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Skin in the Game

By Nassim Nicholas Taleb

Skin In The Game is an assessment of asymmetries in human interactions, aimed at helping you understand where and how gaps in uncertainty, risk, knowledge, and fairness emerge, and how to close them.

You do not want to win an argument. You want to win.

The minority often rules the majority​

For example, 70% of the lamb meat the UK imports from New Zealand is processed according to halal standards. However, only 4% of the population is Muslim, which is the main group that demands halal meat. How can such a small segment account for such a large share of imports? Well, minority rule is usually a result of the majority being flexible or indifferent. In this case, non-Muslims don't mind eating halal meat over non-halal meat as there is no difference in taste.

The majority doesn't care, so the minority gets what it wants. Similarly, firms selling genetically modified food have a hard time advertising. Most people are happy to eat non-genetically modified food because the products don't have a big advantage. Hence, the small but hardcore group of anti-GMO activists decides what makes it onto the shelves.

Asymmetry and missing incentives​

If an actor pockets some rewards from a policy they enact or support without accepting any of the risks, economists consider it to be a problem of "missing incentives". In contrast, to Taleb, the problem is more fundamentally one of asymmetry: one actor gets the rewards, the other is stuck with the risks.

Taleb argues that "For social justice, focus on symmetry and risk sharing. You cannot make profits and transfer the risks to others, as bankers and large corporations do... Forcing skin in the game corrects this asymmetry better than thousands of laws and regulations."

The centrality of negative incentives​

Actors - per Taleb - must bear a cost when they fail the public. A fund manager that gets a percentage on wins, but no penalty for losing is incentivized to gamble with his clients funds. Bearing no downside for one's actions means that one has no "Skin In The Game", which is the source of many evils.

An evolutionary process is an additional argument for SITG. Those who err and have SITG will not survive, hence evolutionary processes will eliminate (physically or figuratively by going bankrupt etc) those tending to do stupid things. Without SITG, this process cannot work.

Examples​

Robert Rubin, a highly-paid director and senior advisor at Citigroup, paid no financial penalty when Citigroup had to be rescued by U.S. taxpayers due to overreach. Taleb calls this sort of a trade, with upside gain but no or limited downside risk, a "Bob Rubin trade."

Many war hawks don't themselves bear any risks of dying in a war they advocate.

Successful people don't always have to be competent, because how we evaluate winners is industry-dependent​

For example, a lawyer who is extremely sought after, but dresses very sloppily, is bound to have proven herself in court over and over again. If she didn't win cases, people wouldn't hire her. The same is true for surgeons, authors whose book's sell like crazy, and elite soldiers: without stellar results, they'd never have made it.

On the other end of the spectrum are CEOs, politicians, and bankers. Being good at what you do won't hurt your chances here, but the main requirement for doing well is beingperceivedas capable. After all, votes and thus people's opinions decide who gets the part.

  • Rich people are easier to scam, because they have less to lose than the people selling to them

The more money you have, the more easily I can convince you to part with some of it.If it's a small portion of your overall fortune, you won't mind as much. The risk-reward-ratio becomes skewed in favor of the seller. They have more skin in the game.

If they sell you a mansion for $4,000,000 rather than $1,000,000, they'll get four times the commission. For someone worth $200 million, however, it almost doesn't matter whether they drop one million on a home or four.

Intellectual Yet Idiot​

Intellectual Yet Idiot (IYI) is a term coined by Nassim Nicholas Taleb in his essay by the same name that refers to the semi-intelligent well-pedigreed "who are telling us 1) what to do, 2) what to eat, 3) how to speak, 4) how to think... and 5) who to vote for". They represent a very small minority of people but have an overwhelming impact on the vast majority because they affect government policy. IYI are often policy makers, academics, journalists, and media pundits.

The IYI pathologizes others for doing things he doesn't understand without ever realizing it is his understanding that may be limited. He thinks people should act according to their best interests and he knows their interests, particularly if they are "red necks" or English non-crisp-vowel class who voted for Brexit. When plebeians do something that makes sense to them, but not to him, the IYI uses the term "uneducated". What we generally call participation in the political process, he calls by two distinct designations: "democracy" when it fits the IYI, and "populism" when the plebeians dare voting in a way that contradicts his preferences.

Taleb points out that being educated and "intellectual" does not always mean that someone isn't an idiot for most purposes. "You can be an intellectual yet still be an idiot. 'Educated philistines' have been wrong on everything from Stalinism to Iraq to low-carb diets."