Skin in the Game
Skin in the Game

Skin in the Game

Table of Contents

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. That these four cannot be disentangled is something that is obvious when one has … skin in the game. (Location 296)

in academia there is no difference between academia and the real world; in the real world, there is. (Location 303)

In case you are giving economic views: Don’t tell me what you “think,” just tell me what’s in your portfolio. (Location 308)

Tags: skin in the game, investing

Prologue, Part 1

Antaeus Whacked

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 400)

The Bob Rubin trade Robert Rubin, a former Secretary of the United States Treasury, one of those who sign their names on the banknote you just used to pay for coffee, collected more than $120 million in compensation from Citibank in the decade preceding the banking crash of 2008. When the bank, literally insolvent, was rescued by the taxpayer, he didn’t write any check—he invoked uncertainty as an excuse. Heads he wins, tails he shouts “Black Swan.” (Location 449)

You will never fully convince someone that he is wrong; only reality can. (Location 471)

Tags: wrong

Note: .wrong people must make their own mistakes

Prologue, Part 2

A Brief Tour of Symmetry

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. What is a tail? Take for now that it is an extreme event of low frequency. It is called a “tail” because, in drawings of bell-curve style frequencies, it is located to the extreme left or right (being of low frequency), and for some reason beyond my immediate understanding, people started calling that a “tail” and the term stuck. Hammurabi’s best known injunction is as follows: “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 508)

Tags: risk

Note: .risk ensure consequencies of risk are adequtely dispersed

Avoid taking advice from someone who gives advice for a living, unless there is a penalty for their advice. (Location 616)

Tags: advice

Note: .advice

You do not want to win an argument. You want to win. (Location 635)

Tags: arguing

Note: .arguing win, rather than winning arguments

What people “think” is not relevant—you want to avoid entering the mushy-soft and self-looping discipline of psychology. People’s “explanations” for what they do are just words, stories they tell themselves, not the business of proper science. What they do, on the other hand, is tangible and measurable and that’s what we should focus on. (Location 646)

Tags: psychology

Note: look at what people do rather than just listen to their explanation

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 (Location 653)

Tags: upside

Note: .upside thr magnitude of results when you are right is more important than the frequency of being right

Those who talk should do and only those who do should talk (Location 711)

Many kids would learn to love mathematics if they had some investment in it, and, more crucially, they would build an instinct to spot its misapplications. (Location 767)

Spartan mother tells her departing son: “With it or on it,” meaning either return with your shield or don’t come back alive (the custom was to carry the dead body flat on it); only cowards throw away their shields to run faster. (Location 803)

Prologue, Part 3

The Ribs of the Incerto

asymmetry in risk bearing leads to imbalances and, potentially, to systemic ruin. (Location 925)

Tags: risk

Note: .risk risk should be balanced adequately


Chapter 1 Why Each One Should Eat His Own Turtles: Equality in Uncertainty

A saying by the brothers Geoff and Vince Graham summarizes the ludicrousness of scale-free political universalism. I am, at the Fed level, libertarian; at the state level, Republican; at the local level, Democrat; and at the family and friends level, a socialist. (Location 1244)

Tags: politics

Note: .politics

buying a stock so you can advertise the qualities of the company, then selling it, benefiting from the trumpeting—this is called market manipulation, and it is certainly a conflict of interest. We removed the skin in the game of journalists in order to prevent market manipulation, thinking that it would be a net gain to society. (Location 1281)


Chapter 2 The Most Intolerant Wins: The Dominance of the Stubborn Minority

So we summarize this chapter and link it to hidden asymmetries, the subtitle of the book. 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. (Location 1652)

Tags: societal norms, asymmetries

Note: .asymmetries you only need a small number of people to move the needle

Appendix to Book 3 A Few More Counterintuitive Things About the Collective


Chapter 3 How to Legally Own Another Person

a contractor has downside, a financial penalty that can be built into the contract, in addition to reputational costs. But consider that an employee will always have more risk. And conditional on someone being an employee, such a person will be risk averse. By being employees they signal a certain type of domestication. (Location 1774)

Tags: contractor, employees

Note: .employees .contractor employees are more risk averse and have more downside

A bank in New York sends a married employee with his family to a foreign location, say, a tropical county with cheap labor, with perks and privileges such as country club membership, a driver, a nice company villa with a gardener, a yearly trip back home with the family in first class, and keeps him there for a few years, enough to be addicted. He earns much more than the “locals,” in a hierarchy reminiscent of colonial days. He builds a social life with other expats. He progressively wants to stay in the location longer, but he is far from headquarters and has no idea of his minute-to-minute standing in the firm except through signals. Eventually, like a diplomat, he begs for another location when time comes for a reshuffle. Returning to the home office means loss of perks, having to revert to his base salary—a return to lower-middle-class life in the suburbs of New York City, taking the commuter train, perhaps, or, God forbid, a bus, and eating a sandwich for lunch! (Location 1836)

The original Aramaic version had a wild ass, instead of a wolf, showing off his freedom. But the wild ass ends up eaten by the lion. Freedom entails risks—real skin in the game. Freedom is never free. (Location 1850)

Tags: freedom

Note: .freedom freedom entails risk. Freedom is never free

You are free—but only as free as your last trade. As we saw with Ahiqar’s wild ass, freedom is never free. (Location 1874)

Tags: freedom

Note: .freedom

What matters isn’t what a person has or doesn’t have; it is what he or she is afraid of losing. (Location 1897)

Tags: losing

Note: .losing what matters most is what someone is afraid of losing

The employee has a very simple objective function: fulfill the tasks that his or her supervisor deems necessary, or satisfy some gameable metric. (Location 1930)

Tags: job, employment

Note: Employees look to gamify certain metrics

Chapter 4 The Skin of Others in Your Game

It is no secret that large corporations prefer people with families; those with downside risk are easier to own, particularly when they are choking under a large mortgage. (Location 1981)

Tags: employees

Note: .employees corporates prefer those with families and mortgages who have more to lose

To be free of conflict you need to have no friends. (Location 2031)

Tags: conflict

Note: .conflict


Chapter 5 Life in the Simulation Machine

Chapter 6 The Intellectual Yet Idiot

Chapter 7 Inequality and Skin in the Game

Skin in the game prevents systems from rotting. (Location 2255)

(Regulators, you may recall, have an incentive to make rules as complex as possible so their expertise can later be hired at a higher price.) (Location 2415)

Tags: regulation

there is an implicit bribe in civil service: you act as a servant to an industry, say, Monsanto, and they take care of you later on. They do not do it out of a sense of honor: simply, it is necessary to keep the system going and encourage the next guy to play by these rules. (Location 2417)

Chapter 8 An Expert Called Lindy

Lindy is a deli in New York, now a tourist trap, that proudly claims to be famous for its cheesecake, but in fact has been known for fifty or so years by physicists and mathematicians thanks to the heuristic that developed there. Actors who hung out there gossiping about other actors discovered that Broadway shows that lasted for, say, one hundred days, had a future life expectancy of a hundred more. For those that lasted two hundred days, two hundred more. The heuristic became known as the Lindy effect. (Location 2431)

Tags: lindy

Note: .lindy

That which is fragile has an asymmetric response to volatility and other stressors, that is, will experience more harm than benefit from it. (Location 2446)

Note: Fragile items experience more harm than benefit in response to volatility (time)

In probability, volatility and time are the same. (Location 2447)

That which is “Lindy” is what ages in reverse, i.e., its life expectancy lengthens with time, conditional on survival. (Location 2465)

Tags: lindy

Note: .lindy life expextancy increases with time

Only the nonperishable can be Lindy. When it comes to ideas, books, technologies, procedures, institutions, and political systems under Lindy, there is no intrinsic aging and perishability. (Location 2467)

Tags: lindy

Note: .lindy

Use laws that are old but food that is fresh. (Location 2474)

Tags: quotes

Note: .quotes

Burn old logs. Drink old wine. Read old books. Keep old friends. (Location 2476)

Tags: quotes

Note: .quotes

You can define a free person precisely as someone whose fate is not centrally or directly dependent on peer assessment. (Location 2489)

a free person does not need to win arguments—just win. (Location 2498)

Tags: winning, freedom

Note: .freedom .winning

Consider that a recent effort to replicate the hundred psychology papers in “prestigious” journals of 2008 found that, out of a hundred, only thirty-nine replicated. Of these thirty-nine, I believe that fewer than ten are actually robust and transfer outside the narrowness of the experiment. (Location 2583)

Loss aversion (a psychological theory by which a loss is more painful than a gain is pleasant): in Livy’s Annals (XXX, 21) Men feel the good less intensely than the bad.fn6 Nearly all the letters of Seneca have some element of loss aversion. (Location 2601)

Tags: lossaversion

Note: .lossaversion we feel bad things more intensely than good things

The Paradox of progress, and the paradox of choice: There is a familiar story of a New York banker vacationing in Greece, who, from talking to a fisherman and scrutinizing the fisherman’s business, comes up with a scheme to help the fisherman make it a big business. The fisherman asked him what the benefits were; the banker answered that he could make a pile of money in New York and come back to vacation in Greece; something that seemed ludicrous to the fisherman, who was already there doing the kind of things bankers do when they go on vacation in Greece. (Location 2621)


Chapter 9 Surgeons Should Not Look Like Surgeons

Consider the chief executive officers of corporations: they don’t just look the part, they even look the same. And, worse, when you listen to them talk, they sound the same, down to the same vocabulary and metaphors. But that’s their job: as I will keep reminding the reader, counter to the common belief, executives are different from entrepreneurs and are supposed to look like actors. (Location 2652)

Tags: ceo

Note: .ceo

Hamburgers, to many of us, are vastly tastier than filet mignon because of the higher fat content, but people have been convinced that the latter is better because it is more expensive to produce. (Location 2870)

Tags: societal norms, favorite

Looking at Saudi Arabia, which should progressively revert to the pre-oil level of poverty, I wonder if taking away some things from them—including the swarm of fawning foreigners coming to skin them—will make them better off. (Location 2885)

Tags: oil, saudiarabia

Note: .saudiarabia

Chapter 11 Facta non Verba (Deeds Before Words)

You will note that no explicit verbal threat was issued. Verbal threats reveal nothing beyond weakness and unreliability. Remember, once again, no verbal threats. (Location 2951)

Chapter 12 The Facts Are True, the News Is Fake

Chapter 13 The Merchandising of Virtue

Chapter 14 Peace, Neither Ink nor Blood

No peace proceeds from bureaucratic ink. If you want peace, make people trade, as they have done for millennia. They will be eventually forced to work something out. (Location 3228)

Tags: peace

Note: People that trade are more likely to be at peace


Chapter 15 They Don’t Know What They Are Talking About When They Talk About Religion

Two people can be using the same word, meaning different things, yet continue the conversation, which is fine for coffee, but not when making decisions, particularly policy decisions affecting others. (Location 3327)

Tags: language

Note: .language

Chapter 16 No Worship Without Skin in the Game


Chapter 18 How to Be Rational About Rationality

Recall that 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. (Location 3591)

How much you truly “believe” in something can be manifested only through what you are willing to risk for it. (Location 3614)

Note: Your belief in something can be shown by what you are prepared to risk on that belief

Not everything that happens happens for a reason, but everything that survives survives for a reason. Rationality is risk management, (Location 3651)

Assume a collection of people play Russian roulette a single time for a million dollars—this is the central story in Fooled by Randomness. About five out of six will make money. If someone used a standard cost-benefit analysis, he would have claimed that one has an 83.33 percent chance of gains, for an “expected” average return per shot of $833,333. But if you keep playing Russian roulette, you will end up in the cemetery. Your expected return is … not computable. (Location 3711)

Tags: russian roulette

Smoking a single cigarette is extremely benign, so a cost-benefit analysis would deem it irrational to give up so much pleasure for so little risk! But it is the act of smoking that kills, at a certain number of packs per year, or tens of thousand of cigarettes—in other words, repeated serial exposure. (Location 3724)

SUMMARY We close this chapter with a few summarizing lines. One may be risk loving yet completely averse to ruin. The central asymmetry of life is: In a strategy that entails ruin, benefits never offset risks of ruin. Further: Ruin and other changes in condition are different animals. Every single risk you take adds up to reduce your life expectancy. Finally: Rationality is avoidance of systemic ruin. (Location 3839)

Tags: favorite

Note: In a strategy that entails ruin, benefits never offset risks of ruin.

Gains tax which can punish the wealth generator, is popular but absurd and certainly suicidal: since the payoff is severely clipped on the upside, it would be a lunacy to be a risk taker with small probability bets, with wins of 20 (after tax) rather than 100, then disburse all savings progressively in wealth tax.

The optimal strategy then would be to go become an academic or a French-style civil servant, the anti-wealth generators. To see the cross-sectional problem temporally: Compare someone with lumpy payoffs, say an entrepreneur who makes $4.5 million every twenty years, to an economics professor who earns the same total over the period ($225K in taxpayer-funded income).

The entrepreneur over the very same income ends up paying 75 percent in taxes, plus wealth tax on the rest, while the rent-seeking tenured academic who doesn’t contribute to wealth formation pays say 30 percent.) (Location 3917)

Tags: entrepreneur, tax

Note: .tax

Rent Seeking: trying to use protective regulations or “rights” to derive income without adding anything to economic activity, without increasing the wealth of others. As Fat Tony would define it, it is like being forced to pay protection money to the Mafia without getting the economic benefits of protection. (Location 4035)

Bob Rubin Trade: payoff in a skewed domain where the benefits are visible (and rewarded with some compensation) and the detriment is rare (and unpunished owing to absence of skin in the game). Can be generalized to politics, anything where the penalty is weak and the victims are abstract and distributed (say taxpayers or shareholders). (Location 4057)

Lindy Effect: when a technology, idea, corporation, or anything nonperishable has an increase in life expectancy with every additional day of survival—unlike perishable items (such as humans, cats, dogs, economic theories, and tomatoes). So a book that has been a hundred years in print is likely to stay in print another hundred years—provided its sales remain healthy. (Location 4068)

Minority Rule: an asymmetry by which the behavior of the total is dictated by the preferences of a minority. Smokers can be in smoke-free areas but nonsmokers cannot be in smoking ones, so nonsmokers will prevail, not because they are initially a majority, but because they are asymmetric. It is held by the author that languages, ethics, and (some) religions spread by minority rule. (Location 4081)

Golden Rule (symmetry): Treat others the way you would like them to treat you. Silver Rule (negative golden rule): Do not do to others what you would not like them to do to you. Note the difference from the Golden Rule, as the silver one prevents busybodies from attempting to run your life. (Location 4100)