Skin in the Game
Skin in the Game

Skin in the Game

Skin in the Game is about four topics in one: a) uncertainty and the reliability of knowledge (both practical and scientific, assuming there is a difference), or in less polite words bull***t detection, b) symmetry in human affairs, that is, fairness, justice, responsibility, and reciprocity, c) information sharing in transactions, and d) rationality in complex systems and in the real world. (Location 90)

The knowledge we get by tinkering, via trial and error, experience, and the workings of time, in other words, contact with the earth, is vastly superior to that obtained through reasoning, something self-serving institutions have been very busy hiding from us. (Location 165)

Their three flaws: 1) they think in statics not dynamics, 2) they think in low, not high, dimensions, 3) they think in terms of actions, never interactions. (Location 190)

And when a blowup happens, they invoke uncertainty, something called a Black Swan (a high-impact unexpected event), after a book by a (very) stubborn fellow, not realizing that one should not mess with a system if the results are fraught with uncertainty, or, more generally, should avoid engaging in an action with a big downside if one has no idea of the outcomes. (Location 201)

The principle of intervention, like that of healers, is first do no harm (primum non nocere); even more, we will argue, those who don’t take risks should never be involved in making decisions. (Location 216)

Prominent people took risks—considerably more risks than ordinary citizens. The Roman emperor Julian the Apostate, about whom much later, died on the battlefield fighting in the never-ending war on the Persian frontier—while emperor (Location 224)

Yet legend has it that Constantine had been offered a deal in the event of a surrender. Such deals are not for self-respecting kings. (Location 231)

less than a third of Roman emperors died in their beds—and one can argue that given that only few of these died of really old age, had they lived longer, they would have fallen either to a coup or in battle. (Location 232)

Because noblesse oblige; the very status of a lord has been traditionally derived from protecting others, trading personal risk for prominence—and they happened to still remember that contract. You can’t be a lord if you aren’t a lord. (Location 236)

Bureaucracy is a construction by which a person is conveniently separated from the consequences of his or her actions. (Location 241)

Decentralization is based on the simple notion that it is easier to macrobull***t than microbull***t. Decentralization reduces large structural asymmetries. (Location 245)

The same mechanism of transferring risk also impedes learning. (Location 273)

You will never fully convince someone that he is wrong; only reality can. (Location 275)

The curse of modernity is that we are increasingly populated by a class of people who are better at explaining than understanding, (Location 278)

Returning to our interventionistas, we saw that people don’t learn so much from their—and other people’s—mistakes; rather it is the system that learns by selecting those less prone to a certain class of mistakes and eliminating others. Systems learn by removing parts, via negativa. (Location 289)

Or, to rephrase, it had to prevail there or life would have been extinct—risk transfer blows up systems. And the very idea of law, divine or otherwise, resides in fixing imbalances and remedying such asymmetries. (Location 318)

The code has one central theme: it establishes symmetries between people in a transaction, so nobody can transfer hidden tail risk, or Bob Rubin–style risks. Yes, the Bob Rubin trade is 3,800 years old, as old as civilization, and so are the rules to counter it. (Location 324)

“If a builder builds a house and the house collapses and causes the death of the owner of the house—the builder shall be put to death.” (Location 329)

And, not unexpectedly, it was the Swiss who started clawing back, in 2008. (Location 336)

It is metaphorical, not literal: you don’t have to actually remove an eye—hence the rule is much more flexible than it appears at first glance. (Location 338)

The more robust Silver Rule says Do not treat others the way you would not like them to treat you. More robust? How? Why is the Silver Rule more robust? (Location 361)

The idea is fractal, in the sense that it works at all scales: humans, tribes, societies, groups of societies, countries, etc., assuming each one is a separate standalone unit and can deal with other counterparts as such. (Location 368)

states to deal with you.” Nobody embodies the notion of symmetry better than Isocrates, who lived more than a century and made significant contributions when he was in his nineties. He even managed a rare dynamic version of the Golden Rule: (Location 374)

you can practice your freedom of religion so long as you allow me to practice mine; you have the right to contradict me so long as I have the right to contradict (Location 382)

attempts to limit speech on grounds that some of it may hurt some people’s feelings. (Location 384)

Behave as if your action can be generalized to the behavior of everyone in all places, under all conditions. The (Location 389)

Universal behavior is great on paper, disastrous in practice. (Location 395)

we are local and practical animals, sensitive to scale. The small is not the large; the tangible is not the abstract; the emotional is not the logical. (Location 397)

We should focus on our immediate environment; we need simple practical rules. Even worse: the general and the abstract tend to attract self-righteous psychopaths similar to the interventionistas of Part 1 of the Prologue. (Location 399)

In New Jersey, symmetry can simply mean, in Fat Tony’s terms: don’t give crap, don’t take crap (Location 408)

Start by being nice to every person you meet. But if someone tries to exercise power over you, exercise power over him. (Location 409)

He is also calm and unfazed unless one really gets him angry. He became wealthy by helping people he generically calls “the suckers” separate from their funds (or, as is often the case, those of their clients, as these people often gamble with other people’s money). (Location 413)

In an option, one person (the buyer of the option), contractually has the upside (future gains), the other (the seller) has a liability for the downside (future losses), for a pre-agreed price. (Location 415)

there is a fundamental problem by which hidden risks will continuously increase, until the final blowup. (Location 420)

Avoid taking advice from someone who gives advice for a living, unless there is a penalty for their advice. (Location 426)

One, the fool, takes risks he doesn’t understand, mistaking his own past luck for skills, the other, the crook, transfers risks to others. Economists, when they talk about skin in the game, are only concerned with the second. (Location 429)

By getting insured when it fits you, not when you are healthy, you end up costing the system more than you put into it, hence causing a raise in premia paid by all sorts of innocent people (including, again, the Spanish grammar specialists). (Location 432)

You do not want to win an argument. You want to win. (Location 446)

We are much better at doing than understanding. (Location 449)

People’s “explanations” for what they do are just words, stories they tell themselves, not the business of proper science. (Location 457)

I personally know rich horrible forecasters and poor “good” forecasters. Because what matters in life isn’t how frequently one is “right” about outcomes, but how much one makes when one is right. Being wrong, when it is not costly, doesn’t count—in a way that’s similar to trial-and-error mechanisms of research. (Location 464)

Many exposures are highly nonlinear: you may be beneficially exposed to rain, but not to floods. The exact argument is flushed out in this author’s technical works. Take for now that forecasting, especially when done with “science,” is often the last refuge of the charlatan, and has been so since the beginning of times. (Location 468)

Without skin in the game, we fail to get the Intelligence of Time (a manifestation of the Lindy effect, which will get an entire chapter, and by which 1) time removes the fragile and keeps the robust, and 2) the life expectancy of the nonfragile lengthens with time). Ideas have, indirectly, skin in the game, and populations that harbor them do as well. (Location 476)

By definition, what works cannot be irrational; about every single person I know who has chronically failed in business shares that mental block, the failure to realize that if something stupid works (and makes money), it cannot be stupid. (Location 485)

For most people you run into in real life—bakers, cobblers, plumbers, taxi drivers, accountants, tax advisors, garbage collectors, dental cleaning assistants, carwash operators (not counting Spanish grammar specialists)—pay a price for their mistakes. (Location 503)

Intellectualism is the belief that one can separate an action from the results of such action, that one can separate theory from practice, and that one can always fix a complex system by hierarchical approaches, that is, in a (ceremonial) top-down manner. (Location 507)

This explains the more severe problems of landscaping and architecture: 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; it takes time and a lot of progressive tinkering for that. (Location 538)

Things designed by people without skin in the game tend to grow in complication (before their final collapse). (Location 546)

But there is an even more vital dimension. Many addicts who normally have a dull intellect and the mental nimbleness of a cauliflower—or a foreign policy expert—are capable of the most ingenious tricks to procure their drugs. When they undergo rehab, they are often told that should they spend half the mental energy trying to make money as they did procuring drugs, they are guaranteed to become millionaires. (Location 559)

knowledge of technical matters, such as risk and probability, did not initially come from books. It did not come from lofty philosophizing and scientific hunger. It did not even come from curiosity. (Location 563)

The field was new and uncharted. I knew in my guts there were mistakes in the theories that used the conventional bell curve and ignored the impact of the tails (extreme events). I knew in my guts that academics had not the slightest clue about the risks. So, to find errors in the estimation of these probabilistic securities, I had to study probability, which mysteriously and instantly became fun, even gripping. (Location 567)

More critically, people with good lawyers can game regulations (or, as we will see, make it known that they hire former regulators, and overpay for them, which signals a prospective bribe to those currently in office). (Location 583)

But owing to funding and current venture capital mechanisms, many people mistaken for entrepreneurs fail to have true skin in the game in the sense that their aim is to either cash out by selling the company they helped create to someone else, or “go public” by issuing shares in the stock market. (Location 661)