Skin in the Game Read online

  Copyright © 2018 by Nassim Nicholas Taleb

  All rights reserved.

  Published in the United States by Random House, an imprint and division of Penguin Random House LLC, New York.

  RANDOM HOUSE and the HOUSE colophon are registered trademarks of Penguin Random House LLC.

  Portions of this work were originally published in different form on Medium.

  LIBRARY OF CONGRESS CATALOGING-IN-PUBLICATION DATA

  NAMES: Taleb, Nassim Nicholas. TITLE: Skin in the game : hidden asymmetries in daily life / Nassim Nicholas Taleb. DESCRIPTION: First edition. | New York : Random House, [2018] | Includes bibliographical references and index IDENTIFIERS: LCCN 2017047111 | ISBN 9780425284629 | ISBN 9780425284636 (ebook) SUBJECTS: LCSH: Risk—Sociological aspects. | Risk-taking (Psychology)— Social aspects. | Information asymmetry—Social aspects. | Uncertainty (Information theory)—Social aspects. | Complexity (Philosophy) CLASSIFICATION: LCC HM1101 .T35 2018 | DDC 302/.12—dc23 LC record available at lccn.loc.gov/​2017047111 International edition ISBN 978-0-525-51107-6

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  Contents

  Cover

  Title Page

  Copyright

  Book 1: Introduction

  Prologue, Part 1: Antaeus Whacked

  Prologue, Part 2: A Brief Tour of Symmetry

  Prologue, Part 3: The Ribs of the Incerto

  Appendix: Asymmetries in Life and Things

  Book 2: A First Look at Agency

  Chapter 1: Why Each One Should Eat His Own Turtles: Equality in Uncertainty

  Book 3: That Greatest Asymmetry

  Chapter 2: The Most Intolerant Wins: The Dominance of the Stubborn Minority

  Appendix to Book 3: A Few More Counterintuitive Things About the Collective

  Book 4: Wolves Among Dogs

  Chapter 3: How to Legally Own Another Person

  Chapter 4: The Skin of Others in Your Game

  Book 5: Being Alive Means Taking Certain Risks

  Chapter 5: Life in the Simulation Machine

  Chapter 6: The Intellectual Yet Idiot

  Chapter 7: Inequality and Skin in the Game

  Chapter 8: An Expert Called Lindy

  Book 6: Deeper into Agency

  Chapter 9: Surgeons Should Not Look Like Surgeons

  Chapter 10: Only the Rich Are Poisoned: The Preferences of Others

  Chapter 11: Facta Non Verba (Deeds Before Words)

  Chapter 12: The Facts Are True, the News Is Fake

  Chapter 13: The Merchandising of Virtue

  Chapter 14: Peace, Neither Ink nor Blood

  Book 7: Religion, Belief, and Skin in the Game

  Chapter 15: They Don’t Know What They Are Talking About When They Talk About Religion

  Chapter 16: No Worship Without Skin in the Game

  Chapter 17: Is the Pope Atheist?

  Book 8: Risk and Rationality

  Chapter 18: How to Be Rational About Rationality

  Chapter 19: The Logic of Risk Taking

  Epilogue

  Dedication

  Acknowledgments

  Glossary

  Technical Appendix

  Notes

  Bibliography

  By Nassim Nicholas Taleb

  About the Author

  This book, while standalone, is a continuation of the Incerto collection, which is a combination of a) practical discussions, b) philosophical tales, and c) scientific and analytical commentary on the problems of randomness, and how to live, eat, sleep, argue, fight, befriend, work, have fun, and make decisions under uncertainty. While accessible to a broad group of readers, don’t be fooled: the Incerto is an essay, not a popularization of works done elsewhere in boring form (leaving aside the Incerto’s technical companion).

  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.*

  It is not just that skin in the game is necessary for fairness, commercial efficiency, and risk management: skin in the game is necessary to understand the world.

  First, it is bull***t identification and filtering, that is, the difference between theory and practice, cosmetic and true expertise, and academia (in the bad sense of the word) and the real world. To emit a Yogiberrism, in academia there is no difference between academia and the real world; in the real world, there is.

  Second, it is about the distortions of symmetry and reciprocity in life: If you have the rewards, you must also get some of the risks, not let others pay the price of your mistakes. If you inflict risk on others, and they are harmed, you need to pay some price for it. Just as you should treat others in the way you’d like to be treated, you would like to share the responsibility for events without unfairness and inequity.

  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.

  Third, the book is about how much information one should practically share with others, what a used car salesman should—or shouldn’t—tell you about the vehicle on which you are about to spend a large segment of your savings.

  Fourth, it is about rationality and the test of time. 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.

  Do not mistake skin in the game as defined here and used in this book for just an incentive problem, just having a share of the benefits (as it is commonly understood in finance). No. It is about symmetry, more like having a share of the harm, paying a penalty if something goes wrong. The very same idea ties together notions of incentives, used car buying, ethics, contract theory, learning (real life vs. academia), Kantian imperative, municipal power, risk science, contact between intellectuals and reality, the accountability of bureaucrats, probabilistic social justice, option theory, upright behavior, bull***t vendors, theology…I stop for now.

  THE LESS OBVIOUS ASPECTS OF SKIN IN THE GAME

  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. For I just don’t like reading books that inform me of the obvious. I like to be surprised. So as a skin-in-the-game-style reciprocity, I will not not drive the reader into a dull college-lecture-type predictable journey, but rather into the type of adventure I’d like to have.

  Accordingly, the book is organized in the following manner. It doesn’t take more than about sixty pages for the reader to get the importance, prevalence, and ubiquity of skin in the game (that is, symmetry) in most of its aspects. But never engage in detailed overexplanations of why something important is important: one debases a principle by end
lessly justifying it.

  The nondull route entails focusing on the second step: the surprising implications—those hidden asymmetries that do not immediately come to mind—as well as the less obvious consequences, some of which are quite uncomfortable, and many unexpectedly helpful. Understanding the workings of skin in the game allows us to understand serious puzzles underlying the fine-grained matrix of reality.

  For instance:

  How is it that maximally intolerant minorities run the world and impose their taste on us? How does universalism destroy the very people it means to help? How is it that we have more slaves today than we did during Roman times? Why shouldn’t surgeons look like surgeons? Why did Christian theology keep insisting on a human side for Jesus Christ that is necessarily distinct from the divine? How do historians confuse us by reporting on war, not peace? How is it that cheap signaling (without anything to risk) fails equally in economic and religious environments? How do candidates for political office with obvious character flaws seem more real than bureaucrats with impeccable credentials? Why do we worship Hannibal? How do companies go bust the minute they have professional managers interested in doing good? How is paganism more symmetrical across populations? How should foreign affairs be conducted? Why should you never give money to organized charities unless they operate in a highly distributive manner (what is called Uberized in modern lingo)? Why do genes and languages spread differently? Why does the scale of communities matter (a community of fishermen turns from collaborative to adversarial once one moves the scale, that is the number of people involved, a notch)? Why does behavioral economics have nothing to do with the study of the behavior of individuals—and markets have little to do with the biases of participants? How is rationality survival and survival only? What is the foundational logic of risk bearing?

  But, to this author, skin in the game is mostly about justice, honor, and sacrifice, things that are existential for humans.

  * * *

  —

  Skin in the game, applied as a rule, reduces the effects of the following divergences that grew with civilization: those between action and cheap talk (tawk), consequence and intention, practice and theory, honor and reputation, expertise and charlatanism, concrete and abstract, ethical and legal, genuine and cosmetic, merchant and bureaucrat, entrepreneur and chief executive, strength and display, love and gold-digging, Coventry and Brussels, Omaha and Washington, D.C., human beings and economists, authors and editors, scholarship and academia, democracy and governance, science and scientism, politics and politicians, love and money, the spirit and the letter, Cato the Elder and Barack Obama, quality and advertising, commitment and signaling, and, centrally, collective and individual.

  Let us first connect a few dots of the items in the list above with two vignettes, just to give the flavor of how the idea transcends categories.

  * To figure out why ethics, moral obligations, and skills cannot be easily separable in real life, consider the following. When you tell someone in a position of responsibility, say your bookkeeper, “I trust you,” do you mean that 1) you trust his ethics (he will not divert money to Panama), 2) you trust his accounting precision, or 3) both? The entire point of the book is that in the real world it is hard to disentangle ethics on one hand from knowledge and competence on the other.

  Never run away from Mamma—I keep finding warlords—Bob Rubin and his trade—Systems like car accidents

  Antaeus was a giant, or rather a semi-giant of sorts, the literal son of Mother Earth, Gaea, and Poseidon, the god of the sea. He had a strange occupation, which consisted of forcing passersby in his country, (Greek) Libya, to wrestle; his thing was to pin his victims to the ground and crush them. This macabre hobby was apparently the expression of filial devotion; Antaeus aimed at building a temple to his father, Poseidon, using for raw material the skulls of his victims.

  Antaeus was deemed to be invincible, but there was a trick. He derived his strength from contact with his mother, Earth. Physically separated from contact with Earth, he lost all his powers. Hercules, as part of his twelve labors (in one variation of the tale), had for homework to whack Antaeus. He managed to lift him off the ground and terminated him by crushing him as his feet remained out of contact with his mamma.

  We retain from this first vignette that, just like Antaeus, you cannot separate knowledge from contact with the ground. Actually, you cannot separate anything from contact with the ground. And the contact with the real world is done via skin in the game—having an exposure to the real world, and paying a price for its consequences, good or bad. The abrasions of your skin guide your learning and discovery, a mechanism of organic signaling, what the Greeks called pathemata mathemata (“guide your learning through pain,” something mothers of young children know rather well). I have shown in Antifragile that most things that we believe were “invented” by universities were actually discovered by tinkering and later legitimized by some type of formalization. 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.

  Next, we will apply this to what is miscalled “policy making.”

  LIBYA AFTER ANTAEUS

  Second vignette. As I am writing these lines, a few thousand years later, Libya, the putative land of Antaeus, now has slave markets, as a result of a failed attempt at what is called “regime change” in order to “remove a dictator.” Yes, in 2017, improvised slave markets in parking lots, where captured sub-Saharan Africans are sold to the highest bidders.

  A collection of people classified as interventionistas (to name names of people operating at the time of writing: Bill Kristol, Thomas Friedman, and others*1) who promoted the Iraq invasion of 2003, as well as the removal of the Libyan leader in 2011, are advocating the imposition of additional such regime change on another batch of countries, which includes Syria, because it has a “dictator.”

  These interventionistas and their friends in the U.S. State Department helped create, train, and support Islamist rebels, then “moderates,” but who eventually evolved to become part of al-Qaeda, the same, very same al-Qaeda that blew up the New York City towers during the events of September 11, 2001. They mysteriously failed to remember that al-Qaeda itself was composed of “moderate rebels” created (or reared) by the U.S. to help fight Soviet Russia because, as we will see, these educated people’s reasoning doesn’t entail such recursions.

  So we tried that thing called regime change in Iraq, and failed miserably. We tried that thing again in Libya, and there are now active slave markets in the place. But we satisfied the objective of “removing a dictator.” By the exact same reasoning, a doctor would inject a patient with “moderate” cancer cells to improve his cholesterol numbers, and proudly claim victory after the patient is dead, particularly if the postmortem shows remarkable cholesterol readings. But we know that doctors don’t inflict fatal “cures” upon patients, or don’t do it in such a crude way, and there is a clear reason for that. Doctors usually have some modicum of skin in the game, a vague understanding of complex systems, and more than a couple of millennia of incremental ethics determining their conduct.

  And don’t give up on logic, intellect, and education, because tight but higher order logical reasoning would show that, unless one finds some way to reject all empirical evidence, advocating regime changes implies also advocating slavery or some similar degradation of the country (since these have been typical outcomes). So these interventionistas not only lack practical sense, and never learn from history, but they even fail at pure reasoning, which they drown in elaborate semiabstract buzzword-laden discourse.

  Their three flaws: 1) they think in statics not dynamics, 2) they think in low, not high, dimensions, 3) they think in terms of actions, never interactions. We will see in more dept
h throughout the book this defect of mental reasoning by educated (or, rather, semi-educated) fools. I can flesh out the three defects for now.

  The first flaw is that they are incapable of thinking in second steps and unaware of the need for them—and about every peasant in Mongolia, every waiter in Madrid, and every car-service operator in San Francisco knows that real life happens to have second, third, fourth, nth steps. The second flaw is that they are also incapable of distinguishing between multidimensional problems and their single-dimensional representations—like multidimensional health and its stripped, cholesterol-reading reduction. 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. The third flaw is that they can’t forecast the evolution of those one helps by attacking, or the magnification one gets from feedback.

  LUDIS DE ALIENO CORIO*2

  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. What is crucial here is that the downside doesn’t affect the interventionist. He continues his practice from the comfort of his thermally regulated suburban house with a two-car garage, a dog, and a small play area with pesticide-free grass for his overprotected 2.2 children.