Hidden Asymmetries in Daily Life

Skin In The Game is about the distortions of symmetry and reciprocity in life. If you have the rewards, you must also get some of the risks and not let others pay the price of your mistakes.

In Skin In The Game, Nassim Nicholas Taleb explains how the willingness of accepting one’s own risks is an important quality of heroes, saints and successful people in all walks of life. Utilising examples from Hammurabi to Seneca and Antaeus the Giant to Donald Trump, Taleb shows us that having skin in the game is the backbone of fairness, commercial efficiency and risk management.

No muscles without strength. No Teaching without experience. No life without effort. Skin in the game applies to all aspects of our lives because it helps us to learn and understand the world.

Skin In the Game In History vs Today

The tale of Antaeus

Antaeus was a giant of sorts—the literal son of Mother Earth Gaea and Poseidon. He had a strange occupation, which consisted of forcing passersby in his country to wrestle. He’d pin his victims to the ground and crush them, which was apparently the expression of filial devotion to his father Poseidon. He aimed to build a temple for Poseidon using the skulls of his victims.

Antaeus was deemed to be invincible. But there was a trick. He derived his strength from contact with his mother, Earth. When he was physically separated from contact with Earth, he lost all his powers. Hercules managed to lift him off the ground and terminated him by crushing him as his feet remained out of contact with his mother.

Just like Antaeus, you can’t separate knowledge from contact with the ground. In fact, you can’t separate anything from contact with the ground. Having skin in the game helps us stay in contact with the real world. Being exposed to the world and paying a price—both good and bad— guide your learning and discovery journey. The Greeks call this Pathemata Methemata, which means to guide your learning through pain.

The Bob Rubin trade

If we don’t decentralise and distribute responsibility, it will happen by itself. A system that doesn’t have a mechanism of skin in the game (with a build-up of imbalances) will eventually blow up and self repair itself.

For instance, bank blowups came in 2008 because of the accumulation of hidden and asymmetric risks in the system. Bankers or master risk transferors could make steady money from a certain class of concealed explosive risks by using academic models that don’t work except on paper. This method invokes uncertainty after a blowup.

Bob Rubin is the former secretary of the US Treasury, one of those who sign their names on the banknote you use. He collected more than $120 million in compensation from Citibank in the decade preceding the crash of 2008. The bank went bankrupt and was rescued by the taxpayers. But Rubin didn’t write any checks, nor did he acknowledge that he transferred risk to taxpayers.

As the public is prone to hating financiers, they started conflating free markets and higher-order forms of corruption. But it is in fact the exact opposite. It is government, not free markets, that makes these things possible by the mechanisms of bailouts. Generally, government interference ends to remove the skin in the game.

Consequences of Having No Skin In The Game

Hammurabi’s law was posted about 3,800 years ago. The code has one central theme. It establishes symmetries between people in a transaction, so nobody can transfer hidden tail risk.

Hammurabi’s best-known injunction is as follows:

‘If a builder builds a house and a house collapses and causes the death of the owner of the house, the builder shall be put to death.’

The well known ‘an eye from an eye’ saying comes from Hammurabi’s rule.

How to beam light on a speaker

Metro-North in New York City renovated its trains in a total overhaul. The trains look more modern and neater; have brighter colours; provide power plugs for your computer (that nobody uses).

There used to be a flat ledge to put a coffee cup on the edge by the wall, which was an option for anyone who struggles to read a book on the train whilst holding a cup. The designer obviously doesn’t drink coffee while reading on the train. Thinking it’s an aesthetic improvement, they made the ledge slightly tilted, which makes it impossible to hold a cup.

This example explains the more severe problems of landscaping and architecture. Architects today build to impress other architects, and we end up with strange, irreversible structures that don’t satisfy the well-being of their residents. Specialisation comes with side effects, one of which is separating labour from the fruits of the labour.

Simplicity

Skin in the game brings simplicity. Things designed by people without skin in the game tend to grow in complication before their final collapse. When you are rewarded for perception instead of results, you need to show sophistication. For example, 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.

We are dumb without skin in the game

People have two brains, one where there is skin in the game and another where there is none. Skin in the game can make boring things less boring. For example, if you are an investor in a company, doing ultra boring things like reading the footnotes of a financial statement (where real information is written) isn’t boring.

Hanging shit

People who have always operated without skin in the game seek complicated and centralised things.  People who are bred, selected and compensated to find complicated solutions do not have an incentive to implement simplified ones.

In other words, many problems in society come from the interventions of people who sell complicated solutions because they’re trained to do. There is absolutely nothing to gain for someone in such a position to propose something simple. You are rewarded for perception and not results. Ironically, they pay no price for the side effects that come with those complications.