Skin in the Game

One of my favourite books… I’ve already read this three times and will continue to re-read it in years to come.

Contact with the earth

  • Antaeus’s strength came from being connected to the earth. Similarly, knowledge cannot be disconnected from the ground. Theory and practice cannot be separated. Moral obligations, ethics and skills cannot be separated.
  • Skin in the game is necessary for understanding the world. It helps us with bullshit identification and filtering, that is, the difference between theory and practice, cosmetic and true expertise.
  • Historically, all warlords and warmongers were warriors themselves. Societies were run by risk takers, not risk transferors.
  • Prominent people took risks—considerably more risks than ordinary citizens. The Roman emperor Julian the Apostate, died on the battlefield fighting as an emperor. There is no better historical evidence of an emperor taking a frontline position in battle than a spear lodged in his chest.
  • The very notion of a lord has been traditionally derived from protecting others, trading personal risk for prominence.
  • Today, many leaders don’t fight in the frontline. Neither do they take the fall when shit hits the fan.

The Bob Rubin Trade

  • Bureaucracy is a construction by which a person is conveniently separated from the consequences of his or her actions.
  • Decentralisation is based on the simple notion that it is easier to macrobullshit than to microbullshit.
  • Decentralisation requires large structural asymmetries.
  • A system that doesn’t have a mechanism of skin in the game, with a build-up of imbalances over time, will eventually blow up and self-repair. If it survives.
  • Bank blowups came in 2008 because of the accumulation of hidden and asymmetric risks in the system: bankers, master risk transferors, could make steady money from a certain class of concealed explosive risks (subprime mortgages), use academic risk models that don’t work on paper, then invoke uncertainty after a blowup, and then had the cheek to ask to be bailed out.
  • Robert Rubin, former Secretary of the US Treasury, collected more than $120 million in compensation from Citibank in the decade preceding the crash of 2008. When the bank, literally insolvent, was rescued by the taxpayer (bailed out with govt money), he invoked uncertainty as an excuse. Heads he wins, tails he shouts “Black Swan”.
  • Rent-seeking is trying to use protective regulations or “rights” to derive income without adding anything to economic activity, not increasing the wealth of others.

How systems learn

  • The same mechanism of transferring risk also impedes learning.
  • You will never fully convince someone that he is wrong; only reality can.
  • Reality does not care about winning arguments. Survival is what matters.
  • The curse of modernity is that we are increasingly populated by a class of people who are better at explaining than understanding or doing.
  • Systems learn only if risk of extinction is present, and there is no evolution without skin in the game.
  • Systems learn via negativa, or by removing parts. Many bad pilots are currently in the bottom of the Atlantic, and many dangerous bad drivers are 6-feet under and pushing up the daisies. Transportation did not get safer because people learn from errors, but the system does.
  • Skin in the game keeps human hubris in check.

Symmetry

  • Hammurabi’s law was posted on a public basalt stele around 3,800 years ago in Babylon, where every literate person could read it. The code has one central theme: it establishes symmetries between people in a transaction, so nobody can transfer hidden tail risk, or Bob Rubin-style risks.
  • Its best known injunction is as follows: “If a builder builds a house and the house collapses and causes the death of the owner of the house—the builder shall be put to death.”
  • When such things happen today, nobody gets put to death. A fine and a slap on the wrist is the word of our era; an eye for an eye is considered barbaric.
  • To be clear, lex talionis, “an eye for an eye”, comes from Hammurabi’s rule. It is metaphorical, not literal. You don’t have to actually remove an eye.

Silver Rule

  • More robust than the Golden Rule.
  • First, the Golden Rule wants you to “Treat others the way you would like them to treat you.".
  • The Silver Rule says “Do not treat others the way you would not like them to treat you.". Why is this more robust?
  • First, it tells you to mind your own business and not decide what is “good” for others. We know with much more clarity what is bad than what is good, or via negativa.

The real world

  • Skin in the game is about the real world. You do not want to win an argument, you want to win.
  • We are much better at doing than understanding. The doer wins by doing, not convincing.
  • The definition of “rational” is oft misunderstood. A practice may appear to be irrational to an overeducated observer, but it has worked for a long time.
  • What works cannot be irrational. A mental block of chronic business failures: the failure to realise that if something stupid works (and makes money), it cannot be stupid.
  • Skin in the game brings simplicity—the disarming simplicity of things properly done. People who see complicated solutions do not have an incentive to implement simplified ones. If I make more money selling you highly advanced technological mumbo jumbo, why would I sell you a simple solution?
  • A bureaucratised system will increase in complication from the interventionism of people who sell complicated solutions, because that’s what their position and training invites them to do. They are incentivised to find complicated solutions, and disincentivised to implement simplified ones.
  • Things designed by people without skin in the game tend to grow in complication (before their final collapse, and “non-skin-in-the-game” people don’t get simplicity.
  • This also hold true when it comes to solutions that are profitable to technologists.

Soul in their game

  • Anything you do to optimise your work, cut some corners, or squeeze more “efficiency” out of it (and out of your life) will eventually make you dislike it.
  • Artisans have their soul in the game:
    • They do things for existential reasons first, financial and commercial ones later. Their decision making is never fully financial, but it remains financial.
    • They have some type of “art” in their profession; they stay away from most aspects of industrialisation; they combine art and business.
    • They put soul in their work: they would not sell something defective or even of compromised quality because it hurts their pride, not their bottom line.
    • They have sacred taboos, things that they would not do even it if improves profit.
  • The villainous takes the short road, virtue the longer one.
  • The skills at making things diverge from those at selling things.

How the minority dominates

  • In the US, the kosher population represents less than 0.3% of all US residents. Yet it appears that all drinks are kosher. Why? Simply because going full kosher allows producers, grocers and restaurants to not have to distinguish between kosher and nonkosher. And herein lies the simple rule that changes the total:
    • A kosher (or halal) eater will never eat nonkosher (or nonhalal) food, but a nonkosher eater isn’t banned from eating kosher.
    • Rephrased in another domain: A disabled person will not use the regular bathroom, but a nondisabled person will use the bathroom for disabled people.
    • And yet another: An honest person will never commit criminal acts, but a criminal will readily engage in legal acts.
  • The minority is considered an intransigent group, and the majority a flexible one. Their relationship rests on an asymmetry in choices.
  • Automatic shifting cars are probably ubiquitous today not due to majority preference, but could just be because those who can drive manual shifts can always drive automatic.
  • A system continues to “renormalise” as a result of renormalisation groups, which bring about the “veto” effect, where a single person can steer the choices of the entire group.

Modern slavery (my own words)

  • Working as a company/salary man was safe… provided the company stayed around.
  • An employee is by design more valuable inside a firm than outside of it; that is, more valuable to the employer than the marketplace.
  • The notion of an employee is a risk-management strategy. Insidiously, you can inflict a much higher punishment on a slave than a free person. A slave has more downside.
  • The best slave is someone you overpay and who knows it, terrified of losing his status.
  • Freedom is never free—it entails risks, or real skin in the game.
  • A pet dog’s life may appear smooth and secure, but in the absence of an owner, it struggles to survive. A wolf on the another hand, is trained to survive.
  • Yet there are wolves among dogs, a category of employees who aren’t slaves. They typically don’t give a flying fuck about their reputation, or at least not their corporate reputation.
  • What matters isn’t what a person has or doesn’t have; it is what he or she is afraid of losing. The more you have to lose, the more fragile you are.
  • The head of the Civil Service will lose his status if he is found to have an extra-marital relationship; yet a taxi driver on the streets can continue to ply his trade even if he gets found out.

Intellectual Yet Idiots (IYI)

  • Academico-bureaucrats who feel entitled to run other peoples’ lives. Their main skill is a capacity to pass exams written by people like the, or to write papers read by people like them. And they can’t tell scientism from science.
  • The IYI thinks that people should act according to their own interests, and he is the one who knows their interests, especially if these people are in a lower social class. When plebeians do something that makes sense to themselves, but not to him, the IYI uses the term “uneducated”.
  • (In a recent context, people rushing to stock-up on food due to elevated DORSCON levels were deemed uneducated, foolish, irrational. Yet what they are doing is perfectly rational—ensuring the survival of themselves and people around them.)

The Lindy Effect

  • That which is “Lindy” is what ages in reverse, i.e., its life expectancy lengthens with time, conditional on survival.
  • Time is equivalent to disorder, and resistance to the ravages of time—what we call survival—is the ability to handle disorder.
  • Time operates through skin in the game. Things that have survived hint that they have some robustness, conditional on their being exposed to harm. For without skin in the game via exposure to reality, the mechanism of fragility is disrupted.
  • Only the non-perishable can be Lindy. When it comes to ideas, books, technologies, procedures, institutions and political systems under Lindy, there is no intrinsic aging and perishability. A physical copy of War and Peace can age; the book itself as an idea doesn’t.
  • In other words, use laws that are old but food that is fresh.
  • Ideas that have roots in ancient lore:
    • Skin in the game. Yiddish proverb: You can’t chew with somebody else’s teeth.
    • Less is more. Truth is lost with too much altercation, in Publilius Syrus.

Surgeons should not look like surgeons

  • Picture this: two surgeons have similar rank in the same department in some hospital. The first is highly refined in appearance, speech and dressing. The second looks like a butcher, overweight, with large hands and uncouth speech. Which would you choose to operate on you?
  • If you can overcome your sucker-proneness, pick the latter, simply because he doesn’t look the part and had to overcome much more in terms of perception to reach success.
  • Reality is blind to looks, and contact with reality filters out incompetence.
  • One bullshit detection heuristic you could use in hiring: hire, conditional on an equal set of skills, the person with the least label-oriented education. It means that this person had to succeed in spite of of a lack of credentials and overcome more serious hurdles.
  • You can tell if a discipline is bullshit if the degree depends severely on the prestige of the school granting it. An MBA from anything outside the top ten is a waste of time; but a degree in mathematics is much less dependent on the school.

The merchandising of virtue

  • Basically exploiting virtue for image, personal gain, careers, social capital/status and etc.
  • Virtue is not something you advertise. It is not an investment strategy. It is not a cost-cutting scheme.
  • (You don’t say you have empathy, or that you’re capable of vulnerability; you simply behave accordingly.)
  • Courage is the only virtue you cannot fake. Sticking up for truth when it is unpopular is far more of a virtue, because it costs you something—your reputation.
  • Three suggestions if you have noble aspirations:
    • Never engage in virtue signaling
    • Never engage in rent-seeking
    • You must start a business and put yourself on the line.

Being rational about rationality

  • There is no such thing as the “rationality” of a belief, there is rationality of action. The latter can be judged only in terms of evolutionary (or survival) considerations.
  • There is a difference between decorative beliefs and beliefs that map to action. How much you truly “believe” in something can be manifested only through what you are willing to risk for it.
  • Everything that survives, survives for a reason. Rationality is risk management.