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Skin in the Game: Hidden Asymmetries in Daily Life
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- Table of Contents
In his most provocative and practical book yet, one of the foremost thinkers of our time redefines what it means to understand the world, succeed in a profession, contribute to a fair and just society, detect nonsense, and influence others. Citing examples ranging from Hammurabi to Seneca, Antaeus the Giant to Donald Trump, Nassim Nicholas Taleb shows how the willingness to accept one’s own risks is an essential attribute of heroes, saints, and flourishing people in all walks of life.
As always both accessible and iconoclastic, Taleb challenges long-held beliefs about the values of those who spearhead military interventions, make financial investments, and propagate religious faiths. Among his insights:
• 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. You cannot get rich without owning your own risk and paying for your own losses. Forcing skin in the game corrects this asymmetry better than thousands of laws and regulations.
• Ethical rules aren’t universal. You’re part of a group larger than you, but it’s still smaller than humanity in general.
• Minorities, not majorities, run the world. The world is not run by consensus but by stubborn minorities imposing their tastes and ethics on others.
• 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.
• Beware of complicated solutions (that someone was paid to find). A simple barbell can build muscle better than expensive new machines.
• True religion is commitment, not just faith. How much you believe in something is manifested only by what you’re willing to risk for it.
The phrase “skin in the game” is one we have often heard but rarely stopped to truly dissect. It is the backbone of risk management, but it’s also an astonishingly rich worldview that, as Taleb shows in this book, applies to all aspects of our lives. As Taleb says, “The symmetry of skin in the game is a simple rule that’s necessary for fairness and justice, and the ultimate BS-buster,” and “Never trust anyone who doesn’t have skin in the game. Without it, fools and crooks will benefit, and their mistakes will never come back to haunt them.”
ISBN-13: 9780425284643
Media Type: Paperback
Publisher: Random House Publishing Group
Publication Date: 01-07-2020
Pages: 304
Product Dimensions: 5.10(w) x 7.80(h) x 0.80(d)
Series: Incerto Series
Nassim Nicholas Taleb spent twenty-one years as a risk taker before becoming a researcher in philosophical, mathematical, and (mostly) practical problems with probability. Although he spends most of his time as a flâneur, meditating in cafés across the planet, he is currently Distinguished Professor at New York University’s Tandon School of Engineering. His books, part of a multivolume collection called Incerto, have been published in forty-one languages. Taleb has authored more than fifty scholarly papers as backup to Incerto, ranging from international affairs and risk management to statistical physics. Having been described as “a rare mix of courage and erudition,” he is widely recognized as the foremost thinker on probability and uncertainty. Taleb lives mostly in New York.
Chapter 1Read an Excerpt
Why Each One Should Eat His Own Turtles: Equality in Uncertainty
Taste of turtle—Where are the new customers?—Sharia and asymmetry—There are the Swiss, and other people—Rav Safra and the Swiss (but different Swiss)
You who caught the turtles better eat them, goes the ancient adage.
The origin of the expression is as follows. It was said that a group of fishermen caught a large number of turtles. After cooking them, they found out at the communal meal that these sea animals were much less edible than they thought: not many members of the group were willing to eat them. But Mercury happened to be passing by—Mercury was the most multitasking, sort of put-together god, as he was the boss of commerce, abundance, messengers, the underworld, as well as the patron of thieves and brigands and, not surprisingly, luck. The group invited him to join them and offered him the turtles to eat. Detecting that he was only invited to relieve them of the unwanted food, he forced them all to eat the turtles, thus establishing the principle that you need to eat what you feed others.
A Customer Is Born Every Day
I have learned a lesson from my own naive experiences:
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.
Of course such advice is usually unsolicited. The asymmetry is when said advice applies to you but not to him—he may be selling you something, or trying to get you to marry his daughter or hire his son-in-law.
Years ago I received a letter from a lecture agent. His letter was clear; it had about ten questions of the type “Do you have the time to field requests?,” “Can you handle the organization of the trip?” The gist of it was that a lecture agent would make my life better and make room for the pursuit of knowledge or whatever else I was about (a deeper understanding of gardening, stamp collections, Mediterranean genetics, or squid-ink recipes) while the burden of the gritty would fall on someone else. And it wasn’t any lecture agent: only he could do all these things; he reads books and can get in the mind of intellectuals (at the time I didn’t feel insulted by being called an intellectual). As is typical with people who volunteer unsolicited advice, I smelled a rat: at no phase in the discussion did he refrain from letting me know that it was “good for me.”
As a sucker, while I didn’t buy into the argument, I ended up doing business with him, letting him handle a booking in the foreign country where he was based. Things went fine until, six years later, I received a letter from the tax authorities of that country. I immediately contacted him to wonder if similar U.S. citizens he had hired incurred such tax conflict, or if he had heard of similar situations. His reply was immediate and curt: “I am not your tax attorney”—volunteering no information as to whether other U.S. customers who hired him because it was “good for them” encountered such a problem.
Indeed, in the dozen or so cases I can pull from memory, it always turns out that what is presented as good for you is not really good for you but certainly good for the other party. As a trader, you learn to identify and deal with upright people, those who inform you that they have something to sell, by explaining that the transaction arises for their own benefit, with such questions as “Do you have an ax?” (meaning an inquiry whether you have a certain interest). Avoid at all costs those who call you to tout a certain product disguised with advice. In fact the story of the turtle is the archetype of the history of transactions between mortals.
I worked once for a U.S. investment bank, one of the prestigious variety, called “white shoe” because the partners were members of hard-to-join golf clubs for proto-aristocrats where they played the game wearing white footwear. As with all such firms, an image of ethics and professionalism was cultivated, emphasized, and protected. But the job of the salespeople (actually, salesmen) on days when they wore black shoes was to “unload” inventory with which traders were “stuffed,” that is, securities they had in excess in their books and needed to get rid of to lower their risk profile. Selling to other dealers was out of the question as professional traders, typically non-golfers, would smell excess inventory and cause the price to drop. So they needed to sell to some client, on what is called the “buy side.” Some traders paid the sales force with (percentage) “points,” a variable compensation that increased with our eagerness to part with securities. Salesmen took clients out to dinner, bought them expensive wine (often, ostensibly the highest on the menu), and got a huge return on the thousands of dollars of restaurant bills by unloading the unwanted stuff on them. One expert salesman candidly explained to me: “If I buy the client, someone working for the finance department of a municipality who buys his suits at some department store in New Jersey, a bottle of $2,000 wine, I own him for the next few months. I can get at least $100,000 profits out of him. Nothing in the mahket gives you such return.”
Salesmen hawked how a given security would be perfect for the client’s portfolio, how they were certain it would rise in price and how the client would suffer great regret if he missed “such an opportunity”—that type of discourse. Salespeople are experts in the art of psychological manipulation, making the client trade, often against his own interest, all the while being happy about it and loving them and their company. One of the top salesmen at the firm, a man with huge charisma who came to work in a chauffeured Rolls Royce, was once asked whether customers didn’t get upset when they got the short end of the stick. “Rip them off, don’t tick them off” was his answer. He also added, “Remember that every day a new customer is born.”
As the Romans were fully aware, one lauds merrily the merchandise to get rid of it.
The Price of Corn in Rhodes
So, “giving advice” as a sales pitch is fundamentally unethical—selling cannot be deemed advice. We can safely settle on that. You can give advice, or you can sell (by advertising the quality of the product), and the two need to be kept separate.
But there is an associated problem in the course of the transactions: how much should the seller reveal to the buyer?
The question “Is it ethical to sell something to someone knowing the price will eventually drop?” is an ancient one—but its solution is no less straightforward. The debate goes back to a disagreement between two stoic philosophers, Diogenes of Babylon and his student Antipater of Tarsus, who took the higher moral ground on asymmetric information and seems to match the ethics endorsed by this author. Not a piece from both authors is extant, but we know quite a bit from secondary sources, or, in the case of Cicero, tertiary. The question was presented as follows, retailed by Cicero in De Officiis. Assume a man brought a large shipment of corn from Alexandria to Rhodes, at a time when corn was expensive in Rhodes because of shortage and famine. Suppose that he also knew that many boats had set sail from Alexandria on their way to Rhodes with similar merchandise. Does he have to inform the Rhodians? How can one act honorably or dishonorably in these circumstances?
We traders had a straightforward answer. Again, “stuffing”—selling quantities to people without informing them that there are large inventories waiting to be sold. An upright trader will not do that to other professional traders; it was a no-no. The penalty was ostracism. But it was sort of permissible to do it to the anonymous market and the faceless nontraders, or those we called “the Swiss,” some random suckers far away. There were people with whom we had a relational rapport, others with whom we had a transactional one. The two were separated by an ethical wall, much like the case with domestic animals that cannot be harmed, while rules on cruelty are lifted when it comes to cockroaches.
Diogenes held that the seller ought to disclose as much as civil law requires. As for Antipater, he believed that everything ought to be disclosed—beyond the law—so that there was nothing that the seller knew that the buyer didn’t know.
Clearly Antipater’s position is more robust—robust being invariant to time, place, situation, and color of the eyes of the participants. Take for now that
The ethical is always more robust than the legal. Over time, it is the legal that should converge to the ethical, never the reverse.
Hence:
Laws come and go; ethics stay.
For the notion of “law” is ambiguous and highly jurisdiction dependent: in the U.S., civil law, thanks to consumer advocates and similar movements, integrates such disclosures, while other countries have different laws. This is particularly visible with securities laws, as there are “front running” regulations and those concerning insider information that make such disclosure mandatory in the U.S., though this wasn’t so for a long time in Europe.
Indeed much of the work of investment banks in my day was to play on regulations, find loopholes in the laws. And, counterintuitively, the more regulations, the easier it was to make money.
Equality in Uncertainty
Which brings us to asymmetry, the core concept behind skin in the game. The question becomes: to what extent can people in a transaction have an informational differential between them? The ancient Mediterranean and, to some extent, the modern world, seem to have converged to Antipater’s position. While we have “buyer beware” (caveat emptor) in the Anglo-Saxon West, the idea is rather new, and never general, often mitigated by lemon laws. (A “lemon” was originally a chronically defective car, say, my convertible Mini, in love with the garage, now generalized to apply to anything that moves).
So, to the question voiced by Cicero in the debate between the two ancient stoics, “If a man knowingly offers for sale wine that is spoiling, ought he to tell his customers?,” the world is getting closer to the position of transparency, not necessarily via regulations as much as thanks to tort laws, and one’s ability to sue for harm in the event a seller deceives him or her. Recall that tort laws put some of the seller’s skin back into the game—which is why they are reviled, hated by corporations. But tort laws have side effects—they should only be used in a nonnaive way, that is, in a way that cannot be gamed. As we will see in the discussion of the visit to the doctor, they will be gamed.
Sharia, in particular the law regulating Islamic transactions and finance, is of interest to us insofar as it preserves some of the lost Mediterranean and Babylonian methods and practices—not to prop up the ego of Saudi princes. It exists at the intersection of Greco-Roman law (as reflected from people in Semitic territories’ contact with the school of law of Berytus), Phoenician trading rules, Babylonian legislations, and Arab tribal commercial customs and, as such, it provides a repository of ancient Mediterranean and Semitic lore. I hence view Sharia as a museum of the history of ideas on symmetry in transactions. Sharia establishes the interdict of gharar, drastic enough to be totally banned in any form of transaction. It is an extremely sophisticated term in decision theory that does not exist in English; it means both uncertainty and deception—my personal take is that it means something beyond informational asymmetry between agents: inequality of uncertainty. Simply, as the aim is for both parties in a transaction to have the same uncertainty facing random outcomes, an asymmetry becomes equivalent to theft. Or more robustly:
No person in a transaction should have certainty about the outcome while the other one has uncertainty.
Gharar, like every legalistic construct, will have its flaws; it remains weaker than Antipater’s approach. If only one party in a transaction has certainty all the way through, it is a violation of Sharia. But if there is a weak form of asymmetry, say, someone has inside information which gives an edge in the markets, there is no gharar as there remains enough uncertainty for both parties, given that the price is in the future and only God knows the future. Selling a defective product (where there is certainty as to the defect), on the other hand, is illegal. So the knowledge by the seller of corn in Rhodes in my first example does not fall under gharar, while the second case, that of a defective liquid, would.
As we see, the problem of asymmetry is so complicated that different schools give different ethical solutions, so let us look at the Talmudic approach.
Rav Safra and the Swiss
Jewish ethics on the matter is closer to Antipater than Diogenes in its aims at transparency. Not only should there be transparency concerning the merchandise, but perhaps there has to be transparency concerning what the seller has in mind, what he thinks deep down. The medieval rabbi Shlomo Yitzhaki (aka Salomon Isaacides), known as “Rashi,” relates the following story. Rav Safra, a third-century Babylonian scholar who was also an active trader, was offering some goods for sale. A buyer came as he was praying in silence, tried to purchase the merchandise at an initial price, and given that the rabbi did not reply, raised the price. But Rav Safra had no intention of selling at a higher price than the initial offer, and felt that he had to honor the initial intention. Now the question: Is Rav Safra obligated to sell at the initial price, or should he take the improved one?
Such total transparency is not absurd and not uncommon in what seems to be a cutthroat world of transactions, my former world of trading. I have frequently faced that problem as a trader and will side in favor of Rav Safra’s action in the debate. Let us follow the logic. Recall the rapacity of salespeople earlier in the chapter. Sometimes I would offer something for sale for, say, $5, but communicated with the client through a salesperson, and the salesperson would come back with an “improvement,” of $5.10. Something never felt right about the extra ten cents. It was, simply, not a sustainable way of doing business. What if the customer subsequently discovered that my initial offer was $5? No compensation is worth the feeling of shame. The overcharge falls in the same category as the act of “stuffing” people with bad merchandise. Now, to apply this to Rav Safra’s story, what if he sold to one client at the marked-up price, and to another one the exact same item for the initial price, and the two buyers happened to know one another? What if they were agents for the same customer?
Book 1 Introduction 1 The Less Obvious Aspects of Skin in the Game 4 Prologue, Part 1: Antaeus Whacked 7 Libya After Antaeus 8 Ludis de Alieno Corio 10 Warlords Are Still Around 11 The Bob Rubin Trade 12 Systems Learn by Removing 13 Prologue, Part 2: A Brief Tour of Symmetry 16 I From Hammurabi to Kant 16 Hammurabi in Paris 16 Silver Beats Gold 19 Fuhgedaboud Universalism 20 II From Kant to Fat Tony 22 Crook, Foot, or Both 22 Causal Opacity and Preferences Revealed 24 Skin in the Game, but Not All the Time 27 III Modernism 27 How to Beam Light on a Speaker 28 Simplicity 29 I Am Dumb Without Skin in the Game 30 Regulations vs. Legal Systems 31 IV Soul in the Game 33 Artisans 34 A Caveat with Entrepreneurs 36 Arrogant Will Do 36 Citizenship de Plaisance 37 Heroes Were Not Library Rats 38 Soul in the Game and Some (Not Too Much) Protectionism 39 Skin in the Ruling 40 Prologue, Part 3: The Ribs of the Incerto 41 The Road 42 An Enhanced Detector 43 The Book Reviewers 43 Organization of the Book 45 Appendix: Asymmetries in Life and Things 47 Book 2 A First Look at Agency 49 Chapter 1 Why Each One Should Eat His Own Turtles: Equality in Uncertainty 51 A Customer Is Born Every Day 51 The Price of Corn in Rhodes 54 Equality in Uncertainty 55 Rav Safra and the Swiss 57 Members and Non-Members 58 Non Mihi non Tibi, sed Nobis (Neither Mine nor Yours, but Ours) 60 Are You on the Diagonal? 61 All (Literally) in the Same Boat 62 Talking One's Book 63 A Short Visit to the Doctor's Office 64 Next 66 Book 3 That Greatest Asymmetry 67 Chapter 2 The Most Intolerant Wins: The Dominance of the Stubborn Minority 69 Criminals with Peanut Allergies 71 Renormalization Group 75 The Veto 76 Lingua Franca 77 Genes vs. Languages 79 The One-Way Street of Religions 80 Decentralize, Again 82 Imposing Virtue on Others 83 Stability of the Minority Rule, a Probabilistic Argument 84 Popper-Goedel's Paradox 85 Irreverence of Markets and Science 86 Unus sed Leo: Only One but a Lion 87 Summary and Next 88 Appendix to Book 3: A Few More Counterintuitive Things About the Collective 89 Zero-Intelligence Markets 91 Book 4 Wolves among Dogs 93 Chapter 3 How to Legally Own Another Person 95 To Own a Pilot 96 From the Company Man to the Companies Person 98 Coase's Theory of the Firm 100 Complexity 101 A Curious Form of Slave Ownership 101 Freedom is Never Free 102 Wolves Among the Dogs 103 Loss Aversion 105 Waiting for Constantinople 106 Do Not Rock Bureaucristan 107 Next 108 Chapter 4 The Skin of Others in Your Game 109 A Mortgage and Two Cats 109 Finding Hidden Vulnerabilities 111 How to Put Skin in the Game of Suicide Bombers 113 Next 115 Book 5 Being Alive Means Taking Certain Risks 117 Chapter 5 Life in the Simulation Machine 119 Jesus Was a Risk Taker 120 Pascal's Wager 121 The Matrix 121 The Donald 122 Next 122 Chapter 6 The Intellectual Yet Idiot 123 Where to Find a Coconut 123 Science and Scientism 124 Intellectual Yet Philistine 125 Never Gotten Drunk with Russians 126 To Conclude 127 Postscript 127 Chapter 7 Inequality and Skin in the Game 128 Inequality vs. Inequality 128 The Static and the Dynamic 130 Pikketism and the Revolt of the Mandarin Class 133 Cobbler Envies Cobbler 135 Inequality, Wealth, and Vertical Socialization 136 Empathy and Homophily 137 Data, Shmata 137 Ethics of Civil Service 138 Next 140 Chapter 8 An Expert Called Lindy 141 Who Is the "Real" Expert? 142 The Lindy of Lindy 143 Do We Need a Judge? 144 Tea with the Queen 145 Institutions 146 Against One's Interest 147 Soul in the Game, Again 148 Science is Lindy-Prone 148 Empirical or Theoretic? 149 The Grandmother vs. the Researchers 150 A Brief Tour of Your Grandparents' Wisdom 151 Book 6 Deeper Into Agency 153 Chapter 9 Surgeons Should Not Look like Surgeons 155 Looking the Part 155 The Green Lumber Fallacy 157 Best-Dressed Business Plan 158 A Bishop for Halloween 159 The Gordian Knot 160 Overintellectualization of Life 161 Another Business of Intervention 162 Gold and Rice 162 The Compensation 164 Education as Luxury Good 164 A BS Detection Heuristic 165 Real Gyms Don't Look Like Gyms 165 Next 166 Chapter 10 Only the Rich Are Poisoned: The Preferences of Others 167 Venenum in Aura Bibitur 168 Large Funeral Homes 169 Conversation 170 Nonlinearity of Progress 170 Next 171 Chapter 11 Facta non Verba (Deeds Before Words) 172 An Offer Very Hard to Refuse 172 The Assassins 174 Assassination as Marketing 175 Assassination as Democracy 176 The Camera for Skin in the Game 176 Chapter 12 The Facts Are True, the News Is Fake 178 How to Disagree with Yourself 178 Information Doesn't Like to Be Owned 179 The Ethics of Disagreement 181 Next 182 Chapter 13 The Merchandising of Virtue 183 The Public and the Private 184 The Virtue Merchants 185 To Be or to Seem? 186 Simony 187 Virtue Is About Others and the Collective 188 Unpopular Virtue 188 Take Risk 189 Chapter 14 Peace, Neither Ink nor Blood 190 Mars vs. Saturn 191 Where Are the Lions? 192 History Seen from the Emergency Room 193 Next 196 Book 7 Religion, Belief, and Skin in the Game 197 Chapter 15 They Don't Know What They Are Talking About When They Talk About Religion 199 Belief vs. Belief 201 Libertarianism and Church-Free Religions 202 Next 203 Chapter 16 No Worship Without Skin in the Game 204 The Gods Do Not Like Cheap Signaling 204 The Evidence 207 Chapter 17 Is the Pope Atheist? 208 Religious in Words 210 Next 210 Book 8 Risk and Rationality 211 Chapter 18 How to Be Rational About Rationality 213 Ocular Deception 214 Ergodicity First 214 From Simon to Gigerenzer 216 Revelation of Preferences 216 What Is Religion About? 217 "Tawk" and Cheap "Tawk" 219 What Does Lindy Say? 219 The Nondecorative in the Decorative 220 Chapter 19 The Logic of Risk Taking 222 Ergodicity 225 Repetition of Exposures 226 Who Is "You"? 228 Courage and Precaution Aren't Opposites 230 Rationality, Again 230 Love Some Risks 231 Naive Empiricism 231 Summary 233 Epilogue: What Lindy Told Me 235 Acknowledgments 237 Glossary 239 Technical Appendix 243 Notes 255 Bibliography 259 Index 265Table of Contents