Skin in the Game: Hidden Asymmetries in Daily Life

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. Open in Kindle

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. Open in Kindle

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. Open in Kindle

But not to worry, if we do not decentralize and distribute responsibility, it will happen by itself, the hard way: a system that doesn’t have a mechanism of skin in the game, with a buildup of imbalances, will eventually blow up and self-repair that way. If it survives. Open in Kindle

Now, if you are going to highlight only one single section from this book, here is the one. The interventionista case is central to our story because it shows how absence of skin in the game has both ethical and epistemological effects (i.e., related to knowledge). We saw that interventionistas don’t learn because they are not the victims of their mistakes, and, as we hinted at with pathemata mathemata: The same mechanism of transferring risk also impedes learning. More practically, You will never fully convince someone that he is wrong; only reality can. Actually, to be precise, reality doesn’t care about winning arguments: survival is what matters. Open in Kindle

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.*4 Open in Kindle

In fact, the deep message of this book is the danger of universalism taken two or three steps too far—conflating the micro and the macro. Likewise the crux of the idea of The Black Swan was Platonification, missing central but hidden elements of a thing in the process of transforming it into an abstract construct, then causing a blowup. Open in Kindle

Avoid taking advice from someone who gives advice for a living, unless there is a penalty for their advice. Open in Kindle

There is another point: we may not know beforehand if an action is foolish—but reality knows. Open in Kindle

There is a difference between a charlatan and a genuinely skilled member of society, say that between a macrobull***ter political “scientist” and a plumber, or between a journalist and a mafia made man. The doer wins by doing, not convincing. Entire fields (say economics and other social sciences) become themselves charlatanic because of the absence of skin in the game connecting them back to earth (while the participants argue about “science”). Open in Kindle

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 Open in Kindle

when you are rewarded for perception, not results, you need to show sophistication. Open in Kindle

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. Open in Kindle

Let us conjecture that the formation of moral values in society doesn’t come from the evolution of the consensus. No, it is the most intolerant person who imposes virtue on others precisely because of that intolerance. The same can apply to civil rights. Open in Kindle

“Never doubt that a small group of thoughtful citizens can change the world. Indeed, it is the only thing that ever has,” wrote 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. Open in Kindle

Society doesn’t evolve by consensus, voting, majority, committees, verbose meetings, academic conferences, tea and cucumber sandwiches, or polling; only a few people suffice to disproportionately move the needle. All one needs is an asymmetric rule somewhere—and someone with soul in the game. And asymmetry is present in about everything.*6 Open in Kindle

Leave people alone under a good structure and they will take care of things. Open in Kindle

Ironically, by being beggars, they had the equivalent of f*** you money, which we can more easily get by being at the lowest rung than by joining the income-dependent classes. Open in Kindle

Lovers of paychecks are lazy…but they would never let you down at times like these. Open in Kindle

People of some means have a country house—which is inefficient compared to hotels or rentals—because they want to make sure it is available if they decide they want to use it on a whim. There is a trader’s expression: “Never buy when you can rent the three Fs: what you Float, what you Fly, and what you…(that something else).” Yet many people own boats and planes, and end up stuck with that something else. Open in Kindle

If the company man is, sort of, gone, he has been replaced by the companies person. For people are no longer owned by a company but by something worse: the idea that they need to be employable. The employable person is embedded in an industry, with fear of upsetting not just their employer, but other potential employers.*2 Open in Kindle

Another aspect of the dog vs. wolf dilemma: the feeling of false stability. A dog’s life may appear smooth and secure, but in the absence of an owner, a dog does not survive. Most people prefer to adopt puppies, not grown-up dogs; in many countries, unwanted dogs are euthanized. A wolf is trained to survive. Employees abandoned by their employers, as we saw in the IBM story, cannot bounce back. Open in Kindle

the people you meet when riding high are also those you meet when riding low, and I saw the fellow getting some (more subtle) abuse from the same accountant before he got fired, as he eventually ran out of luck. You are free—but only as free as your last trade. As we saw with Ahiqar’s wild ass, freedom is never free. Open in Kindle

It is much easier to do business with the owner of the business than some employee who is likely to lose his job next year; likewise it is easier to trust the word of an autocrat than a fragile elected official. Open in Kindle

This method—of hitting you where they think it hurts—implies hitting people around you who are more vulnerable than you. Open in Kindle

Because, to repeat, life is sacrifice and risk taking, and nothing that doesn’t entail some moderate amount of the former, under the constraint of satisfying the latter, is close to what we can call life. If you do not undertake a risk of real harm, reparable or even potentially irreparable, from an adventure, it is not an adventure. Our argument—that the real requires peril—can lead to niceties about the mind-body problem, but don’t tell your local philosopher. Open in Kindle

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

You can define a free person precisely as someone whose fate is not centrally or directly dependent on peer assessment. Open in Kindle

And recall that, a free person does not need to win arguments—just win.*2 Open in Kindle

If anything, being rich you need to hide your money if you want to have what I call friends. This may be known; what is less obvious is that you may also need to hide your erudition and learning. People can only be social friends if they don’t try to upstage or outsmart one another. Indeed, the classical art of conversation is to avoid any imbalance, as in Baldassare Castiglione’s Book of the Courtier: people need to be equal, at least for the purpose of the conversation, otherwise it fails. It has to be hierarchy-free and equal in contribution. You’d rather have dinner with your friends than with your professor, unless of course your professor understands “the art” of conversation. Open in Kindle

So long as society is getting richer, someone will try to sell you something until the point of degradation of your well-being, and a bit beyond that. Open in Kindle

precautionary principle during the conversation, worth restating here. It asserts that one does not need complex models as a justification to avoid a certain action. If we don’t understand something and it has a systemic effect, just avoid it. Open in Kindle

And you never cure structural defects; the system corrects itself by collapsing.*2 Open in Kindle

The principle of charity stipulates that you try to understand a message as if you were yourself its author. Open in Kindle

Sticking up for truth when it is unpopular is far more of a virtue, because it costs you something—your reputation. If you are a journalist and act in a way that risks ostracism, you are virtuous. Some people only express their opinions as part of mob shaming, when it is safe to do so, and, in the bargain, think that they are displaying virtue. This is not virtue but vice, a mixture of bullying and cowardice. Open in Kindle

when young people who “want to help mankind” come to me asking, “What should I do? I want to reduce poverty, save the world,” and similar noble aspirations at the macro-level, my suggestion is: 1) Never engage in virtue signaling; 2) Never engage in rent-seeking; 3) You must start a business. Put yourself on the line, start a business. Open in Kindle

If you want peace, make people trade, as they have done for millennia. They will be eventually forced to work something out. We are largely collaborative—except when institutions get in the way. Open in Kindle

We just saw in Book 6 various asymmetries in life coming from largely undetected agency problems, where absence of skin in the game contaminates fields and produces distortions. Open in Kindle

Religions such as Christianity, Judaism, and, to some extent Shiite Islam, evolved (or, rather, let their members evolve in developing a sophisticated society) precisely by moving away from the literal. The literal doesn’t leave any room for adaptation. Open in Kindle

Just as paganism cannot be pigeon-holed, the same applies to libertarianism. It does not fit the structure of a political “party”—only that of a decentralized political movement. The very concept doesn’t allow for the straitjacket of a strong party line and unified policy with respect to, say, court locations or relations with Mongolia. Political parties are hierarchical, they are designed in a way to substitute someone’s own decision making with a well-defined protocol. Open in Kindle

beware labels when it comes to matters associated with beliefs. And avoid treating religions as if they are all the same animal. But there is a commonality. Open in Kindle

Note that the putative predecessors of the pope, the various Roman emperors, had a similar policy of seeking treatment first, and having recourse to theology after, although some of their treatments were packaged as delivered by the deities, such as the Greek god Asclepius or the weaker Roman equivalent Vediovis. Open in Kindle

a) rationality resides in what you do, not in what you think or in what you “believe” (skin in the game), and b) rationality is about survival. Open in Kindle

So when we look at religion, and, to some extent, ancestral superstitions, we should consider what purpose they serve, rather than focusing on the notion of “belief,” epistemic belief in its strict scientific definition. 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. This is similar to vision: the purpose of your eyes is to orient you in the best possible way, and get you out of trouble when needed, or help you find prey at a distance. Your eyes are not sensors designed to capture the electromagnetic spectrum. Their job description is not to produce the most accurate scientific representation of reality; rather the most useful one for survival. Open in Kindle

Our perceptional apparatus makes mistakes—distortions—in order to lead us to more precise actions: Open in Kindle

A distortion is meant to bring about an enhancement for your aesthetic experience. Open in Kindle

harboring superstitions is not irrational by any metric: nobody has managed to build a criterion for rationality based on actions that bear no cost. But actions that harm you are detectable, if not observable. Open in Kindle

Survival comes first, truth, understanding, and science later. In other words, you do not need science to survive (we’ve survived for several hundred million years or more, depending on how you define the “we”), but you must survive to do science. Open in Kindle

Judging people by their beliefs is not scientific. 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. Open in Kindle

The axiom of revelation of preferences (originating with Paul Samuelson, or possibly the Semitic gods), as you recall, states the following: you will not have an idea about what people really think, what predicts people’s actions, merely by asking them—they themselves don’t necessarily know. What matters, in the end, is what they pay for goods, not what they say they “think” about them, or the various possible reasons they give you or themselves for that. Open in Kindle

Beliefs are…cheap talk. There may be some type of a translation mechanism too hard for us to understand, with distortions at the level of the thought process that are actually necessary for things to work. Open in Kindle

errors is the most rational thing to do, when the errors are of little cost, as they lead to discoveries. Open in Kindle

skin in the game means that you do not pay attention to what people say, only to what they do, and to how much of their necks they are putting on the line. Let survival work its wonders. Open in Kindle

“TAWK” AND CHEAP “TAWK” The first principle we draw: There is a difference between beliefs that are decorative and different sorts of beliefs, those that map to action. There is no difference between them in words, except that the true difference reveals itself in risk taking, having something at stake, something one could lose in case one is wrong. And the lesson, by rephrasing the principle: How much you truly “believe” in something can be manifested only through what you are willing to risk for it. Open in Kindle

The only definition of rationality that I’ve found that is practically, empirically, and mathematically rigorous is the following: what is rational is that which allows for survival. Open in Kindle

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. Open in Kindle

But it remains the case that whatever their purpose, kashrut laws survived several millennia not because of their “rationality” but because the populations that followed them survived. Open in Kindle

Rationality does not depend on explicit verbalistic explanatory factors; it is only what aids survival, what avoids ruin. Open in Kindle

Not everything that happens happens for a reason, but everything that survives survives for a reason. Open in Kindle

Even if their forecasts were true (they aren’t), no individual can get the same returns as the market unless he has infinite pockets and no uncle points. This is conflating ensemble probability and time probability. Open in Kindle

Ruin is indivisible and invariant to the source of randomness that may cause it. Open in Kindle

I believe that risk aversion does not exist: what we observe is, simply, a residual of ergodicity. People are, simply, trying to avoid financial suicide and take a certain attitude to tail risks. But we do not need to be overly paranoid about ourselves; we need to shift some of our worries to bigger things. Open in Kindle

Unless you are perfectly narcissistic and psychopathic—even then—your worst-case scenario is never limited to the loss of only your life. Open in Kindle

“The difference between successful people and really successful people is that really successful people say no to almost everything,” Open in Kindle

The Chernoff bound can be explained as follows. The probability that the number of people who drown in their bathtubs in the United States doubles next year—assuming no changes in population or bathtubs—is one per several trillions lifetimes of the universe. This cannot be said about the doubling of the number of people killed by terrorism over the same period. Open in Kindle