Chapter 21 Skin in the game: Antifragility and Optionality at the Expense of Others

This chapter will look at what we are getting ourselves into when someone gets the upside, and a different person gets the downside.

Heroism is the exact inverse of the agency problem: someone elects to bear the disadvantage (risks his own life, or harm to himself, or, in milder forms, accepts to deprive himself of some benefits) for the sake of others. What we have currently is the opposite: power seems to go to those, like bankers, corporate executives (non-entrepreneurs), and politicians, who steal a free option from society.

 In traditional societies, a person is only as respectable and as worthy as the downside he (or, more, a lot more, than expected, she) is willing to face for the sake of others. The most courageous, or valorous, occupy the highest rank in their society: knights, generals, commanders. Even mafia dons accept that such rank in the hierarchy makes them the most exposed to be whacked by competitors and the most penalized by the authorities.

For the Stoics, prudence is connatural to courage—the courage to fight your own impulses.

Heroism has evolved through civilization from the martial arena to that of ideas.

A new form of courage was born, that of the Socratic Plato, which is the very definition of the modern man: the courage to stand up for an idea, and enjoy death in a state of thrill, simply because the privilege of dying for truth, or standing up for one’s values, had become the highest form of honor.

You can imagine how distraught I feel when I hear about the glorified heroism-free “middle-class values,” which, thanks to globalization and the Internet, have spread to any place easily reached by British Air, enshrining the usual opiates of the deified classes: “hard work” for a bank or a tobacco company, diligent newspaper reading, obedience to most, but not all, traffic laws, captivity in some corporate structure, dependence on the opinion of a boss (with one’s job records filed in the personnel department), good legal compliance, reliance on stock market investments, tropical vacations, and suburban life (under some mortgage) with a nice-looking dog and Saturday night wine tasting.

Hammurabi’s code—now about 3,800 years old—identifies the need to reestablish a symmetry of fragility, spelled out as follows: If a builder builds a house and the house collapses and causes the death of the owner of the house—the builder shall be put to death. If it causes the death of the son of the owner of the house, a son of that builder shall be put to death. If it causes the death of a slave of the owner of the house—he shall give to the owner of the house a slave of equal value.

Now, clearly, the object here is not to punish retrospectively, but to save lives by providing upfront disincentive in case of harm to others during the fulfillment of one’s profession.

Heuristics to solve the agency problem. First, never get on a plane if the pilot is not on board. Second, make sure there is also a copilot. The first heuristic addresses the asymmetry in rewards and punishment or transfer of fragility between individuals. The second heuristic is that we need to build redundancy, a margin of safety, avoiding optimization, mitigating (even removing) asymmetries in our sensitivity to risk.

In the old days, privilege came with obligations—except for the small class of intellectuals who served a patron or, in some cases, the state. You want to be a feudal lord—you will be the first to die. You want war? First in battle. Let us not forget something embedded in the U.S. Constitution: the president is commander in chief. Caesar, Alexander, and Hannibal were on the battlefield—the last, according to Livy, was first-in, last-out of combat zones. George Washington, too, went to battle, unlike Ronald Reagan and George W. Bush, who played video games while threatening the lives of others. Even Napoleon was personally exposed to risks; his showing up during a battle was the equivalent of adding twenty-five thousand troops. Churchill showed an impressive amount of physical courage. They were in it; they believed in it. Status implied you took physical risks.

Talk by academics, consultants, and journalists, when it comes to predictions, can be just talk, devoid of embodiment and stripped of true evidence. As in anything with words, it is not the victory of the most correct, but that of the most charming—or the one who can produce the most academic-sounding material.

He promoted the “earth is flat” idea of globalization without realizing that globalization brings fragilities, causes more extreme events as a side effect, and requires a lot of redundancies to operate properly. And the very same error holds with the Iraq invasion: in such a complex system, the predictability of the consequences is very low, so invading was epistemologically irresponsible.

The past is fluid, marred with selection biases and constantly revised memories. It is a central property of suckers that they will never know they were the suckers because that’s how our minds work.

Comments: our memory is also fluid; it changes over time; details change and evolve and gradually only a tint of residue survives; so are dreams because dreams are simply the byproducts of our brain processing the information collected during daylight activities.  The past/history is like the collective memory of groups; hence, it is also subject to the laws of changes over time.

Never ask anyone for their opinion, forecast, or recommendation. Just ask them what they have—or don’t have—in their portfolio.

Comments: New professors/teachers, never ask anyone for their opinions on the right degree of rigor, difficulty, workload of their course assignments. Just ask them whether they can share their courseware, especially the homework, assignment, quizzes, and exams because those assessment methods will affect students’ grades and therefore their scores on the instructor’s performance.  The university administrators use students’ overall satisfaction of their classroom experiences (virtual or real) as a yardstick of instructors’ teaching quality.

Suckers try to win arguments, nonsuckers try to win. it is rather a good thing to lose arguments. More generally, for Mother Nature, opinions and predictions don’t count; surviving is what matters.

Comment: To friends and family, being right (or winning arguments) is not as important as being nice. In practical matters, surviving and thriving matters more than winning arguments.

We saw that bureaucrats (whether in government or large corporations) live in a system of rewards based on narratives, “tawk,” and the opinion of others, with job evaluation and peer reviews—in other words, what we call marketing. Aristotelian, that is. Yet the biological world evolves by survival, not opinions and “I predicted” and “I told you so.” Evolution dislikes the confirmation fallacy, endemic in society.

Comment: This solves the problem that has been puzzled and angered me since becoming a professional. As someone who is not good at “tawk” but in a profession that requires good “tawk”,  I have fallen badly several times; a better career path is to self employ, never an employee.

The Romans removed the soldiers’ incentive to be a coward and hurt others thanks to a process called decimation. If a legion loses a battle and there is suspicion of cowardice, 10 percent of the soldiers and commanders are put to death, usually by random lottery. Playing on one’s inner agency problem can go beyond symmetry: give soldiers no options and see how antifragile they can get. The flip side of this is  “Never put your enemy’s back to the wall.”

Comments: There are two equivalent Chinese idioms:”破釜沉舟“，”背水一战“。  Both come from history.  In a war, the general orders “camp cooking wares destroyed, and boats burned” so that soldiers will have no other options but fight for their lives.  The second idiom has a similar meaning. Because boats are burned,  with the raging river behind their back, soldiers have to fight for their life; otherwise, death will be their fate.

OPTIONS, ANTIFRAGILITY, AND SOCIAL FAIRNESS

A blatant manifestation of the agency problem is the following. There is a difference between a manager running a company that is not his own and an owner-operated business in which the manager does not need to report numbers to anyone but himself, and for which he has a downside. Corporate managers have incentives without disincentives—something the general public doesn’t quite get, as they have the illusion that managers are properly “incentivized.” Somehow these managers have been given free options by innocent savers and investors. I am concerned here with managers of businesses that are not owner-operated.

Comments: Well said. To laymen, corporations are conceptualized. This makes the principle-agent issues obscure. However, every business doers, no matter how small, are acutely aware of this issue, but a one-unit only mini-landlord, if he entrusted his business/property to someone else to manage, that manager will not put as much effort and care into the business/property as himself.

The asymmetry is visibly present: volatility benefits managers since they only get one side of the payoffs. The main point (alas, missed by almost everyone) is that they stand to gain from volatility— the more variations, the more value to this asymmetry. Hence they are antifragile.

Some people suggest enforcing a “clawback provision” as a remedy, which consists of making people repay past bonuses in cases of subsequent failure. It would be done as follows: managers cannot cash their bonuses immediately, they can only do so three or five years later if there are no losses. But this does not solve the problem: the managers still have a net upside, and no net downside. At no point is their own net worth endangered. So the system still contains a high degree of optionality and transfer of fragility. The same applies to the fund manager involved in managing a pension fund—he, too, has no downside.

Comment: clawback is not a new practice. It is in practice in many less-developed thus less modernized societies. I once hired a post-doc, whom I pay than a full-time professor’s salary in mainland China. After one or two meetings, he was nowhere to be seen and lied about his whereabouts and the reasons.  late,  he confessed he actually lived in Shenzhen, worked on his other papers, and took care of his pregnant wife.  He actually felt bad and agreed to terminate his contract early and pay back a portion of his salary voluntarily.  I was taken aback first at the idea of clawback of salaries. Upon checking the university rules and regulations, actually, it is written there in black and white.  Although the clawback money will go to the university’s coffer, it was done.  Later when I resigned before my contract ended, only two or months earlier, I had to forgo the contract-end gratuity pay, equivalent to  15% of the past three-year salary—-worth more than 60% of the annual salary of my next post in the U.S.  This is also a form of clawback.   

THE ANTIFRAGILITY AND ETHICS OF (LARGE) CORPORATIONS

A rule then hit me: with the exception of, say, drug dealers, small companies and artisans tend to sell us healthy products, ones that seem naturally and spontaneously needed; larger ones—including pharmaceutical giants—are likely to be in the business of producing wholesale iatrogenics, taking our money, and then, to add insult to injury, hijacking the state thanks to their army of lobbyists. Further, anything that requires marketing appears to carry such side effects. You certainly need an advertising apparatus to convince people that Coke brings them “happiness”—and it works.There are, of course, exceptions: corporations with the soul of artisans, some with even the soul of artists. Rohan Silva once remarked that Steve Jobs wanted the inside of the Apple products to look aesthetically appealing, although they are designed to remain unseen by the customer. This is something only a true artisan would do—carpenters with personal pride feel fake when treating the inside of cabinets differently from the outside. Again, this is a form of redundancy, one with an aesthetic and ethical payoff.

Comments: This is a keen observation. However, Caleb did not go deep to dig into why this is so.  Perhaps, with specialization and division of labor, no single person watches the design of products carefully enough in a big company. However, entrepreneurs or founders of companies do care about the details of their products as if products are their babies. Caleb forget, the exception, Steve Jobs, is not an expectation so Jobs started his company off at his dad’s garaged. Jobs is an entrepreneur, a modern-day artisan.

However, being an artisan, or an entrepreneur does not automatically mean that his/her products are designed and made with care. It is only a necessary condition not sufficient. I once hired a handyman to install Luxury Vinyle plank floor in my small bathroom.   The guy was not well equipped. When asked how he will handle the dirt etc, he replied he will simply shove all dust, stuff we do not want to see under the plank.  Immediately, I regretted hiring him. Not unexpected,  after he collected my check and left, I found he left the toilet seat uncalked, his utility knife in the bathroom. He didn’t care about his work. I will not rehire him or recommend him to friends of course.

As the saying goes, it is hardest to be a great man to one’s chambermaid. And marketing beyond conveying information is insecurity.

Comments： The saying says a lot. It is because the chambermaid knows a lot about a man.  Many celebrities, great men/women are simply common fathers/mothers, uncles/aunts to their next generations, not very different from others. Huinyin Lin, an archest, who died in the 60s, is still the popular topic of the media in the region that is influenced by Chinese culture–including Taiwan, Hong Kong, and Singapore. To her daughter/son, she is simply a mother who was often ill. People who live near the Vatican are less religious than people in other regions precisely they know much more about the people who dedicate their life to religion, the agency issue is less an issue for them.

We accept that people who boast are boastful and turn people off. How about companies? Why aren’t we turned off by companies that advertise how great they are? We have three layers of violations: First layer, the mild violation: companies are shamelessly self-promotional, like the man on the British Air flight, and it only harms them. The second layer, the more serious violation: companies trying to represent themselves in the most favorable light possible, hiding the defects of their products— still harmless, as we tend to expect it and rely on the opinion of users. The third layer, the even more serious violation: companies trying to misrepresent the product they sell by playing with our cognitive biases, our unconscious associations, and that’s sneaky. The latter is done by, say, showing a poetic picture of a sunset with a cowboy smoking and forcing an association between great romantic moments and some given product that, logically, has no possible connection to it. You seek a romantic moment and what you get is cancer.

Comments: the effect of the third layer can be called “what was I thinking syndrome”. When you purchased something at a shop, after you got home, you put it in a closet, never see it again because the thing is ill-fitted, or you cannot find its use, then you say to yourself, “what was I thinking buying”—-buyer’s remorse. This means that something beyond your conscious worked when you purchase the stuff. The third lay is very powerful, yet sneaky.

Chapter 24 Fitting Ethics to a Profession

How the slaves can snatch control—Squeezing the sissies—The tantalized class, permanently tantalized.

Back to the sucker problem in believing that wealth makes people more independent. We need no more evidence for it than what is taking place now: recall that we have never been richer in the history of mankind. And we have never been more in debt (for the ancients, someone in debt was not free, he was in bondage). So much for “economic growth.”

At the local level, it looks like we get socialized in a certain milieu, hence exposed to a treadmill. You do better, move to Greenwich, Connecticut, then become a pauper next to a twenty-million dollar mansion and million-dollar birthday parties. And you become more and more dependent on your job, particularly as your neighbors get big tax-sponsored Wall Street bonuses. This class of persons is like Tantalus, who was subjected to eternal punishment: he stood in a pool of water underneath a fruit tree and whenever he tried to grab the fruit it moved away and whenever he tried to drink, the water receded.

Comments： The ancient Greek has figured out human nature–each god/goddess represents a part of us.

THE PROFESSIONALS AND THE COLLECTIVE

We have known since Adam Smith that the collective does not require the benevolence of individuals, as self-interest can be the driver of growth. But all this does not make people less unreliable in their personal opinions about the collective. For they are involving the skin of others, so to speak.

An antique city-state, or a modern municipality, shame is the penalty for the violation of ethics— making things more symmetric. Banishment and exile, or, worse, ostracism were severe penalties— people did not move around voluntarily and considered up-rooting a horrible calamity. In larger organisms like the mega holy nation-state, with a smaller role for face-to-face encounters, and social roots, shame ceases to fulfill its duty of disciplinarian.

Comments: shame plays a smaller role in the municipality now in modern China as municipal officials are appointed by the top on a rotation basis.  Only at the village/town (with a population of less than 10000) the traditional way of anti-opportunism of government officials still works if they behave unethically.

And aside from shame, there is friendship, socialization in a certain milieu, being part of a group of people that have diverging interests from the collective. Cleon, the hero of the Peloponnesian War, advocated the public renouncement of friends upon taking up public affairs—he paid for it with some revilement by historians. A simple solution, but quite drastic: anyone who goes into public service should not be allowed to subsequently earn more from any commercial activity than the income of the highest-paid civil servant. It is like a voluntary cap (it would prevent people from using the public office as a credential building temporary accommodation, then going to Wall Street to earn several million dollars). This would get priestly people into office.

THE ETHICAL AND THE LEGAL

Former regulators and public officials who were employed by the citizens to represent their best interests can use the expertise and contacts acquired on the job to benefit from glitches in the system upon joining private employment —law firms, etc.

Think about it a bit further: the more complex the regulation, the more bureaucratic the network, the more a regulator who knows the loops and glitches would benefit from it later, as his regulator edge would be a convex function of his differential knowledge. This is a franchise, an asymmetry one has at the expense of others. (Note that this franchise is spread across the economy; the car company Toyota hired former U.S. regulators and used their “expertise” to handle investigations of its car defects.)

Second, the difference between the latter and the spirit of regulation is harder to detect in a complex system. The point is technical, but complex environments with nonlinearities are easier to game than linear ones with a small number of variables. The same applies to the gap between the legal and the ethical.

Third, in African countries, government officials get explicit bribes. In the United States they have the implicit, never mentioned, promise to go work for a bank at a later date with a sinecure offering, say $5 million a year, if they are seen favorably by the industry. And the “regulations” of such activities are easily skirted.

BIG DATA AND THE RESEARCHER’S OPTION

Modernity provides too many variables (but too little data per variable), and the spurious relationships grow much, much faster than real information, as noise is convex and information is concave.

The tragedy is that it is very hard to get funding to replicate—and reject—existing studies. And even if there were money for it, it would be hard to find takers: trying to replicate studies will not make anyone a hero. So we are crippled with a distrust of empirical results, except for those that are negative. To return to my romantic idea of the amateur and tea-drinking English clergyman: the professional researcher competes to “find” relationships. Science must not be a competition; it must not have rankings—we can see how such a system will end up blowing up. Knowledge must not have an agency problem.

THE TYRANNY OF THE COLLECTIVE

Mistakes made collectively, not individually, are the hallmark of organized knowledge—and the best argument against it. The argument “because everyone is doing it” or “that’s how others do it” abounds. It is not trivial: people who on their own would not do something because they find it silly now engage in the same thing but in groups. And this is where academia in its institutional structure tends to violate science.

 

Chapter 25 Conclusion  

The chapter summarizes the entire book–Antifragile, thus omitted.  Instead, reviewing the keywords, definitions that appear in the books repeatedly is more fruitful.

“If we take a step back and more generally consider the issue of partitioned versus connected systems, partitioned systems are more stable, and connected systems are both more vulnerable and have more opportunities for collective action. Vulnerability (fragility) is connectivity without responsiveness. Responsiveness enables connectivity to lead to opportunity. If collective action can be employed to address threats or to take advantage of opportunities, then the vulnerability can be mitigated and outweighed by the benefits. This is the basic relationship between the idea of sensitivity as we described it and your concept of antifragility.”

Comments: Globalization makes the world more vulnerable–or fragile; pandemics will be more frequent; anything that occurred in one corner of the world will have repercussions in another part of the world or even the whole world. and, it is not possible to predict due to the complexity. All we can do is to build in redundancy and backups.