Skin in the Game, by Nassim Taleb

A discussion on having something to lose guiding our society's decision making.

It’s one thing to study war and another to live the warrior’s life.

There was no collector of art like John Pierpont Morgan. His wife Fanny had remarked that her husbad “would buy anything from a pyramid to Mary Magdalene’s tooth”. When he died in 1913, he left an estate worth roughly $80 million, of which$60 million was tied up in his collections. So it was a huge opportunity the one that presented to the art dealer Joseph Duveen when he received an audience from Morgan in his luxurious mansion on Fifth Avenue.

Without a greeting, Morgan pointed to five large vases on his marble floor and told Duveen that three were sixteenth-century Ming masterpieces, and the other two exact copies, carefully and expensively produced over the previous months. He commanded Duveen to study the vases and tell him which were the copies and which were the invaluable originals.

The elegant Duveen, with his tailcoat, spats, top hat, cane and all, paraded around the vases, taking a quick look at them. Then, raised his cane and, with two violent strokes, smashed two vases, which shattered into pieces. He explained that if he were mistaken, he’d of course reimburse Morgan for the loss. Duveen had been correct, and the astonished J. P. Morgan was both relieved and impressed. From then onwards, Morgan went on to use the Duveens in many dealings.

If Duveen would have just said which were fake copies, Morgan would always have suspected that he was a charlatan, that he chose two vases randomly. Only by putting his reputation and his money on the line, Duveen gain Morgan’s respect. Both the dealer and the collector understood the language of Skin in the Game.

If this is the first time yo stumble upon Nassim Taleb, you must know that he is definitely a unique writer, and perhaps is this book, the latest one in the Incerto series, the best gateway to the rest, as it covers and summarises information from the others, leaving going more deeply into any topic as an exercise to the reader. Skin in the Game is, I believe, the culmination of a journey that started in 2001 with the publication of Fooled by Randomness.

What means having skin in the game?

1. A bullshit identification and filtering: In academia there is no difference between academia and the real world; in the real world, there is.

2. Getting some of the risks in order to have the rewards, and not let others pay the price of your mistakes. Don’t tell me what you ‘think’, tell me what’s in your portfolio.

3. Sharing information in a practical way with others, understanding the difference between dealing with somebody multiple times and dealing with multiple people once.

4. Acknowledging the complexity of our world not through models, but through trial and error.

If there is a lesson to be learnt by the United States since World War II ended, that is “Thou shall not intervene”. Starting in Vietnam, the US has stepped in as the police country several times only to find themselves to be part of the problem instead of the solution. Perhaps only recently, we’re starting to realise that the “war on terror” isn’t going anywhere.

However, not even Nobel Peace Prize Obama is willing to pull out troops from Irak, even though the objective set out in 2001— avenging the victims of 9/11— has been accomplished. The lessons from Vietnam haven’t been learnt. The people in command, which Taleb calls interventionistas, fail to learn because they don’t have skin in the game, and thus:

1. They think in statics, not dynamics: They are incapable of thinking in second steps and unaware of the need for them.

2. They think in low, not high, dimensions: 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.

3. They think in terms of actions, never interactions: They can’t forecast the evolution of those one helps by attacking, or the magnification one gets from feedback.

We end up populating what the call ‘the intelligentsia’ with people who are delusional, literally mentally deranged, simply because they never have to pay for the consequences of their actions, repeating modernist slogans stripped of all depth, like “democracy”, while encouraging headcutters.

Skin in the Game

They don’t seem to be that far from the ‘populism’ that they so vigorously criticise. They have been stranded on an island of unaccountability for so long, that they have lost the laymen’s respect.

Farage: “I know that none of you have done a proper job in your lives, or worked in business, or worked in trade, or indeed ever created a job, but listen, just listen”. Schulz: “Mr Farage, just a second. Ladies and gentlemen, I do understand that you’re getting emotional, but you’re acting like UKIP [Farage’s political party] normally act, so please, don’t imitate them. Mr Farage I would say something to you: the fact that you’re claiming nobody’s ever done a decent job in their life, you can’t really say that.” Farage: “You’re quite right, Mr Schulz, UKIP used to protest against the establishment and now the establishment protests against UKIP, so something has happened here.”

They should have been guided by the principle of “first, do no harm”. They instead kept talking about actions that would be designed to be limited in duration and scope. Those who don’t take risks should never be involved in making decisions, especially when we are now skilled enough to kill ourselves as a species. It happens in war time, and it happens in peace time: Other People’s Money is a book on the problem of bankers’ bonuses during the fat cows, and the bailouts during the thin cows.

[Former Secretary of the Treasury] Bob Rubin, […] one of those who sign their names on the banknote you just used to pay for coffee, collected more than \$120 million in compensation from Citibank in the decade preceding the banking crash of 2008. When the bank, literally insolvent, was rescued by the taxpayer, he didn’t write any check— he invoked uncertainty as an excuse. Heads he wins, tails he shouts “Black Swan”.

Skin in the Game

Taleb is dealing on the first part of the book with the political issues in our days. To solve them, Taleb is suggesting the minimum intervention of the government. Does that mean that we should do without firemen, or police, or sewerage? Probably not; these activities aren’t easy to disentangle from a public body, and if the government would stop doing them, the mafia would happily step in. However, there are many aspects in which the government has simply overreached.

The curse of modernity is that we are increasingly populated by a class of people who are better at explaining than understanding.

Skin in the Game

In Thinking in Bets, Annie Duke argues the opposite: resultism is bad, and the thinking process trumps the outcome. Both come from experience in placing bets: Duke as a poker player, and Taleb as a trader. The fact that they reached opposite conclusions is fascinating.

There’s another, more subtle takeaway from the anecdote of Duveen and Morgan, and it has to do with how we perceive and respect the opinion of others. The main assumption in a democratic system is that everyone must have a voice, because we are all rational agents and an agreeable consensus is expected to have many sensible inputs that make it likely to be the best choice possible in any discussion.

Taleb, however, raises the issue that, in complex systems like any modern day society, the whole behaves differently from what someone would expect the sum of its parts would. He is pointing out an emergent property that he calls the minority rule.

It suffices for an intransigent minority with significant skin in the game to reach a minutely small level, say 3 or 4 percent of the total population, for the entire population to have to submit to their preferences.

Skin in the Game

Let’s look at some examples:

1. A kosher (or halal) eater will never eat non kosher (or non halal) food, but a non kosher eater isn’t banned from eating kosher.

2. A disabled person will not use the regular bathroom, but a non disabled person will use the bathroom for disabled people.

3. Someone with a peanut allergy will not eat products that touch peanuts (or gluten), but a person without such allergy can eat items with peanut (or gluten) traces I them.

In all cases, a small percentage of population makes almost all drinks kosher, almost all bathrooms “disable-friendly”, and almost all schools peanut free. The minority rule can also be applied to why some well known chains such as McDonald’s or Starbucks thrive: if I travel to a foreign country, I might risk it with some local food or play safe and take a Happy Meal.

Nobody ever got fired for hiring IBM.

– Unknown

The minority rules also applies, of course, to prohibitions. Outcomes are paradoxically more stable under the minority rule: if we required a widespread consensus, the variance of the results would be higher, and would eventually crash into separate groups. As a consequence, those impositions by the minority rule will be more likely two-valued, as we suggested in Language in Thought and Action: conditional to the rule having been applied, it is far more likely that it came from those who imposed it, not those who compromised.

I am the way and the truth and the life. No one comes to the Father except through me

– John 14:6

Roman pagans were initially tolerant to Christians. But Christians weren’t tolerant of Roman paganism. The “persecution” of the Christians had vastly more to do with the intolerance of the Christians for the pantheon of local gods than the reverse, as described in The Darkening Age.

What remains, however, is the side of the story told by Christians. The Constantinian shift is, by all means, fake news: biographies of saints have dominated the discourse. There are endless accounts of Christians martyrs and saints, but very little is known of pagan heroes. Even the early Christians have been expurgated from the record, in a fashion that led Dan Brown to reveal the world what most subject matter experts already knew: that there are codices being written about Jesus Christ outside the Bible, like the The Nag Hammadi Library.

It’s worth now asking can democracy tolerate enemies? Would you agree to deny the freedom of speech to every political party that has in its charter the banning the freedom of speech? Can states allow independent parties when independence goes against the Constitution? Should a society that has elected to be tolerant be intolerant about intolerance?

This is in fact the incoherence that Gödel detected in the United States Constitution, while Karl Popper independently discovered the same inconsistency in democratic systems and published in The Open Society and its Enemies.

It’s the main point where I see Taleb and Jordan Peterson’s 12 Rules for Life overlap. Taleb suggests that we should expel intolerants from our society, and Peterson enshrines free-speech as the ultimate quality of a modern and good society, at the expense of having people that censor and attack opposing views. Taleb, however, can’t help pointing out that history shows that intolerants almost always end up imposing their views. He, in other words, is saying that Peterson’s battle has already being fought, and he’s on the losing side.

The effects of skin in the game also apply in more mundane activities, as Duveen showed. But, also, in how we are perceived by others. In software engineer, we are constantly experiencing the results of our actions. There’s even a name for it: “technical debt”. Like normal debt, any shortcut that you may take when building a computer program will come back to haunt you when you try to add new features or modify it. Those who are rewarded by being perceived as 10x engineers will take as many shortcuts as they can, only to fall back on the rest of the team for paying back the technical debt they should have owned instead.

More broadly, one of the reasons why inexperienced people, in almost any branch of knowledge, go for the most complex solutions, is because they have been taught a lot of things in very little time and were rewarded by perception on their tests. If only they learnt what they needed, if only they learnt by making mistakes that cost money. When there is fire, you run faster than in any competition, and similarly, poker is a much different game when the stakes are real. It’s the same when learning a new language; you need to throw yourself into the wild, or you won’t learn a thing.

Taleb brings back politics to the individual and their responsibility. In order to do that, he or she must acknowledge some actions that would categorically never do, regardless of the material rewards; and things he or she would do unconditionally, regardless of its consequences. An individual, Taleb says, must have honour.

Contrast that with the Khashoggi case: regardless of the extremely cruel conditions in which Khashoggi was tortured and executed, no major government has raised any concerns about the involvement of Saudi Arabia. It’s likely that, their being the main buyers and ‘job providers’ for many industries in the West have had something to do with it. Likewise, Russia’s involvement in Litvinenko’s death has being swoopen under the mat in order to extend the EU procurement of gas and oil coming from Russia.

Skin in the Game isn’t however a paradigm-shifting book; most of the ideas on this book have been presented in Antifragile, or The Black Swan. It is, however, a gateway to Taleb’s philosophy. A high level view of an idea that was elaborated in his previous works, and takes a digestible form that drags your attention and calls for action.