• Alex Vikner

Skin in the Game by Taleb

Skin in the Game by Nassim Nicholas Taleb discusses the importance of taking personal risks for one's opinions for the sake of fairness, commercial efficiency, and risk management, as well as being necessary to understand the world. These are my reading notes.


A brief tour of symmetry

Complex systems do not have obvious cause-and-effect mechanisms. Hence, under opacity you don’t mess with them.


The first principle of intervention, like that of healers, is first do no harm.


Those who don’t take risks should never be involved in making decisions.


To reduce large structural asymmetries, we need to decentralize. This is based on the notion that it is easier to macrobullshit than microbullshit. Decentralization is convex to variations.


Interventionistas don’t learn because they are not the victims of their mistakes. Skin in the game keeps human hubris in check.


Hammurabi’s code (3,800 years ago) states that if a builder builds a house and the house collapses and kills the owner of the house, the builder shall be put to death. This establishes symmetry between people in a transaction, so nobody can transfer hidden tail risk.


The Silver Rule (do not treat others the way you would not like them to treat you) is more robust than the Golden Rule (treat others the way you would like them to treat you) since it tells you to mind your own business and not decide what is “good” for others. Moreover, we know with much more clarity what is bad than what is good.


Intellectualism refers to the dangerous belief that one can separate action from the results of such action, that one can separate theory from practice, and that one can always fix a complex system in a top-down manner.


Those who talk should do and only those who do should talk.


A side effect of modernism is that as things get more technological, there is a growing separation between the maker and the user. Architects today build to impress other architects, and we end up with strange, irreversible structures that do not satisfy the well-being of their residents.


Success is leading an honorable life. Honor implies that there are some actions you would categorically never do, regardless of the material rewards. It also means that there are things you would do unconditionally, regardless of the consequences.


Entrepreneurs are heroes in our society. They fail for the rest of us.


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


A free person is someone who cannot be squeezed into doing something he would otherwise never do.


If you can’t put your soul into something, give it up and leave that stuff to someone else.


A first look at agency

Beware of the person giving advice, telling you that a certain action on your part is “good for you” while it is also good for him and the harm to you doesn’t directly affect him.


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.


Groups behave differently at a different scale. A country is not a large city, a city is not a large family, and the world is not a large village. There are scale transformations.


Politics is not scale-free. For instance, one can be a libertarian at the Fed level, Republican at the state level, Democrat at the local level, and socialist at the family and friends level.


That greatest asymmetry

The main idea behind complex systems is that the ensemble behaves in ways not predicted by its components. The interactions matter more than the nature of the units.


Hence, the average behavior of the market participant will not allow us to understand the general behavior of the market.


Similarly, understanding the sub-parts of the brain (say, neurons) work will never allow us to understand how the brain works.


The underlying structure of reality matters much more than the participants, something policymakers fail to understand. Under the right market structure, a collection of idiots produces a well-functioning market.


Minority rule says that it suffices that an intransigent minority with significant skin in the game to reach a minutely small level, say 3–4% of the population, for the entire population to have to submit to their preferences.


The relationship between the intransigent minority and the flexible majority rests on an asymmetry in choices. The minority causes renormalization.


All it takes is a few motivated activists for the banning of some books.


Once a moral rule is established, it will suffice to have a small intransigent minority of geographically distributed followers to dictate a norm in society.


An intolerant minority can control and destroy democracy. So, we need to be intolerant with some intolerant minorities. They violate the Silver Rule.


Had science operated by majority consensus, we would be still stuck in the Middle Ages.

Never doubt that a small group of thoughtful citizens can change the world. Indeed, it is the only thing that ever has. — Margaret Mead

Revolutions are unarguably driven by an obsessive minority. And the entire growth of society, whether economic or moral, comes from a small number of people.


Society doesn’t evolve by consensus, voting, majority, committees, verbose meetings, academic conferences, or polling; only a few people suffice to disproportionately move the needle.


Wolves among dogs

Every organization wants a certain number of people associated with it to be deprived of a certain share of their freedom.


Someone who has been employed for a while is giving you strong evidence of submission.


Slave ownership by companies has traditionally taken very curious forms. The best slave is someone you overpay and who knows it, terrified of losing his status.


In the famous tale by Ahiqar, the dog boasts to the wolf all the contraptions of comfort and luxury he has, almost prompting the wolf to enlist. Until the wolf asks the dog about his collar and is terrified when he understands its use. “Of all your meals, I want nothing.” He ran away and is still running.


The question is: would you like to be a dog or a wolf? Whatever you do, just don’t be a dog claiming to be a wolf.


Freedom entails risks — real skin in the game. Freedom is never free.


A dog’s life is is marked by a feeling of false stability: it may appear smooth and secure, but in the absence of an owner, a dog does not survive. Wolves are trained to survive.


Yet, there is a category of employees who aren’t slaves. You can identify them as follows: they don’t care about their corporate reputation.


Ironically, the highest status, that of a free man, is usually indicated by voluntarily adopting the mores of the lowest class.


What matters isn’t what a person has or doesn’t have; it is what he or she is afraid of losing.


Being alive means taking certain risks

People can detect the difference between front- and back-office operators. Scars signal skin in the game.


Always do more than you talk. And precede talk with action. For it will always remain that action without talk supersedes talk without action.


The intellectual yet idiot (IYI) is a product of modernity. Typically, the IYI get first-oder logic right, but not second-order (or higher) effects, making him totally incompetent in complex domains. The IYI likes to use buzzwords from philosophy to science when discussing unrelated phenomena; he goes two or three levels too theoretical for a given problem.


There is inequality and inequality. The first is the inequality people tolerate: one has no difficulty acknowledging a large surplus to a deemed hero. The second is the inequality people find intolerable because the subject appears to be just a person like you, except that he has been playing the system, and getting himself into rent-seeking, acquiring privileges that are not warranted.


Skin in the game prevents systems from rotting.

No downside for some means no upside for the rest.

Inequality is in the disproportion of the role of the tail. The more inequality in the system, the more the winner-take-all effect, the more we depart from the methods of thin-tailed Mediocristan in which economists were trained.


Indeed, for many environments, the relevant data points are those in the extremes; these are rare by definition, and it suffices to focus on those few but big to get an idea of the story.


For a rich person isolated from vertical socializing with the poor, the poor become something entirely theoretical, a textbook reference.


The only effective judge of things is time. For time operates through skin in the game.


Academia has a tendency, when unchecked (from lack of skin in the game), to evolve into a ritualistic self-referential publishing game.


The most convincing statements are those in which one stands to lose.


The deprostitutionalization of research will be done as follows. Force people who want to do “research” to do it on their own time, that is, to derive their income from other sources. Sacrifice is necessary.


A brief tour of our grandparents’ wisdom:

  • Cognitive dissonance: in order to avoid inconsistent beliefs, people rationalize that the grapes they can’t reach got to be sour.

  • Loss aversion: a loss is more painful than a gain is pleasant.

  • Negative advice (via negativa): we know the wrong better than what’s right.

  • Skin in the game: “You can’t chew with somebody else’s teeth” — Yiddish proverb

  • Antifragility: “When our souls are mollified, a bee can sting” — Cicero

  • Time discounting: “A bird in the hand is better than ten on the tree” — Levantine proverb

  • Madness of crowds: “Madness is rare in individuals, but in groups, parties, nations, it is the rule” — Nietzsche

  • Less is more: “Truth is lost with too much altercation” — Publilius Syrus

  • The paradox of progress: King Pyrrhus tried to cross into Italy, Cyneas, his adviser, tried to make him feel the vanity of such action. “To what end are you going into such enterprise?” he asked. Pyrrhus answered, “To make myself the master of Italy.” Cyneas: “And so?” Pyrrhus: “To get to Gaul, then Spain.” Cyneas: “Then?” Pyrrhus: “To conquer Africa, then … come rest at ease.” Cyneas: “But you are already there, why take more risks?”


Deeper into agency

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.


Surgeons should not look like surgeons. If you have the choice between two surgeons with equal skills, pick the one who looks like a butcher rather the polished, well-articulated ones with Ivy League degrees on the wall, as the former had to overcome a lot more obstacles to arrive where he is due to his “not looking the part”.


A useful heuristic is to use education in reverse: hire, conditional on an equal set of skills, the person with the least label-oriented education. It means that the person had to succeed in spite of the credentialization of his competitors and overcome more serious hurdles.


In any activity, hidden details are only revealed via Lindy (i.e. time).


Never pay for complexity of presentation when all you need are results.


Many problems in society come from the interventions of people who sell complicated solutions because that’s what their position and training invite them to do.


It is easy to scam people by getting them into complications.


Russian Roulette allows you to make money 5 times out of 6. This has bankrupted banks, as they lose money very seldom but then they do, they lose more than they ever made.


If wealth is giving you fewer options instead of more (and more varied) options, you’re doing it wrong.


You can criticize either what a person said or what a person meant. The former is more sensational, hence lends itself more readily to dissemination. The mark of the charlatan is to defend his position or attack a critic by focusing on some specific statement.


It is immoral to claim virtue without fully living with its direct consequences.


If your private life conflicts with your intellectual opinion, it cancels your intellectual ideas, not your private life.


If your private actions do not generalize, then you cannot have general ideas.


Virtue lies 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.


Courage (risk taking) is the only virtue you cannot fake. The perfect virtuous act is to take an uncomfortable position, one penalized by the common discourse.


Taleb's advice for young people with noble aspirations:

  1. Never engage in virtue signaling;

  2. Never engage in rent-seeking;

  3. You must start your own business. Put yourself on the line.


Religion, belief, and skin in the game

There are people who are atheists in actions, religious in words and others who are religious in actions, religious in words but there is practically no atheist in both actions and words, completely devoid of rituals, respect for the dead, and superstitions (say a belief in economics, or the miraculous powers of the mighty state and its institutions).


When we look at religion, we should consider what purpose it serves, rather than focusing on the notion of “belief”. In science, belief is literal belief, it is right or wrong, never metaphorical. In real life, belief is an instrument to do things, not the end product.


Judging people by their beliefs is not scientific.


Religion exists to enforce tail risk management across generations, as its binary and unconditional rules are easy to teach and enforce.


Risk and rationality

Survival comes first, truth, understanding, and science later.

First live, then philosophize — Hobbes

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.


There is a difference between beliefs that are decorative and those that map to action.

What is rational is that which allows for survival.

When you consider beliefs in evolutionary terms, do not look at how they compete with each other, but consider the survival of the populations that have them.


Not everything that happens happens for a reason, but everything that survives survives for a reason.


The Logic of Risk Taking

In order to succeed, you must first survive.

100 people gamble a certain set amount each over a set period of time in a casino. If gambler number 28 goes bust, number 29 doesn’t necessarily do so. You can safely calculate that about 1% of gamblers will go bust. And if you keep playing, you will be expected to have about the same ratio, 1% of gamblers going bust, on average, over that same time window.


1 person goes to a casino 100 days in a row, starting with a set amount. If he goes bust on day 28, there is no game no more. No matter how good the gambler is, you can safely calculate that he has 100% probability of eventually going bust. Hence, the probabilities of success from a collection of people do not apply to this gambler.


A situation is non-ergodic when observed past probabilities do not apply to future processes. There is a “stop” somewhere, an absorbing barrier that prevents people with skin in the game from emerging from it — and to which the system will invariably tend. Let us call these situations “ruin”. The central problem is that if there is a possibility of ruin, cost-benefit analyses are no longer possible.


In a strategy that entails ruin, benefits never offset risks of ruin. Never cross a river if it is on average 4 feet deep.

Sequence matters and the presence of ruin disqualifies cost-benefit analysis.

This idea of repetition makes paranoia about some low-probability events, even that seem “pathological,” perfectly rational.


The Thorp, Kelly, and Shannon school of information theory requires that, for an investment strategy to be ergodic, and eventually capture the return of the market, agents increase their risks as they are winning, but contract after losses, a technique called “playing with the house money”. In practice, it is done by threshold, for ease of execution, not complicated rules: you start betting aggressively whenever you have a profit, never when you have a deficit, as if a switch was turned on or off.


Individual ruin is not as big a deal as collective ruin. And of course ecocide, the irreversible destruction of our environment, is the big one to worry about.


Courage is when you sacrifice your own well-being for the sake of the survival of a layer higher than yours.


People confuse risk of ruin with variations and fluctuations. Not all risks are equal. Also, never compare a multiplicative, systemic, and fat-tailed risk to a non-multiplicative, idiosyncratic, and thin-tailed one.