Review – Skin in the Game

There’s a specific type of intellectual energy that I get from sitting down with a book of Nassim Taleb’s. His ability to tie together the seemingly disparate fields of mathematics, philosophy, finance, and local, national, and international relations, as well as his ability to thoroughly and clearly debunk much of the popular psychologic and economic thinking of the moment, sets him apart from most contemporary thinkers in my view (who oftentimes relegate themselves to a single line of inquiry), and make him one of a select group of people that I admire most.

An aside: Meeting Nassim Taleb in a chance encounter on the streets of New York late last year (no doubt on his way to, or coming from squid ink pasta lunch), I was completely starstruck, and stopped him in the middle of a busy Manhattan intersection to express my admiration and thanks. He was incredibly gracious and accepted my handshake, though he helpfully asked to continue our conversation on the sidewalk and out of the street.

Taleb’s writing, and writing style (he famously refuses to accept any but the lightest edits of his manuscripts), is so foreign and different from anything being written today across commercial economics / business / philosophy writing, that I struggle to come up with any immediate contemporaries of his. After reading one of his books oftentimes find myself at a loss to figure out what to read next (other than another one of his books.) He has a tendency to cut through the over-explained or over-academic bullshit, and offer straightforward, no-nonsense prose, as well as no shortage of data and source material to back up his claims. Nassim will drop casual asides, or aphorisms mid-way through chapters that are so resonant that other business books could be (or are) based entirely off them.

Skin in the Game is the latest entry in Taleb’s ‘Incerto’ series. Having just finished the book, I think Skin in the Game is Taleb’s most immediately practical and “useful” book, and a worthy addition to the series. While Fooled by Randomness offered a way of thinking about the world, Black Swan dealt with the impact of seismic events (that while have been since proven to be true, aren’t the types of things that most healthy people think about in their day-to-day lives), and Antifragile provided a fascinating way of evaluating systems and ideas, (again, a role that most of us don’t find ourselves in on a regular basis), Skin in the Game provides a straightforward approach for guiding our personal inquiries, choices, and evaluations.

Skin / Soul in the Game

As with all of Taleb’s books, the primary thesis of Skin in the Game is derived from a simple concept – the bifurcation of people with and without “skin in the game” (which he defines as exposure to downside risk), and the harmful effects of listening those without skin in the game. These “experts,” which he coins “Intellectuals-Yet-Idiots” (IYIs, or simply idiots), include economists, foreign policy experts, academics, politicians, etc., groups whose ideas should be appraised with a healthy amount of skepticism.

He explains that all of these groups share a common “asymmetry” of risk, whereby their prognosticating, or advocating (say, for the invasion of Iraq) subjects these practitioners to little-to-no downside in the event they are wrong: at the end of the day, they will still return home to their suburban home or urban apartment and continue to receive their monthly stipend, with limited exposure to the potential downside risks associated with a full-scale military invasion, a change of monetary policy, new government legislation, etc.

He illustrates this concept through what he calls the “Bob Rubin trade,” based on the former Treasury Secretary Robert Rubin, who was prominently involved in the loosening of banking regulations with the Clinton administration, and was able to parlay that experience into a multi-million dollar position at Citigroup. Citi was famously most flagrantly overleveraged financial institution leading up to the 2008 Crisis, and was subsequently bailed out to the tune of nearly ~$300 billion by US taxpayers. Despite Rubin’s prominent role in all stages of this saga, at no point was there any palpable penalty or downside risk felt by Rubin – he remained a salaried employee of Citibank, and no doubt benefited greatly from the massive 2010 bonuses paid out with taxpayer funds.

To counteract or avoid the class of risk-free advocates, consultants, and experts, Taleb’s solution is to “avoid taking advice from someone who gives advice for a living, unless there is a penalty for their advice.” In Talebian fashion, he neatly summarizes this concept by the aphorism: “if you do not take risks for your opinion, you are nothing.” Committing yourself fully to your opinions / work / output, at the expense of not only your own reputation, but also potentially that of others, is what he calls “soul in the game,” a level further than skin in the game (which only factors in personal downside and reputational risk).

He helpfully offers a table summarizing these asymmetries, from which I’ve pulled out a few choice examples that particularly resonated with me:

No Skin in the Game:	Skin in the Game:	Soul in the Game:
Politicians	Activists	Dissidents / Revolutionaries
Bureaucrats, policy wonks	Citizens	Saints, knights, soldiers
Centralized government	Government of city-states	Municipal government

 

Learning with Skin in the Game

Early on in the book, Taleb elucidates a point, and a feeling, that I’ve struggled to put into words up to this point:

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. When you have skin in the game, dull things like checking the safety of the aircraft because you may be forced to be a passenger in it cease to be boring. If you an investor in a company, doing ultra-boring things like reading the footnotes of a financial statement (where the real information is to be found) becomes, well, almost not boring.)

He continues:

A confession. When I don’t have skin in the game, I am usually dumb. My knowledge of technical matters, such as risk and probability, did not initially come from books. It did not come from lofty philosophizing and scientific hunger. It did not even come from curiosity. It came from the thrills and hormonal flush one gets while taking risks in the markets.

When there was risk on the line, suddenly a second brain in me manifested itself, and the probabilities of intricate sequences became suddenly effortless to analyze and map.

… what you learn from the intensity and the focus you had when under the influence of risk stays with you. You may lose the sharpness, but nobody can take away what you’ve learned.

For someone as intelligent, well-read, and informed as Taleb, this strikes me as not only a remarkable bit of humility, but also a codex of sorts for developing an intellect like Taleb. As he recounts to his readers throughout the Incerto series, his formative time as a trader, placing options and derivatives trades with quantifiable downside and unlimited upside (‘fat tail’ risks), have informed much of his academic output and commercial writing in the decades since. Beyond formative, these experiences provided him with a lens and worldview to carry forward his inquiries, borne of the “real,” or applicable world.

In finance circles, one oftentimes comes across eager investors, oftentimes riding the high of a recent stock market wager, looking for a ‘curriculum’ or book that will set themselves down the path towards unimpeded stock market success. While the casual, and oftentimes first answer is Benjamin Graham’s Intelligent Investor, lauded by Warren Buffett on the front cover as “by far the best book on investing ever written” (despite the fact that Graham himself broke his book’s value investing rules in his biggest investment success, Geico.) However, an increasingly popular choice is called What I Learned Losing a Million Dollars, written by former CBOE trader Jim Paul (Taleb himself generously called it “One of the rare noncharlatanic books in finance.”) The book deals with Paul’s heyday as a commodities trader, and the success (and related hubris) he developed early in his career. However, as the book continues Paul himself explains how this hubris led to his downfall – the eponymous loss of $1.6 million (of his own) dollars. While investment novices may be puzzled by the near-consensus recommendation, Paul’s explanation behind his losses is probably the most clearheaded account in print on the highs-and-lows of true “skin in the game,” and the lessons these experiences engendered.

In my own personal life, I’ve witnessed this play out in a number of ways. Despite countless iterations of economics and finance class, the day-to-day intricacies of inflation and monetary policy have mostly alluded me. It is only now, that I am living in a developing country and am personally subjected to inflation risk (with significant potential downside), have I begun to seek out, and fully grasp, these concepts. Similarly, despite the multi-billion dollar language training industry, and three College semesters of Brazilian Portuguese under my belt, it wasn’t until I actually showed up in Brazil for the first time that I actually recognized my inadequacy in the language, which subconsciously activated this “second brain” as I sought to get up to speed. Since then, little of my continued advancement in the language has come from books or lessons. Rather, being among other Portuguese speakers, and being at the risk of looking stupid or saying the wrong thing, has continued to propelled my language study further.

 

Loss Aversion, or Downside risk

Taleb’s application of skin in the game extends to one’s personal life and career through the concept of “loss aversion.”

He explains that “what matters isn’t what a person has or doesn’t have; it is what he or she is afraid of losing.”

Taleb uses the concept of loss aversion to explain the attraction and danger of corporate employment, which he casually considers a form of slave ownership. As Taleb explains, when a corporation hires a full-time employee, as opposed to a freelancer or contractor, they are purchasing their time and autonomy in exchange for an annual salary and related perks (including healthcare in the United States, which I’d be remiss to call a “perk.”) In the process, the employee is slowly conditioned to the comfort of a steady paycheck and associated inflationary lifestyle changes. Somewhat uncomfortably, Taleb points to the expatriate (a role which I currently happen to inhabit) as a particularly pernicious extension of this “slavery,” whereby the related perks and inflated lifestyle induce even further reliance on their company.

Over time, the employee, in his/her desire to remain employed, incurs the feeling of “loss aversion,” leading to an overemphasis on corporate reputation, internal politics, and more subconscious changes to one’s behavior and activity. And rather than limiting this concept to the semi-outdated concept of the “company” or salaryman, Taleb argues that this extends even further, creating the “companies” man:

For people are no longer owned by a company by 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.

Never without a solution, Taleb closes this section by recounting his experience working alongside a series of eccentric, sometimes crude, and oftentimes primitive (in dress, speak, etc.) traders and salespeople, who, unlike their counterparts concerned with generic qualitative job assessments and the whims of their bosses, were so assured of their value that they seemed to flaunt their status as “freepeople.” Similarly, with his own back against the wall in the form of a lackluster trading period, Taleb’s “skin in the game” forced him to develop arbitrage trading concepts (no doubt borne of the aforementioned “second mind), resulting in a temporary recovery of job status, though at no point void of his own personal “job security.”

 

The Lindy Effect

As with his previous book, Antifragile, Taleb does not rest on his laurels in pursuit of new ideas and solutions that help to counteract the impact of IYIs and our contemporary religious, (geo)political, and economic ailments. In pursuit of these solutions, each of Taleb’s books is chock-full of wisdom and references to religious thinkers and philosophers throughout history. As I continue to re-discover, the importance of a strong filter to combat the noise and increasing deluge of information is essential, and Taleb introduces a useful heuristic to assist to those ends, which he coins the “Lindy effect,” named after the NYC restaurant/institution Lindy’s.

Despite Lindy’s 2-star Yelp rating, and Taleb’s admission that Lindy’s famed cheesecake is nothing to write home about, Lindy’s has been in operation since 1921. Taleb cites Lindy’s as an example of the “reverse” aging effect: places, things, or ideas (“nonperishables”) that become more robust, or antifragile over time, and thereby more likely to survive. Over the long-term, time is the only true judge of worthiness and importance. This concept of the Lindy Effect is used to create Nassim Taleb’s definition of rationality: that which survives over time is rational, by nature of its continued existence.

Unlike other public intellectuals, who may be more hesitant to invoke the names of their inspirations or source material, Taleb has no qualms standing on the shoulders of his intellectual forebearers, both ancient and more recent. Throughout the book, Taleb demonstrates the power of time-tested concepts that have oftentimes converged across different religions, cultures, and centuries, employing the Lindy effect as proof of their continued relevance and importance. Taleb calls these concepts “grandparents’ wisdom,” demonstrating the historical origins of much of the “folksy” advice and proverbs we’re accustomed to hearing from our own elders. One of Taleb’s foremost skills is returning to these previously-held and well trodden ideas, as if providing a mentor’s compendium of the seemingly endless array of avenues to discover more and inquire further.

As I continue to mull through how to take more active control of my daily reading and media consumption in the face of near-constant distraction and an ever-increasing collection of to-reads and the latest ideas of the day, the Lindy effect is a heuristic that I need to return to (and not wait to implement): foregoing keeping up with the news or having opinions about the latest trends in favor of seeking out the robust, antifragile ideas that have endured (without intermediaries or explanations).

 

How to apply my own skin (or soul) in the game

While reading this book, I continually returned to thinking about how to put some of these concepts in action, how to create more incidence of “skin in the game” in my own life.

One of my immediate reactions was the creation of this blog, which, as opposed to its predecessor, very clearly highlights my own name and identity. By writing here, in my name, I am exposing myself to the potential risks associated with publicizing my own opinions and writing, and holding myself accountable to every word being written.

While many on the internet use the guise of anonymity to promote their (oftentimes hateful) agenda, or restrict their online identities to a curated collection of apolitical facts and innocuous musings, the decision to leave myself exposed to the potential “risk” of my name and these ideas (however noncontroversial they may be) attached to my name creates a level of skin in the game. On the other hand, this also creates the beneficial impact of forcing me to develop my ideas and their robustness before hitting publish: by restricting myself to the longform blog medium, as opposed to 140/280 characters or the Facebook status update, I have to structure, compose, and revise these ideas with an elevated level of care and attention to detail.

More broadly, Nassim Taleb concludes Skin in the Game with a helpful collection of advice for his readers, which all center around the time-tested concept of “living honorably,” and taking risk:

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.

While all three amount to a formula for living without guilt and in the continued pursuit of justice and truth, it is the third that I find especially compelling. As Taleb romantically evokes throughout his work, his approach towards labor, and any money that results as a byproduct, continues to be in pursuit of his own intellectual curiosities, rather than that of an employer (I can unequivocally say that Taleb would be among the worst employees imaginable). More broadly, there is no disconnect between Taleb’s output and his work – as the book sums up, his skin is thoroughly in the game, and as a result, he leaves himself accountable to no one but himself.

These aspects of starting your own business especially resonate with me, and as I continue to contribute to this site over the coming months, I hope to explore further, and begin putting into practice.