Skin in the Game is about four topics in one: a) uncertainty and the reliability of knowledge (both practical and scientific, assuming there is a difference), or in less polite words bull*** t detection, b) symmetry in human affairs, that is, fairness, justice, responsibility, and reciprocity, c) information sharing in transactions, and d) rationality in complex systems and in the real world. That these four cannot be disentangled is something that is obvious when one has… skin in the game.*

The abrasions of your skin guide your learning and discovery, a mechanism of organic signaling, what the Greeks called pathemata mathemata (“ guide your learning through pain,” something mothers of young children know rather well).

The knowledge we get by tinkering, via trial and error, experience, and the workings of time, in other words, contact with the earth, is vastly superior to that obtained through reasoning, something self-serving institutions have been very busy hiding from us.

1) they think in statics not dynamics, 2) they think in low, not high, dimensions, 3) they think in terms of actions, never interactions.

more generally, should avoid engaging in an action with a big downside if one has no idea of the outcomes.

The principle of intervention, like that of healers, is first do no harm (primum non nocere); even more, we will argue, those who don’t take risks should never be involved in making decisions.

Prominent people took risks—considerably more risks than ordinary citizens.

Bureaucracy is a construction by which a person is conveniently separated from the consequences of his or her actions.

Decentralization is based on the simple notion that it is easier to macrobull*** t than microbull*** t. Decentralization reduces large structural asymmetries.

The same mechanism of transferring risk also impedes learning.

You will never fully convince someone that he is wrong; only reality can.

The experience of the system is different from that of individuals; it is grounded in filtering. To summarize so far, Skin in the game keeps human hubris in check.

For, as with financial traders, the best place to hide risks is “in the corners,” in burying vulnerabilities to rare events that only the architect (or the trader) can detect—the idea being to be far away in time and place when blowups happen.

The Silver Rule can be seen as the Negative Golden Rule, and as I am shown by my Calabrese (and Calabrese-speaking) barber every three weeks, via negativa (acting by removing) is more powerful and less error-prone than via positiva (acting by addition* 1).

“Deal with weaker states as you think it appropriate for stronger states to deal with you.”

The very idea behind the First Amendment of the Constitution of the United States is to establish a silver rule–style symmetry: you can practice your freedom of religion so long as you allow me to practice mine; you have the right to contradict me so long as I have the right to contradict you.

As we will belabor ad nauseam in this book, we are local and practical animals, sensitive to scale. The small is not the large; the tangible is not the abstract; the emotional is not the logical. Just as we argued that micro works better than macro, it is best to avoid going to the very general when saying hello to your garage attendant.

Avoid taking advice from someone who gives advice for a living, unless there is a penalty for their advice.

One, the fool, takes risks he doesn’t understand, mistaking his own past luck for skills, the other, the crook, transfers risks to others. Economists, when they talk about skin in the game, are only concerned with the second.

Entire fields (say economics and other social sciences) become themselves charlatanic because of the absence of skin in the game connecting them back to earth (while the participants argue about “science”). Chapter 9 shows how they will develop elaborate rituals, titles, protocols, and formalities to hide this deficit.

You may not know in your mind where you are going, but you know it by doing.

People’s “explanations” for what they do are just words, stories they tell themselves, not the business of proper science. What they do, on the other hand, is tangible and measurable and that’s what we should focus on.

Further, there is something called the inverse problem in mathematics, which is solved by—and only by—skin in the game.

By definition, what works cannot be irrational; about every single person I know who has chronically failed in business shares that mental block, the failure to realize that if something stupid works (and makes money), it cannot be stupid.

What is rational is what allows the collective—entities meant to live for a long time—to survive.

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

As the great game theorist Ariel Rubinstein holds: do your theories or mathematical representations, don’t tell people in the real world how to apply them. Let those with skin in the game select what they need.

The skills at making things diverge from those at selling things.

In that sense, decentralization and fragmentation, aside from stabilizing the system, improves people’s connection to their labor.

asymmetry in risk bearing leads to imbalances and, potentially, to systemic ruin.

Salespeople are experts in the art of psychological manipulation, making the client trade, often against his own interest, all the while being happy about it and loving them and their company.

So, “giving advice” as a sales pitch is fundamentally unethical—selling cannot be deemed advice. We can safely settle on that. You can give advice, or you can sell (by advertising the quality of the product), and the two need to be kept separate.

The ethical is always more robust than the legal. Over time, it is the legal that should converge to the ethical, never the reverse.

Indeed much of the work of investment banks in my day was to play on regulations, find loopholes in the laws. And, counterintuitively, the more regulations, the easier it was to make money.

As club members know, the very purpose of a club is exclusion and size limitation.

For whenever the “we” becomes too large a club, things degrade, and each one starts fighting for his own interest.

Modernity put it in our heads that there are two units: the individual and the universal collective—in that sense, skin in the game for you would be just for you, as a unit. In reality, my skin lies in a broader set of people, one that includes a family, a community, a tribe, a fraternity. But it cannot possibly be the universal.

Groups behave differently at a different scale. This explains why the municipal is different from the national.

Every metric is gameable—

Administrators everywhere on the planet, in all businesses and pursuits, and at all times in history, have been the plague. NEXT

The main idea behind complex systems is that the ensemble behaves in ways not predicted by its components.

Genes follow majority rule; languages minority rule. Languages travel; genes less so.

Second, becoming Muslim is irreversible, as apostasy is the heaviest crime under the religion, sanctioned by the death penalty.

my heuristic is that the more pagan, the more brilliant one’s mind, and the higher one’s ability to handle nuances and ambiguity. Purely monotheistic religions such as Protestant Christianity, Salafi Islam, or fundamentalist atheism accommodate literalist and mediocre minds that cannot handle ambiguity.* 4

If, on the other hand, we merge all states in one, then the minority rule will prevail all across. This is the reason the U.S.A. works so well. As I have been repeating to everyone who listens, we are a federation, not a republic. To use the language of Antifragile, decentralization is convex to variations.

Let us conjecture that the formation of moral values in society doesn’t come from the evolution of the consensus. No, it is the most intolerant person who imposes virtue on others precisely because of that intolerance. The same can apply to civil rights.

Outcomes are paradoxically more stable under the minority rule—the variance of the results is lower and the rule is more likely to emerge independently across separate populations. What emerges from the minority rule is more likely to be black-and-white, binary rules.

The minority rule produces low-variance in outcomes.

“Should a society that has elected to be tolerant be intolerant about intolerance?”

Yes, an intolerant minority can control and destroy democracy. Actually, it will eventually destroy our world. So, we need to be more than intolerant with some intolerant minorities.

Society doesn’t evolve by consensus, voting, majority, committees, verbose meetings, academic conferences, tea and cucumber sandwiches, or polling; only a few people suffice to disproportionately move the needle. All one needs is an asymmetric rule somewhere—and someone with soul in the game. And asymmetry is present in about everything.* 6

The higher the dimension, in other words, the higher the number of possible interactions, and the more disproportionally difficult it is to understand the macro from the micro, the general from the simple units. This disproportionate increase of computational demands is called the curse of dimensionality.

Understanding how the subparts of the brain (say, neurons) work will never allow us to understand how the brain works.

The underlying structure of reality matters much more than the participants, something policymakers fail to understand.

Under the right market structure, a collection of idiots produces a well-functioning market.

And dependability is a driver behind many transactions. People of some means have a country house—which is inefficient compared to hotels or rentals—because they want to make sure it is available if they decide they want to use it on a whim.

By being employees they signal a certain type of domestication.

For people are no longer owned by a company but 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.* 2

Perhaps, by definition, an employable person is the one you will never find in a history book, because these people are designed to never leave their mark on the course of events.

contracts can be too costly to negotiate due to transaction costs; the solution is to incorporate your business and hire employees with clear job descriptions because you can’t afford legal and organizational bills for every transaction. A free market is a place where forces act to determine specialization, and information travels via price point; but within a firm these market forces are lifted because they cost more to run than the benefits they bring. So market forces will cause the firm to aim for the optimal ratio of employees and outside contractors.

One single delay in the chain can stop the entire process.

FREEDOM IS NEVER FREE

Whatever you do, just don’t be a dog claiming to be a wolf. In Harris’s sparrows, males develop secondary traits that correlate with their fighting ability. Darker color is associated with dominance. However, experimental darkening of lighter males does not raise their status, because their behavior is not altered. In fact these darker birds get killed—as the researcher Terry Burnham once told me: “birds know that you need to walk the walk.”

Risk takers can be socially unpredictable people. Freedom is always associated with risk taking, whether it leads to it or comes from it. You take risks, you feel part of history. And risk takers take risks because it is in their nature to be wild animals.

What matters isn’t what a person has or doesn’t have; it is what he or she is afraid of losing.

simple objective function: fulfill the tasks that his or her supervisor deems necessary, or satisfy some gameable metric.

To make ethical choices you cannot have dilemmas between the particular (friends, family) and the general.

Scars signal skin in the game.

People can detect the difference between front-and back-office operators.

They are also prone to mistake the ensemble for the linear aggregation of its components—that is, they think that our understanding of single individuals allows us to understand crowds and markets, or that our understanding of ants allows us to understand ant colonies.

True equality is equality in probability.

Skin in the game prevents systems from rotting.

Static inequality is a snapshot view of inequality; it does not reflect what will happen to you in the course of your life.

Dynamic (ergodic) inequality takes into account the entire future and past life.

Dynamic equality is what restores ergodicity, making time and ensemble probabilities substitutable.

The idea of fragility helped put some rigor around the notion that the only effective judge of things is time—by things we mean ideas, people, intellectual productions, car models, scientific theories, books, etc.

Being reviewed or assessed by others matters if and only if one is subjected to the judgment of future—not just present—others.

they only mean that a certain set of (currently) powerful people are happy with your work.

An idea survives if it is a good risk manager, that is, not only doesn’t harm its holders, but favors their survival—this also applies to superstitions that have crossed centuries because they led to some protective actions. More technically, an idea needs to be convex (antifragile), or at least bring about a beneficial reduction of fragility somewhere.

The fallacy is that what one may need to know in the real world does not necessarily match what one can perceive through intellect: it doesn’t mean that details are not relevant, only that those we tend (IYI-style) to believe are important can distract us from more central attributes of the price mechanism.

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

You can tell if a discipline is BS if the degree depends severely on the prestige of the school granting it.

On the other hand a degree in mathematics is much less dependent on the school

As with label universities, you pay quite a bit of money to join, largely for the benefit of the real estate developer.

Most gains in physical strength come from working the tails of the distribution, close to your limit.

This chapter managed to mix weight lifting and fundamental research under the single argument that, while the presence of skin in the game does away with the cosmetic, its absence causes multiplicative nonsense.

An entire industry meant to swindle you will swindle you: financial consultants, diet advisors, exercise experts, lifestyle engineers, sleeping councilors, breathing specialists, etc.

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

Baldassare Castiglione’s Book of the Courtier: 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. You’d rather have dinner with your friends than with your professor, unless of course your professor understands “the art” of conversation.

Verbal threats reveal nothing beyond weakness and unreliability.

Just the act of taking their pictures is similar to holding their lives in your hands and controlling their future behavior thanks to your silence.

Journalism isn’t Lindy compatible. Information transmits organically by word of mouth, which circulates in a two-way manner. In Ancient Rome, people got information without a centralized filter. In the ancient Mediterranean marketplaces, people talked; they were the receivers and the purveyors of news.

“Give me a few lines written by any man and I will find enough to get him hung” goes the saying attributed to Richelieu, Voltaire, Talleyrand, a vicious censor during the French revolution phase of terror, and a few others.

It is much more 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. It is not an investment strategy. It is not a cost-cutting scheme. It is not a bookselling (or, worse, concert-ticket-selling) strategy.

So always keep in mind that historians and policy scholaristas are selected from a cohort of people who derive their knowledge from books, not real life and business.

mathematicians think in (well, precisely defined and mapped) objects and relations, jurists and legal thinkers in constructs, logicians in maximally abstract operators, and… fools in words.

But it is easy to trip them, as Socrates did, simply by asking them what they think they mean by what they said—

In science, belief is literal belief; it is right or wrong, never metaphorical. 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.

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

There is nothing particularly irrational in beliefs per se (given that they can be shortcuts and instrumental to something else): to him everything lies in the notion of “revealed preferences.”

Actually, by a mechanism (more technically called the bias-variance tradeoff), you often get better results making “errors,” as when you aim slightly away from the target when shooting.

To repeat, we do not have enough grounds to discuss “irrational beliefs.” We do with irrational actions.

Not everything that happens happens for a reason, but everything that survives survives for a reason.

Now, when you read material by finance professors, finance gurus, or your local bank making investment recommendations based on the long-term returns of the market, beware. Even if their forecasts were true (they aren’t), no individual can get the same returns as the market unless he has infinite pockets and no uncle points.

almost all people involved in the field have made the severe mistake of missing the effect of the difference between ensemble and time.*

Adding people without fundamental insights does not sum up to insight;

“The difference between successful people and really successful people is that really successful people say no to almost everything,”

I make the case for risk loving, for systematic “convex” tinkering, and for taking a lot of risks that don’t have tail risks but offer tail profits.

Never compare a multiplicative, systemic, and fat-tailed risk to a non-multiplicative, idiosyncratic, and thin-tailed one.

One may be risk loving yet completely averse to ruin.

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

Rationality is avoidance of systemic ruin.