Skin In the Game

Nassim Taleb’s Skin in the Game is one of those books I find myself returning to again and again. It’s full of practical, hard-hitting wisdom. His words literally sting and make you wince. In its essence, it provides principles to deal with the reality and heuristics for bull**t identification.

I highly recommend reading it multiple times, to truly understand its wisdom. You will learn how to filter out nonsense, differentiate between theory and practice, fake and true expertise, and academia and the real world.

What follows are my notes and learnings I took from the book. Hope you find them useful. But please, go buy the book. You will thank me later.

Simplicity

People who are incentivized to provide complicated solutions do not have an incentive to implement simplified ones. Never pay for the complexity of presentation when all you need is results.

A bureaucracy will increase in complication from interventionistas who sell complicated solutions because that’s what their position and training invite them to do.

People who are bred, selected, and compensated to find complicated solutions do not have an incentive to implement simplified ones.

Many problems in society come from the interventions of people who sell complicated solutions becasue that’s what their position and training invite them to do.

There is absolutely no gain for someone in such a position to propose something simple. They are rewarded for perception, not results. Meanwhile, they pay no price for the side effects that grow non-linearly with such complications.

There is absolutely no benefit for someone in such a position to propose something simple: when you are rewarded for perception, not results, you need to show sophistication.

Anyone who has submitted a “scholarly” paper to a journal knows that you usually raise the odds of acceptance by making it more complicated than necessary.

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. Same can be applied for the software. Things designed by people without skin in the game tend to grow in complication (before their final collapse).

You don’t need complex models to avoid a certain catastrophic stupidity. If you don’t understand something and it has a systemic (affecting the whole system) effect, just avoid it.

On Survival

Survival comes first. Truth, understanding, and science later.

You do not need science to survive, but you must survive to do science. Better safe than sorry.

First, live. Then philosophize. Our knowledge of the world is fundamentally incomplete, so we need to avoid getting into unanticipated trouble.

Probability of Ruin. Beware of systems where observed past probabilities do not apply to future processes. Chances of ‘ruin’, no reversibility away from the situation.

If you incur a tiny probability of complete ruin as a “one-off” risk, survive it, then do it again as another one-off deal, you will eventually go bust with a probability of one hundred percent.

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

Virtue-Signalling. To Be, or To Seem?

It’s immoral to claim virtue without fully living with its direct consequences.

If your private life conflicts with your intellectual opinion, it cancels your intellectual ideas, not your private life.

Virtue is not something you advertise. The usual global causes, such as poverty, environment, etc. are, in most cases, virtue advertising platforms.

Sticking up for truth when it is unpopular is far more of a virtue, because it costs you something - your reputation.

Prefer to be asked why you don’t have a statue, rather than why you have one.

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.

Intelligentsia

The curse of modernity is that we are increasingly populated by a class of people who are better at explaining than understanding, or doing.

In general, when you hear someone invoking abstract modernistic notions, you can assume that they got some education (but not enough, or in the wrong discipline) and have too little accountability.

People who are delusional, literally mentally deranged, simply because they never have to pay for the consequences of their actions.

People who repeat modernist slogans stripped of all depth.

They never learn from their mistakes as they don’t have a skin in the game, and aren’t harmed from their actions.

Modernism, Intellectualism and Scientism. Belief that one can separate an action from the results of action, that one can separate theory from practice, that one can always fix a complex system by hierarchical approaches in a ceremonial top-down manner.

Scientism is a naive interpretation of science as complication rather than science as a process and a skeptical enterprise.

• Using mathematics when it’s not needed, to replace logic.
• Replacing the natural, that is age-old processes that have survived trillions of high-dimensional stressors with something in a “peer-reviewed” journal that may not survive replication or statistical scrutiny is neither science nor good practice.

Change, for the sake of change, is frequently the opposite of progress. Too high a rate of mutation prevents locking in the benefits of previous changes: evolution and progress requires some, but not too frequent, variation.

There is a difference between beliefs that are decorative and different sorts of beliefs, those that map to action.

Focus on what people do, not what they think or say. People’s explanations for what they do are just words, stories they tell themselves, not the reality of their actions. What they do, on the other hand, is tangible and measurable and that’s what we should focus on.

What people “think” is not relevant - you want to avoid entering the mushy-soft and self-looping discipline of psychology.

No Verbal Threats. Verbal threats reveal nothing beyond weakness and unreliability. You do not want to win an argument. You want to win.

Facing Adversity

No one is more unhappy than he who never faces adversity. For he is not permitted to prove himself. - Seneca

Skin in the game helps to solve the Black Swan problem and other matters of uncertainty at the level of both the individual and the collective: what has survived has revealed its robustness to Black Swan events and removing skin in the game disrupts such selection mechanisms.

Without skin in the game, we fail to get the Intelligence of Time, in which

• time removes the fragile and keeps the robust,
• the life expectancy of the antifragile lengthens with time

The Lindy Effect. That which is “Lindy” is what ages in reverse, i.e. its life expectancy lengthens with time, conditional on survival. Only the nonperishable can be Lindy, e.g. ideas, books, technologies, procedures, institutions, etc.

Soul in the Game

You have some art and craftsmanship in your profession.

You won’t sell something defective or even of compromised quality because it hurts your pride.

You are not in your profession just to make money.

Having an assistant (virtual, technical, or human) removes your soul from the game.

People have two brains, one when there is skin in the game, one when there is none.

Skin in the game can make boring things less boring.

We are dumb without the skin in the game

When you have skin in the game, dull things like checking the safety of the aircraft because you may be forced to fly in it cease to be boring.

What you learn from the intensity and the focus you had when under the influence of risk stays with you.

Fake Entrepreneurship

Because of the funding and venture capital mechanisms, many people are mistaken for real entrepreneurs.

These fake entrepreneurs don’t have true skin in the game, in the sense that their aim is to either cash out by selling the company they helped create, or “go public” by issuing shares in the stock market. The true value of the company, what it makes, and its long-term survival are of small relevance to them.

Macroeconomics can be nonsense since it is easier to macrobulls**t than microbulls**t. Nobody can tell if a theory really works.

This is a pure financing scheme and we will exclude this class of people from our “entrepreneur” risk-taker class. We can easily identify them by their ability to write a convincing business plan.

This form of entrepreneurship is the equivalent of bringing great-looking and marketable children into the world with the sole aim of selling them at age four.

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

A free person does not need to win arguments - just win.

Learn from doers, not talkers

Always do more than you talk. And precede talk with action. For it will always remain that ‘action without talk > talk without action’.

The principal thing you can learn from an academic is how to be an academic, and the chief thing you can learn from a life coach or inspirational speaker is how to become a life coach or inspirational speaker.

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.

Usually, what is presented as good for you is not really good for you but certainly good for the other party. One lauds merrily the merchandise to get rid of it.

Data is not necessarily rigor. People flood their stories with numbers and graphs in the absence of solid or logical arguments. Just a little bit of significant data is needed when one is right, particularly when it is dis-confirmatory. Only one data point is sufficient to show that Black Swans exist. Traders, when they make profits, have short communications; when the lose they drown you in details, theories, and charts.

Having Opinions - Who is the Real Expert?

Those who talk should do, and only those who do should talk.

Things that have survived, conditional on their being exposed to harm. For without skin in the game, without exposure to reality, the mechanism of fragility is disrupted. Things may survive for no reason for a while, at some scale, then ultimately collapse, causing a lot of collateral harm.

Surgeons should not look like surgeons. The one who doesn’t look the part, conditional on having made a successful career in his profession, had to have much to overcome in terms of perception. Contact with the reality filters out incompetence, as reality is blind to looks.

The most convincing statements are those in which one stands to lose, ones in which one has maximal skin in the game. Someone with a high public presence who is controversial and takes risks for his opinion is less likely to be a bulls**t vendor (this reminds me of DHH and Jason Fried of 37signals, and why I admire them so much).

The most unconvincing ones are those in which one patently (but unknowingly) tries to enhance one’s status without making a tangible contribution.

Showing off is reasonable, it’s human. As long as the substance exceeds the showoff, you are fine. Stay human, take as much as you can, under the condition that you give more than you take.

Ideas need to have skin in the game. You know an idea will fail if it is not useful, and can be therefore vulnerable to the falsification of time. The longer an idea has been around without being falsified, the longer its future life expectancy.

True intellect should not appear to be intellectual.

In any type of activity or business divorced from the direct filter of skin in the game, the great majority of people know the jargon, play the part, and are intimate with the cosmetic details, but are clueless about the subject.

The Irrationality of Rationality

By definition, what works cannot be irrational. If something stupid works, it cannot be stupid.

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

A practice may appear to be irrational to an over-educated and naive observer, because we are not intelligent enough to understand it - but it has worked for a long time.

Is it irrational? We have no grounds to reject it. Most of what is called “irrational” comes from misunderstanding of probability.

But we know what is unmistakably irrational: what threatens the survival and causes total, absolute ruin. Anything that hinders one’s survival at an individual, collective, tribal, or general level is irrational.

What is Rational, allows survival over the long term.

When we look at religion, or an ancestral superstitions, we should consider what purpose they serve, rather than focusing on the notion of belief. 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.

Ethics

Do nothing to others which if done to you would cause you pain. Deal with the weaker as you think it appropriate for stronger to deal with you.

The ethical is always more robust than what is legal. Avoid anything unethical, even though it might be perfectly legal.

It may not be ethically required, but the most effective, shame-free policy is maximal transparency, even transparency of intentions.

Only the Rich are Robbed

When people get rich, they lose control of their preferences, substituting constructed preferences for their own, complicating their lives unnecessarily, triggering their own misery.

These constructed preferences are of course the preferences of those who want to sell them something.

It is easy to scam people by getting them into complications. Further, the rich start using experts and consultants. An entire industry meant to swindle you will swindle you: financial consultants, diet advisers, exercise experts, lifestyle engineers, sleeping councilors, breathing specialists, etc.

Avoid short-term, one-shot transactions.

Misalignment of interests in a transaction: a vendor in a one-shot transaction does not have his interests aligned to yours - and so has high incentives to cheat you in the deal. Your neighborhood vendor, is playing a long-term game instead, and has good incentives to work with you.

Large funeral homes

If wealth is giving you fewer options instead of more (and more varied) options, you’re doing it wrong.

Most people are happier in close quarters, where they can feel human warmth and company. But when they have big bucks they end up pressured to move into outsized , impersonal, and silent mansions, far away from neighbors. On late afternoons, the silence of these large mansions has a funeral feel to it.

Prosperous people of the type who don’t look rich are certainly aware of the point - they live in comfortable quarters and instinctively know that a move will be a mental burden. Many still live in their original houses.

Very few people understand their own choices, and end up being manipulated by those who want to sell them something.

If you want to have friends, you need to hide your money and not be a show-off. Same goes with your wisdom and learning.

People can only be social friends if they don’t try to upstage or outsmart one another. The classical art of conversation is to avoid any imbalance. 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.

Say No.

No muscles without strength.

No friendship without trust.

No opinion without consequence.

No age without values.

No life without effort.

No comfort without effort.

No food without nourishment.

No love without sacrifice.

No power without fairness.

No statistics without logic.

No teaching without experience.

No politeness without warmth.

No values without embodiment.

No degrees without wisdom.

No virtue without risk.

No complication/complexity without depth of understanding.

No fluency without content.

No science without skepticism.

No religion without tolerance.

Learn to Distinguish

• Action and cheap talk
• consequence and intention
• practice and theory
• honor and reputation
• expertise and charlatanism
• concrete and abstract
• ethical and legal
• genuine and cosmetic
• merchant and bureaucrat
• entrepreneur and CEO
• strength and display
• love and gold-digging
• Omaha (Buffett) and Wall Street
• Wisdom and academia
• science and scientism
• politics and politicians
• quality and advertising
• commitment and signalling

On Advice

Age	Listen To	Ignore
Young	Reasoning	Conclusion
Middle-Age	Reasoning and Conclusion	Nothing
Old	Conclusion	Reasoning