Skin in the Game: Hidden Asymmetries in Daily Life
304Skin in the Game: Hidden Asymmetries in Daily Life
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Overview
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.”
Product Details
ISBN-13: | 9780425284643 |
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Publisher: | Random House Publishing Group |
Publication date: | 01/07/2020 |
Series: | Incerto Series |
Pages: | 304 |
Sales rank: | 45,499 |
Product dimensions: | 5.10(w) x 7.80(h) x 0.80(d) |
About the Author
Read an Excerpt
Chapter 1
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?
Table of Contents
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 265