply, the minute one is judged by others rather than by reality, things become warped as follows. Firms that haven’t gone bankrupt yet have something called personnel departments. So there are metrics used and “evaluation forms” to fill.

  The minute one has evaluation forms, distortions occur. Recall that in The Black Swan I had to fill my evaluation form asking for the percentage of profitable days, encouraging traders to make steady money at the expense of hidden risks of Black Swans, consequential losses. Russian Roulette allows you to make money five times out of six. This has bankrupted banks, as banks lose less than one in one hundred quarters, but then they lose more than they ever made. My declared approach was to try to make money infrequently. I tore the evaluation form in front of the big boss and they left me alone.

  Now the mere fact that an evaluation causes you to be judged not by the end results, but by some intermediary metric that invites you to look sophisticated, brings some distortions.

  EDUCATION AS LUXURY GOOD

  Ivy League universities are becoming in the eyes of the new Asian upper class the ultimate status luxury good. Harvard is like a Vuitton bag and a Cartier watch. It is a huge drag on the middle class, who have been plowing an increased share of their savings into educational institutions, transferring their money to bureaucrats, real estate developers, tenured professors of some discipline that would not otherwise exist (gender studies, comparative literature, or international economics), and other parasites. In the United States, we have a buildup of student loans that automatically transfer to these rent extractors. In a way it is no different from racketeering: one needs a decent university “name” to get ahead in life. But we have evidence that collectively society doesn’t advance with organized education, rather the reverse: the level of (formal) education in a country is the result of wealth.*2

  A BS DETECTION HEURISTIC

  The heuristic here would be to use education in reverse: hire, conditional on an equal set of skills, the person with the least label-oriented education. It means that the person had to succeed in spite of the credentialization of his competitors and overcome more serious hurdles. In addition, people who didn’t go to Harvard are easier to deal with in real life.

  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).

  The same applies to research papers. In math and physics, a result posted on the repository site arXiv (with a minimum hurdle) is fine. In low-quality fields like academic finance (where papers are usually some form of complicated storytelling), the “prestige” of the journal is the sole criterion.

  REAL GYMS DON’T LOOK LIKE GYMS

  This education labeling provides a lot of cosmetic things but misses something essential about antifragility and true learning, reminiscent of gyms. People are impressed with expensive equipment—fancy, complicated, multicolored—meant to look as if it belonged on a spaceship. Things appear maximally sophisticated and scientific—but remember that what looks scientific is usually scientism, not science. As with label universities, you pay quite a bit of money to join, largely for the benefit of the real estate developer. Yet people into strength training (those who are actually strong across many facets of real life) know that users of these machines gain no strength beyond an initial phase. By having recourse to complicated equipment that typically targets very few muscles, regular users will eventually be pear-shaping and growing weaker over time, with skills that do not transfer outside of the very machine that they trained on. The equipment may have some use in a hospital or a rehabilitation program, but that’s about it. On the other hand, the simpler barbell (a metal bar with two weights on both ends) is the only standard piece of equipment that gets you to recruit your entire body for exercises—and it is the simplest and cheapest to ge
t. All you need to learn are the safety skills to move off the floor at your maximum while avoiding injury. Lindy again: weight lifters have known the phenomenology for at least two and a half millennia.

  All you need are shoes to run outside when you can (and perhaps some pants that don’t make you look ridiculous), and a barbell with weights. As I am writing these lines I am checking the brochure of a fancy hotel where I will be spending the next two days. The brochure was put together by some MBA: it is glossy, shows all the machines and the jars of the color-rich juices to “improve” your health. They even have a swimming pool; but no barbell.

  And if gyms should not look like gyms, exercise should not look like exercise. Most gains in physical strength come from working the tails of the distribution, close to your limit.

  NEXT

  This chapter managed to mix weight lifting and fundamental research under the single argument that, while the presence of skin in the game does away with the cosmetic, its absence causes multiplicative nonsense. Next, let us consider the divergence of interest between you and yourself when you become rich.

  *1 Non teneas aurum totum quod splendet ut aurum/nec pulchrum pomum quodlibet esse bonum.

  *2 The same argument applies to biographies of scientists and mathematicians written by science journalists—or professional biographers. They will find some narrative and, worse, put scientists on pedestals.

  The salesman is the boss—How to drink poison—Advertising and manipulation—The unbearable silence of large mansions on Sunday evening

  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. And these constructed preferences are of course the preferences of those who want to sell them something. This is a skin-in-the-game problem, as the choices of the rich are dictated by others who have something to gain, and no side effects, from the sale. And given that they are rich, and their exploiters not often so, nobody would shout victim.

  I once had dinner in a Michelin-starred restaurant with a fellow who insisted on eating there instead of my selection of a casual Greek taverna with a friendly owner-operator whose second cousin was the manager and third cousin once removed was the friendly receptionist. The other customers seemed, as we say in Mediterranean languages, to have a cork plugged in their behind obstructing proper ventilation, causing the vapors to build on the inside of the gastrointestinal walls, leading to the irritable type of decorum you only notice in the educated semi-upper classes. I noted that, in addition to the plugged corks, all the men wore ties.

  Dinner consisted of a succession of complicated small things, with microscopic ingredients and contrasting tastes that forced you to concentrate as if you were taking some entrance exam. You were not eating, rather visiting some type of museum with an affected English major lecturing you on some artistic dimension you would have never considered on your own. There was so little that was familiar and so little that fit my taste buds: once something on the occasion tasted like something real, there was no chance to have more as we moved on to the next dish. Trudging through the dishes and listening to some bull***t by the sommelier about the paired wine, I was afraid of losing concentration. It costs a lot of energy to fake that you’re not bored. In fact, I discovered an optimization in the wrong place: the only thing I cared about, the bread, was not warm. It appears that this is not a Michelin requirement for three stars.

  VENENUM IN AURO BIBITUR

  I left the place starving. Now, if I had a choice, I would have had some time-tested recipe (say a pizza with very fresh ingredients, or a juicy hamburger) in a lively place—for a twentieth of the price. But because the dinner partner could afford the expensive restaurant, we ended up the victims of some complicated experiments by a chef judged by some Michelin bureaucrat. It would fail the Lindy effect: food does better through minute variations from Sicilian grandmother to Sicilian grandmother. It hit me that the rich were natural targets; as the eponymous Thyestes shouts in Seneca’s tragedy, thieves do not enter impecunious homes, and one is more likely to be drinking poison in a golden cup than an ordinary one. Poison is drunk in golden cups (Venenum in auro bibitur).

  It is easy to scam people by getting them into complications—the poor are spared that type of scamming. This is the same complication we saw in Chapter 9 that makes academics sell the most possibly complicated solution when a simple one can do. Further, the rich start using “experts” and “consultants.” An entire industry meant to swindle you will swindle you: financial consultants, diet advisors, exercise experts, lifestyle engineers, sleeping councilors, breathing specialists, etc.

  Hamburgers, to many of us, are vastly tastier than filet mignon because of the higher fat content, but people have been convinced that the latter is better because it is more expensive to produce.

  My idea of the good life is to not attend a gala dinner, one of those situations where you find yourself stuck seated for two hours between the wife of a Kansas City real estate developer (who just visited Nepal) and a Washington lobbyist (who just returned from a vacation in Bali).

  LARGE FUNERAL HOMES

  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. But when they have big bucks they end up pressured to move into outsized, impersonal, and silent mansions, far away from neighbors. On late afternoons, the silence of these large galleries has a funereal feel to it, but without the soothing music. This is something historically rare: in the past, large mansions were teeming with servants, head-servants, butlers, cooks, assistants, maids, private tutors, impoverished cousins, horse grooms, even personal musicians. And nobody today will come to console you for having a mansion—few will realize that it is quite sad to be there on Sunday evening.

  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.

  Prosperous people of the type who don’t look rich are certainly aware of the point—they live in comfortable quarters and instinctively know that a move will be a mental burden. Many still live in their original houses.

  Very few people understand their own choices, and end up being manipulated by those who want to sell them something. In that sense, impoverishment might even be desirable. Looking at Saudi Arabia, which should progressively revert to the pre-oil level of poverty, I wonder if taking away some things from them—including the swarm of fawning foreigners coming to skin them—will make them better off.

  To put it another way: if wealth is giving you fewer options instead of more (and more varied) options, you’re doing it wrong.

  CONVERSATION

  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, the classical art of conversation is to avoid any imbalance, as in Baldassare Castiglione’s Book of the Courtier: people need to be equal, at least for the purpose of the conversation, otherwise it fails. It has to be hierarchy-free and equal in contribution. You’d rather have dinner with your friends than with your professor, unless of course your professor understands “the art” of conversation.

  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. Of course there will be tension with the outside, but that’s another discussion. This idea of competition being lifted within a group or a tribe w
as, once again, present in the notion of a group as studied by Elinor Ostrom.

  NONLINEARITY OF PROGRESS

  Now let us generalize to progress in general. Do you want society to get wealthy, or is there something else you prefer—avoidance of poverty? Are your choices yours or those of salespeople?

  Let’s return to the restaurant experience and discuss constructed preferences as compared to natural ones. If I had a choice between paying $200 for a pizza or $6.95 for the French complicated experience, I would readily pay $200 for the pizza, plus $9.95 for a bottle of Malbec wine. Actually I would pay to not have the Michelin experience.

  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.

  Now, many societies have been getting wealthier and wealthier, many beyond the positive part of the inverted U curve, not counting the effect of the increased comfort on their spoiled children. And I am certain that if pizza were priced at $200, the people with corks plugged in their behinds would be lining up for it. But it is too easy to produce, so they opt for the costly, and pizza with fresh natural ingredients will be always cheaper than the complicated crap.