Guest Post by Nassim Taleb
When selecting a surgeon for your next brain procedure, should you pick a surgeon who looks like a butcher or one who looks like a surgeon? The logic of skin in the game implies you need to select the one who (while credentialed) looks the least like what you would expect from a surgeon, or, rather, the Hollywood version of a surgeon.
The same logic mysteriously answers many vital questions, such as 1) the difference between rationality and rationalization, 2) that between virtue and virtue signaling, 3) the nature of honor and sacrifice, 4) Religion and signaling (why the pope is functionally atheist) 5) the justification for economic inequality that doesn’t arise from rent seeking, 6) why to never tell people your forecasts (only discuss publicly what you own in your portfolio) and, 7) even, how and from whom to buy your next car.
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What is Skin in the Game? The phrase is often mistaken for one-sided incentives: the promise of a bonus will make someone work harder for you. For the central attribute is symmetry: the balancing of incentives and disincentives, people should also penalized if something for which they are responsible goes wrong and hurts others: he or she who wants a share of the benefits needs to also share some of the risks.
My argument is that there is a more essential aspect: filtering and the facilitation of evolution. Skin in the game –as a filter –is the central pillar for the organic functioning of systems, whether humans or natural. Unless consequential decisions are taken by people who pay for the consequences, the world would vulnerable to total systemic collapse. And if you wonder why there is a current riot against a certain class of self-congratulatory “experts”, skin the game will provide a clear answer: the public has viscerally detected that some “educated” but cosmetic experts have no skin in the game and will never learn from their mistakes, whether individually or, more dangerously, collectively.
Have you wondered why, on high-speed highways there are surprisingly few rogue drivers who could, with a simple manoeuver, kill scores of people? Well, they would also kill themselves and most dangerous drivers are already dead (or with suspended license). Driving is done under the skin in the game constraint, which acts as a filter. It’s a risk management tool by society, ingrained in the ecology of risk sharing in both human and biological systems. The captain who goes down with the ship will no longer have a ship. Bad pilots end up in the bottom of the Atlantic Ocean; risk-blind traders become taxi drivers or surfing instructors (if they traded their own money).
Systems don’t learn because people learn individually –that’s the myth of modernity. Systems learn at the collective level by the mechanism of selection: by eliminating those elements that reduce the fitness of the whole, provided these have skin in the game. Food in New York improves from bankruptcy to bankruptcy, rather than the chefs individual learning curves –compare the food quality in mortal restaurants to that in an immortal governmental cafeteria. And in the absence of the filtering of skin in the game, the mechanisms of evolution fail: if someone else dies in your stead, the built up of asymmetric risks and misfitness will cause the system to eventually blow-up.
Yet the social science and the bureaucrato-BSers have missed and keeps missing that skin in the game is an essential filter. Why? Because, outside of hard science, scholars who do not have skin in the game fail to get that while in academia there is no difference between academia and the real world, in the real world, there is. They teach evolution in the classrooms but, because they are not doers, they don’t believe that evolution applies to them; they almost unanimously vote in favor of a large state and advocate what I’ve called “Soviet-Harvard top-down intelligent design” in social life.
As illustrated by the story of the surgeon, you can tell, from the outside, if a discipline has skills and expertise, from the presence of the pressures of skin in the game and some counterintuitive consequences. But what we call “empty suits”, of the kind you see in think tanks or large corporations –those who want to increasingly run our lives or intervene in Libya — look like actors playing the part, down to their vocabulary and the multiplicative meetings. Talk is cheap and people who talk and don’t do are easily detectable by the public because they are too good at talking.
Plumbers, bakers, engineers, and piano tuners are judged by their clients, doctors by their patients (and malpractice insurers), and small town mayors by their constituents. The works of mathematicians, physicists, and hard scientists are judged according to rigorous and unambiguous principles. These are experts, plus or minus a margin of error. Such selection pressures from skin in the game apply to perhaps 99% of the population. But it is hard to tell if macroeconomists, behavioral economists, psychologists, political “scientists” and commentators, and think-tank policymakers are experts. Bureaucrato-academics tend to be judged by other bureaucrats and academics, not by the selection pressure of reality. This judgment by peers only, not survival, can lead to the pestilence of academic citation rings. The incentive is to be published on the right topic in the right journals, with well sounding arguments, under easily some contrived empiricism, in order to beat the metrics.
Accountants, not other “peer” forecasters, nor referees using metrics should be judging forecasters.
Metrics are always always gamed: a politician can load the system with debt to “improve growth and GDP”, and let his successor deal with the delayed results.
Alas, you can detect the degradation of the aesthetics of buildings when architects are judged by other architects. So the current rebellion against bureaucrats whether in DC or Brussels simply comes from the public detection of a simple principle: the more micro the more visible one’s skills. To use the language of complexity theory, expertise is scale dependent. And, ironically, the more complex the world becomes, the more the role of macro-deciders “empty suits” with disproportionate impact should be reduced: we should decentralize (so actions are taken locally and visibly), not centralize as we have been doing.
In addition, owning one’s risk was an unescapable moral code for past four millennia, until very recent times. War mongers were required to be warriors. Fewer than a third of Roman emperors died in their bed (assuming those weren’t skillfully poisoned). Status came with increased exposure to risk: Alexander, Hannibal, Scipio, and Napoleon were not only first in battle, but derived their authority from a disproportionate exhibition of courage in previous campaigns. Courage is the only virtue that can’t be faked (or gamed like metrics). Lords and knights were individuals who traded their courage for status, as their social contract was an obligation to protect those who granted them their status. This primacy of the risk-taker, whether warrior (or, critically, merchant), prevailed almost all the time in almost every human civilization; exceptions, such as Pharaonic Egypt or Ming China, in which the bureaucrat-scholar moved to the top of the pecking order were followed by collapse.
Appendix: Verbagiastic psycholophasters don’t get it
Verbagiastic Tetlock and Nudgeboy Thaler didn’t get the idea of skin in the game. It’s not an aid for decision-making. Even if it is so, it is not incentive. He seems to not realize that there is such a thing as evolution.
The people who got their money from thin air had no skin in the game but the 99% of US want their skin to hang on our wall.
Taleb’s skin-in-the-game ideas are fine. It’s just that when corruption becomes the norm, it doesn’t seem worthwhile to risk any skin. I’ll just watch, thanks.
Tetlock’s argument is that SITG helps but is not dispositive. This seems innocuous and correct, insofar as it applies to situations . Taleb objects because I think he believes that Tetlock misses Taleb’s main point: SITG is about systems, not situations.
Thaler’s objection, outlined in his book “Mis-Behaving”, which is quite good, is that many banks and companies go bust with leadership with a lot of skin in the game – eg Lehman, Bear Stearns. And he correctly cited lots of behavioral research suggesting decision making doesn’t improve at higher stakes versus low/no stakes. But this is no refutation; poor individual outcomes don’t invalidate the general principle.
Taleb can obviously speak for himself. But I guess he feels these academics fail to grasp that he’s making a systems and evolutionary point, not a point about individual behavior. And Thaler’s point that we see poor decisions from people with a lot of skin in the game doesn’t refute Taleb’s system-based view that SITG is essential to society, evolution and systems.
I don’t have time to run this info down, but I would bet my house that the execs from Lehman and Bear Stearns are either still employed with large salaries, or are on a beach somewhere enjoying their ill-gotten gains.
Captain Willard doesn’t understand Taleb’s meaning of SITG: in older societies, losers were **utterly destroyed**.. killed… shunned… kicked out of the village; our current SYSTEM backstops losers across the board. What happened to “Loser” Mike Milken.. he’s still got a few or three billion and people in CA think he’s a hero. Not sure if I heard they named a street after him. “Loser” John McCain has kept coming back like the Terminator his whole sick and twisted life. “Loser” Angelo Mozilo got an honorary degree from Pepperdine’s business school *after* his sub-prime mortgage scamming came to light. “Loser” Bill Cosby has 60 honorary degrees. Once in a while the SYSTEM throws a Madoff in jail, but that’s just for show.
The current SYSTEM allows thieves and scumbags to prosper at the level of a functioning global cartel. They all have each other’s backs so there is no individual accountability. Accountability to them is like sunlight to Dracula: they could not survive if held accountable. Individual risk is minimal. Just look at the whole FBI situation: it’s come to the point where it’s impossible to arrest the number of criminals because there’d be nobody left to do the arresting.
Now, while individual accountability is at an all-time low, *SYSTEMIC* risk is, I would say, extremely high, to a degree because of the increasingly bad actions of increasing numbers of unpunished bad actors.
Another example of SYSTEMIC lack of accountability is in the schools: whatever you thought of them 20 years ago, they’ve become even more broken because of the overall decision not to punish or expel violent and disruptive students..
And again with illegal immigrants.. there are now so many that they are not looked upon as individual law-breakers, but as a protected class within the SYSTEM which will now be rewarded with voting rights in some locales.
Evolutionarily, this SYSTEM will crash due to its unsustainable nature, and what will replace it will be something simpler in which individuals exercise more judgmental autonomy. It may be that the state no longer enjoys its monopoly on violence, effectively ending the nation-state proposition which is already almost completely undermined by globalist “free”-trade and open-borders initiatives. When you look at Islam, one of its “features” is its lack of hierarchy and its mandates to individual violence. I think they are better positioned to take advantage of politely “domesticated” civilizational systems which require a great deal more energy to maintain.
I agree with all your points.
I was simply trying to distinguish the academic preoccupation with experimental behavior versus Taleb’s concern with the function of systems. Perhaps I should have made this clearer.
“Now, while individual accountability is at an all-time low, *SYSTEMIC* risk is, I would say, extremely high, to a degree because of the increasingly bad actions of increasing numbers of unpunished bad actors.”
Now that’s an observation that could launch an entire branch of study.
There is, at minimum a very solid essay in that idea.
Unfortunately, the only time this changes – from today’s academic idiots making decisions that effect you – to the skin in the game principle is when the people with guns stop enforcing their policies, and forcing skin in the game by their leaders. It really is that simple. All throughout history, when the leader lost the confidence of the armies (enforcers), that leader lost their influence.
We will never have a shot at this until 1. Sheeple – STOP being sheeple. 2. The enforcers with the guns STOP doing the bidding of the academics and bureaucrats that tell them what to do under the auspices of “law” and credential. How much power do you think that any of these asshats would have if large numbers of local Sheriffs simply told them to fuck off? Rather than suck ups like the idiot in Coward county Florida?
During the 2008 – 09 RE collapse, some local Sheriff’s and judges told the banksters that they had to PROVE that they actually owned the note before they would enforce any foreclosure. What do you suppose the corner office banksters did? They certainly did not go to the home themselves and kick out the family. Some tried (miserably BTW) to state some legal “case” of MERS and were summarily thrown out. They just judge shopped until they could find a sympathetic enforcer they could have do their dirty work for them. All tyrants, be it bankers or bureaucrats have only ONE way of enforcing their tyranny, and that is through the force of (and gullibility) of a gun. It may be why you see an increasing less intelligent cop these days. They WANT idiots with guns, they are easier to convince that the sky is red, and that black is white. Can’t have those guns growing a conscience, or asking why, can we? Any tyrants wet dream is an army of idiots, just smart enough to pull the trigger, but definitely NOT smart enough to ask why.
Why should I worry about having skin in the game when I don’t have a dog in the fight?
Besides the system argument, there’s a moral argument. Should you make decisions where you have nothing to lose but others do? What gives you the right? My King James pronounces blessings upon “he who is liberal,” but 600 years ago, this meant “generous”. In particular, it meant, “generous w/ his own money.” “Liberals” today are generous with other people’s money.
And one of the German kings said, “The Monarchy in Europe began to decline when Kings ceased to lead their armies into battle.” There’s a difference between being brave for yourself & being brave for other people.
Profesdor Dan Ariely in his books addresses some of the interesting moral implications of behavioral psychology in his books, which I think you would enjoy, if you have not already read them.
But I hope Taleb would agree with you. I certainly agree with you.
Here’s another “loser”:
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A bronze statue dedicated to the former crack-smoking Democratic mayor of Washington, D.C., Marion Barry, has been erected just blocks from the White House.
Barry, who served two terms as city mayor from 1979 to 1991 and again from 1995 to 1999, as well as a city councilman, had a statue unveiled in his honor last Saturday by the D.C. Commission on the Arts and Humanities next to the Washington City Council building, located just blocks from the White House.
The former mayor was known for his run-ins with the law and attracted national attention in 1991 when the FBI caught him under a sting operation smoking crack cocaine with his girlfriend, for which he consequently went to prison.
However, following his release from prison, he ran again in 1994 for the mayorship and won, securing himself another four-year term.
…
“…it was Marion Barry that brought opportunity to Washington, D.C.,” said current Democratic mayor Muriel Bowser. “He embodied the spirit of Washington.”
http://www.breitbart.com/big-government/2018/03/05/statue-of-former-crack-smoking-d-c-mayor-unveiled-blocks-from-white-house/
I think I can say, as a native Washingtonian, that There is no doubt that Marion Barry embodied the Spirit of Washington.
Let’s hope that the statue becomes the future rendezvous point for hookers and crack rock slingers of all political persuasions
The genius of Taleb is in Chapter 1 “Why Each One Should Eat his Own Turtles”.
“Free citizens in ancient and post-classical societies were traditionally part of clubs”.
When my Grandparents immigrated here from Eastern Europe, they lived in a Polish neighborhood and were organized as an extended family with tribal economic interests in the Eastern European club.
Now if you are a member of the Tribal Banking Club how do you go about neutralizing competing clubs?
Solution- Increase the mobility of society, encourage people to move away from their families, isolate them. Fragment economic interests to the Nuclear Family level. Discourage Religion.
Meanwhile, the Tribal Banking Club keeps their family and religious ties. Their children attend tribal schools. They increase their power, because they are organized as a club with specific goals and calculated worldwide alliances.
What to do about this? Maybe cryptocurrencies are the answer? Self interested clubs trade with one another within the organization. Set their own interest rates and decide in an unrigged market how goods and services are priced. Because maybe, shazam, the services performed by the Public sector have no actual value in an unrigged market.
Tetlock misses most of the point, even if having skin in the game does not improve decision making on an individual basis (how he can prove this would be interesting and I would like to see the data and analysis to be convinced), it does on a society-wide basis as those with poor decision making skills lose capital or power and hence stop making decisions of import.
Unfortunately we allow people to make suggestions or actual policy affecting millions in spite of having no record of success, or a record of failure-see the Fed’s record of forecasting or Larry Summers on the one big investing decision he ever made.
While reading about skin in the game here I couldn’t help thinking about the cops, and what’s wrong with them. They have no skin in the game. The cash paid out in the lawsuits covering their wrong-doing never comes out of their own pockets. They never lose their jobs for unjust brutality or murder. They get paid vacation when then shoot a citizen. They get away with anything and everything, and if questioned their superiors merely state that “they were following department policy”, and that makes it disappear into the ether and it’s all forgotten.