Skin in the Game, Nassim Taleb
The Less Obvious Aspects of Skin in the Game: Those Hidden Asymmetries and Their Consequences. The book as Taleb suggests is:
1… ...bull***t identification and filtering, that is, the difference between theory and practice…
Don’t tell me what you “think” show me your portfolio (and why investment managers should eat their own cooking)
It is also relevant to me in my interest in autism. If you’ve met one person with autism, you’ve met one person with autism.
So much theory vanishes in the face of meeting ASD people in practice.
And academic theory (of the bad kind) has been responsible for much pain, disaster and cruelty in this area. (Yes I’m thinking of you Bruno Bettelheim - abuser of children, fraud of qualifications with the hugely damaging "theory" that "cold refrigerator" mothers were responsible for autism - the descendants of this theory are still very much alive in France and thus still causing immense harm to 0.5 million French and their families - see BBC link here and Guardian article here).
2..it is about the distortions of symmetry and reciprocity in life: If you have the rewards, you must also get some of the risks, not let others pay the price of your mistakes.
Whereas the key concepts in
Fooled by Randomness (on how we tend to mistake luck for skills, how randomness does not look random) [amazon link]
Black Swan (on how high-impact but rare events dominate history, how we retrospectively give ourselves the illusion of understanding them thanks to narratives) [Amazon link]
Anti-Fragile (on how some things like disorder (hence volatility, time, chaos, variability, and stressors) while others don’t, how we can classify things along the lines fragile-robust-antifragile) [amazon link]
...would be new for many people, the first order surface notion of aligned incentives would at first glance be known to many.
However, the insights come from the less obvious aspects and second order thinking plus the emphasis on the downside disincentives, the symmetry or not of the incentives. [Second order thinking is important if you want to outperform as an active manager, see Howard Mark's Book, amazon link]
This focus on what people have to lose not merely on what they have to gain is an idea that arguably has not had as much attention although embedded in the skin in the game notion.
3...the book is about how much information one should practically share with others
Taleb shared a portion of this discussion earlier and there’s a practical moral dilemma from Greek philosophy that I comment on here on the ethics of stuffing
If you know something about trade ships coming into port that no one else knows, do you tell your customers? (ethics of stuffing)
My view is that transparency is very important and in the long run it can save you.
4 ...it is about rationality and the test of time. Rationality in the real world isn’t about what makes sense to your New Yorker journalist or some psychologist using naive first-order models, but something vastly deeper and statistical, linked to your own survival.
This point chimes very well with Poor Economics by Banerjee and Duflo [amazon link here]. They look at people (about 900 million) who live on 99c a day (15 small bananas) and the rationality of their decision making
The book explains the rationality behind: “why microfinance is useful without being the miracle some hoped it would be; why the poor often end up with health care that does them more harm than good; why children of the poor can go to school year after year and not learn anything; why the poor don’t want health insurance.” [amazon link here].
A reading of both can open up your second order thinking on “rationality”.
Finally re-emphasising an expansion of point 2:
“Do not mistake skin in the game as defined here and used in this book for just an incentive problem, just having a share of the benefits (as it is commonly understood in finance). No. It is about symmetry, more like having a share of the harm, paying a penalty if something goes wrong. The very same idea ties together notions of incentives, used car buying, ethics, contract theory, learning (real life vs. academia), Kantian imperative, municipal power, risk science, contact between intellectuals and reality, the accountability of bureaucrats, probabilistic social justice, option theory, upright behavior, bull***t vendors, theology …”
Two other lesser known point on Taleb. He is an advocate of the precautionary principle with respect to climate change and believes we should be combatting it.
“We have only one planet. This fact radically constrains the kinds of risks that are appropriate to take at a large scale. Even a risk with very low probability becomes unacceptable when it affects all of us - there is no reversing mistakes of that magnitude.
He gave a commencement speech to the American University in Beirut which you can view and read here.
If you'd like to feel inspired by commencement addresses and life lessons try: Neil Gaiman on making wonderful, fabulous, brilliant mistakes; or Nassim Taleb's commencement address; or JK Rowling on the benefits of failure. Or Charlie Munger onalways inverting; Sheryl Sandberg ongrief, resilience and gratitude or investor Ray Dalio on Principles.
Cross fertilise. Read about the autistic mind here.
More thoughts: My Financial Times opinion article on the importance of long-term questions to management teams and Environment, Social and Governance capital.