Skin in the Game—Afterthought

I greatly enjoyed reading ‘Fooled by Randomness’, ‘Antifragile’, and ‘The Black Swan’, so I was looking forward to Taleb’s latest book—skin in the game. I read it first time in an e-format a few years ago. Running into the book again in a local library, I decided to read it for a second time.

I have to say I am greatly disappointed. The book consists of several short essays, and for the most part he bluntly criticizes those who are well-known academicians, journalists such as Steven Pinker, Richard Thaler, and Richard Hawkins because they have no skin in the same. As a result,  their conclusions are often static, hold only in a narrow scope,  and  they often ignore asymmetry of risk, locked in the mediocristan but ignore extremistan (tail risks). In many cases, grandma’s views are more valid and relevant than “intellectual idiots” because Grandma’s views are passed down from grandma’s grandma and have survived thousands of years’ stress tests.

The languages in the book are sharp and blunt, not “polite” and “courteous”.  I like his style, but overall this book is the lessor one of his works. The reason is that throughout the book he only negates few positivates—how to control tail risk, but few suggestions how to deal with tail risks.

In summary, “skin in the game” is a solution to “agency problems”–an important topic in Microeconomics.

Nevertheless, I would like to recap some of rules he values.

In dealing with interpersonal relationships:

1. Golden rule (symmetry): Treat others the way you would like them to treat you.
2. Silver rule(negative golden rule): Do not do to others what you would not like them to do to you. This rule prevents busybodies from attempting to run your life.
3.  Do not listen to what he says, look what he does. “Do not tell me what you think, just tell me what’s in your portfolio.
4. Start by being nice to every person you meet. But if someone tries to exercise power over you, exercise power over him.
5. Avoid taking advice from someone who gives advice for a living unless there is a penalty for their advice.
6. If you do not take risks for your opinion, you are nothing.
7. Beware of the person who gives advice, telling you that a certain action on your part is “good for you” while it is also good for him, while the harm to you doesn’t directly affect him.
8. The ethical is always more robust than the legal. Over time, it is the legal that should converge to the ethical, never the reverse. Laws come and go, ethics stay.

On Bureaucracy

• Bureaucracy is a construction by a person who is conveniently separated from the consequences of his or her actions.
• Decentralization is based on the simple notion that it is easier to macrobullshit than microbullshit.
• Decentralization reduces large structural asymmetries.
• You do not want to win an argument. You want to win.
• We are much better at doing than understanding.
• You might not know in your mind where you are going, but you know it by doing.
• What is rational is what allows the collective-entities meant to live for a long time–to survive.

System learns by removing

• The same mechanism of transferring risk also impedes learning.
• You will never fully convince someone that he is wrong; only reality can.
• The curse of modernity is that we are increasingly populated by a class of people who are better at explaining than understanding.
• There is no evolution without skin in the game.
• Systems learn by removing parts, via negativa. (fit survives).
• Skin in the game keeps human hubris in check.
• We may not know beforehand if an action is foolish, but reality knows.

Modernism: those who talk should do and only those who do should talk.

Simplicity

• Things designed by people without skin in the game tend to grow in complication before their final collapes.
• Non-skin-in-the-game people don’t get simplicity.

Risk sharing under uncertainty

• No person in a transaction should have certainty about the outcome while the other one has uncertainty.
• Sympathy for all would be tyranny for thee, my good neighbor–Nietzsche.
• What has been lost for the benefit of all must be made up by the contribution of all.
• A doctor is pushed by the system to transfer risk from himself to you, and from the present into the future, or from the immediate future into a more distant future.
• Avoid treatment when he or she is mildly ill, but use medicine for the “tail events,” that is, for rarely encountered severe conditions.

The dominance of the stubborn minority–the most intolerant wins.

• Genes follow majority; Languages minority rule. Languages travel; genes less so.
• The average behavior of the market participant will not allow us to understand the general behavior of the market.
• The psychological experiments on individuals showing “biases” do not allow us to automatically understand aggregates or collective behavior, nor do they enlighten us about the behavior of groups.
• Under the right market structure, a collection of idiots produces a well-functioning market.
• Understanding the genetic makeup of a unit will never allow us to understand the behavior of the unit itself.
• Understanding how the subparts of the brain (say, neurons) work will never allow us to understand how the brain works.
• It may be that some idiosyncratic behavior on the part of the individual may be necessary for efficient functioning at the collective level.
• Individuals don’t need to know where they are going; markets do.

Theory of the firm

• An employee is-by design-more valuable inside a firm than outside of it; that is, more valuable to the employer than the marketplace.
• Loss aversion: what matters isn’t what a person has or doesn’t have; it is what he or she is afraid of losing.
• Do not rock Bureaucristan: people whose survival depends on qualitative “job assessments: by someone of higher rank in an organization cannot be trusted for critical decisions.

The skin of others in your game

• To make ethical choices you cannot have dilemmas between the particular (friends, family) and the general.
• Explicit communal punishment can be used where other methods of justice have failed, provided they are not based on an emotional reaction, but on a well-outlined method of justice defined prior to the events.

The static and the dynamic

• The way to make society more equal is by forcing (through skin in the game) the rich to be subjected to the risk of exiting from the 1 percent.
• Cobbler envies cobbler, carpenter envies carpenter.

An Expert Called Lindy

• That which is “Lindy” is what ages in reverse, i.e., its life expectancy lengthens with time, conditional on survival.
• Use laws that are old but food that is fresh.
• You can define a free person precisely as someone whose fate is not centrally or directly dependent on peer assessment.
• Being reviewed or assessed by others matters if and only if one is subjected to the judgement of future-not just present-others.
• Contemporary peers are valuable collaborators, not final judges.
• Academia has tendency, when unchecked (from lack of skin in the game), to evolve into a ritualistic self-referential publishing game.
• Anything that smacks of competition destroys knowledge.
• One should give more weight to research that, while being rigorous, contradicts other peers, particularly if it entails costs and reputational harm for its author.
• Someone with a high public presence who is controversial and takes risks for his opinion is less likely to be a bullshit vendor.

So called human behavior findings are already embedded in old sayings/proverbs.

• Cognitive dissonance: sour grapes in Aesop.
• Loss aversion: men feel the good less intensely than the bad.
• Negative advice (via negativa): the good is not as good as the absence of bad.
• Skin in the game: You cannot chew with somebody else’s teeth.
• Antifragility: When our souls are mollified, a bee can sting.
• Time discounting: a bird in the hand is better than ten on the tree.
• Madness of crowds: Madness is rare in individuals, but in groups, parties, nations, it is the rule.
• Less is more: Truth is lost with too much altercation
• Overconfidence: I lost money because of my excessive confidence

Deep into agency problem

• 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.
• Hire the successful trader, conditional on a solid track record, whose details you can understand the least.
• What one may need to know in the real world does not necessarily match what one can perceive through intellect.
• What can be phrased and expressed in a clear narrative that convinces suckers will be a sucker trap.
• True intellect should not appear to be intellectual.
• Just as the slick fellow in a Ferrari looks richer than the rumpled centi-millionaire, scientism looks more scientific than real science.
• People who are bred, selected, and compensated to find complicated solutions do not have an incentive to implement simplified ones. This is particularly acute in the meta-problem, when the solution is about solving this very problem.

Only the rich are poisoned.

•  Thieves do not enter impecunious homes, and one is more likely to be drinking poison in a golden cup than an ordinary one.
• If wealth is giving you fewer options instead of more (and more varied) options, you’re doing it wrong.
• 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.
• People need to be equal, at least for the purpose of the conversation, otherwise it fails.
• 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.
• So long as society is getting richer, someone will try to sell you something until the point of degradation of your well-being, and a bit beyond that.

Deeds before words: a living enemy is worth ten dead ones.

The facts are true, the news is fake: I never said that I said-No news is news-information flows in both directions.

The merchandising is virtue:

• Virtue is what you do when nobody is looking, have the guts to be unpopular, call someone lonely on Saturdays.
• It is immoral to be in opposition to the market system and not live in a hut or cave isolated from it.
• It is much more immortal to claim virtue without fully living with its direct consequences.
• If a car salesman tries to sell you a Detroit car while driving a Honda, he is signaling that the wares he is touting may have a problem.
• From Mathew 6:1-4. Be careful not to practice your righteousness in front of others to be seen by them. If you do, you will have no reward from your Father in heaven. So when you give to the needy, do not announce it with trumpets, as the hypocrites do in the synagogues and on the streets, to be honored by others. Truly I tell you, they have received their reward in full. But when you give to the needy, do not let your left hand know what your right hand is doing, so that your giving may be in secret. Then your father, who sees what is done in secret, will reward you.
• True virtue likes mostly in also being nice to those who are neglected by others, the less obvious cases, those people the grand charity business tends to miss.
• Sticking up for truth when it is unpopular is far more of a virtue, because it costs you something-your reputation. 
• virtue: never engage in virtue signaling; never engage in rent-seeking; you must start a business. Put yourself on the line, start a business.
• We need people to take risks. The entire idea is to move the descendants of homo sapiens away from the macro, away from abstract universal aims, away from the kind of social engineering that rings tail risks to society.

Peace, Neither Ink Nor Blood

•  If the “law of the jungle” means anything, it means collaboration for the most part, with a few perceptional distortions caused by our otherwise well-functioning risk-management intuitions. Even predators end up in some type of arrangement with their prey.
• History is largely peace punctuated by wars, rather than wars punctuated by peace. The problem is that we humans are prone to the availability heuristic, by which the salient is mistaken for the statistical, and the conspicuous and emotional effect of an event makes up think it is occurring more regularly than in reality. This helps us to be prudent and careful in daily life, forcing us to add an extra layer of protection, but it does not help with scholarship.
• Historians and international affairstas who reach us are more motivated by stories of conflict than by organic collaboration on the ground between a broader set of non-institutional players, merchants, barbers, doctors, money changers, plumbers, prostitutes, and others. History is the whole life of an organism, not episodes of lurid wars. Therefore, there is a problem of representativeness, or to what extent the narrated maps to the empirical. Accounts of past wars are fraught with overestimation biases. The lurid rises to the surface and keeps rising from account to account.
• Reading a history book without putting its events in perspective, offers a similar bias to reading an account of life in New York seen from an emergency room at Bellevue Hospital.

When we talk about religion.

• Belief requires an entry fee. The gods do not like cheap signaling.
• And almost all things are by the law purged with blood; and without shedding of blood is no remission.

Risk and rationality

•  There is no such thing as the “rationality” of a belief, there is rationality of action.
• The rationality of an action can be judged only in terms of evolutionary considerations.
• How much you truly believe in something can be manifested only through what you are willing to risk for it.
• When you consider belief in evolutionary terms, do not look at how they compete with each other, but consider the survival of the populations that have them.
• Rationality does not depend on explicit verbalistic explanatory factors; it is only what aids survival, what avoids ruin.

The logic of risk taking

• Unless you are perfectly narcissistic and psychopathic-even then-your worst-case scenario is never limited to the loss of only your life.
• Courage is when you sacrifice your own well-being for the sake of the survival of a layer higher than yours.
• ” The difference between successful people and really successful people is that really successful people say no to almost everything”–Warren Buffet.
• Volatile things are not necessarily risky, and the reverse is also true.
• One may be risk loving yet completely averse to ruin.
• In a strategy that entails ruin, benefits never offset risks of ruin.
• Rationality is avoidance of systemic ruin.
• No muscles without strength, friendship without trust, opinion without consequence, change without aesthetics, age without values, life without effort, water without thirst, food without nourishment, love without sacrifice, power without fairness, fact without rigor, statistics without logic, mathematics without proof, teaching without experience, politeness without warmth, values without embodiment, degrees without erudition, militarism without fortitude, progress without civilization, friendship without investment, virtue without risk, probability without ergodicity, wealth without exposure, complication without depth, fluency without content, decision without asymmetry, science without skepticism, religion without tolerance.