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.

Integrity

• We need to differentiate between:
  • a goal
  • a direction
  • a focus
  • an actual commitment
• Three accelerators:
  • Keep commitment to yourself
  • Stand up for something
  • Be open
• Values are found in your soul, not in a book
• Purity of motives =/= good. There is no value judgment in the phrase “pure motives”. It just means you have no hidden agenda. It might very well be that your sole agenda is to destroy a person’s career, and you openly declare it. That would be a pure motive as well, albeit a purely evil one.
• It’s human tendency to assume we ourselves have good—or at least justifiable—intents.
• …

The Techmium

• Can technology want? We often think of desire as a unique trait of living things: your dog wants to be walked; worms want moisture; bacteria want food, and plants want sunlight.
• Whatever it is, it is a force. You would feel it if you were to stand in its way.
• While it is far-fetched to say that Technology is a life form, it does possess traits that describe autonomy: self-repair, self-defense, self-maintenance, self-control of goals and self-improvement.
• Technology and life both share a fundamental essence, in that they exist in the invisible, intangible organisation of the energy and information instead of the visible, tangible material form.
  • Technology is based on immaterial flows of information. It is disguised as material, but it is primarily action. While it inhabited a material body, its heart was something softer.
• And hence we need a new word to describe it: Techmium.

But first, some things about technology

• Technology opens up new opportunities. Humans’ ability to make warm clothing opened up possibilities that were closed to us before: the arctic regions.
• Harsh weather and climates are barriers, but also stand guard to a whole world of possibilities and resources. And this is just the physical world we’re talking about.
• Animals have technology as well, since they can make tools. Chimpanzee’s have termite-fishing spears; beavers build damns; warblers build baskets, and birds build nets. Their tools reflect their environment and physical attributes. Innovation takes place with its particular direction based on its environment and ecology.
• People who live in the mountains would make different tools from those who live by the sea.

Symbiotic relationship

• As much as we make tools and remake them; we also remake ourselves.
• We are co-evolving with technology as we become incredibly dependent on it. We have become so intertwined with technology, that if today’s tools were suddenly removed from us, many of our modern lives would be severely disrupted.
• The techmium gains its immense power not only from its scale, but from its self-amplifying nature. One breakthrough invention leads to another, just like how the steam engine did. Or electricity. Or paper.
• “No empire, no sect, no star seems to have exerted greater influence in human affairs than these mechanical discoveries."—Francis Bacon, 1620
  • Printing press
  • Gunpowder
  • Magnetic compass
• Organisms have learned to build structures, and those structures then continued to allow the creature to extend itself beyond its tissue. e.g. The hard, two-meter mound of a termite colony operates as if it were an external organ of the insects: The mound’s temeprature is regulated and it is repaired after injury.
• What we think of as coral—stony, treelike structures—are the apartment buildings of nearly invisible coral animals. The coral structure and coral animals behave as one. It grows, and it breathes.
• Therefore a nest or a hive can best be considered a body built rather than grown. A shelter is animal technology, the animal extended.

Creation of Technology

• How is technology conceived? Can it be created simply by observing, or using?
• If a creature selects a particular hole in the ground as its shelter, without doing anything to it, is it considered technology? It still is a shelter, and carefully selected for the creature’s specific needs. No other kind of hole would suffice.
• And if it were to leave and find another, it would look for a similar kind.
• To answer the first question, yes. Technology is being created all the time, especially when people use tools in ways not originally intended by their creators.
• Double-entry bookkeeping, invented in 1494 by a Franciscan monk, enabled companies to monitor their cash flow and for the first time to steer complex business. Is it an idea, or a technology? Whether it’s pen and paper or a mobile app, what form it takes doesn’t matter.

Techmium is the extended Human…mind

• Marshall McLuhan noted that clothes are humans’ extended skin. Wheels are extended feet. Camera and telescopes are extended eyes. In this way, we can think of technology as our extended body.
• During the industrial age, it was easy to see the world this way. Steam-powered shovels, locomotives, television, and the levers and gears of engineers were a fabulous exoskeleton that turned man into superman.
• But here’s the kicker: this analogy is flawed.
• The extended costume of the animal is the result of the genetic makeup. What technology they create is attributed to their physical needs, as if they have a blueprint.
• Humans on the other hand, don’t. If anything, our blueprints spring from our minds.
• If technology is an extension of humans, it is not an extension of our physical body, but of the mind. Technology is therefore the extended body for ideas.

Convergence

• Invention is inevitable. The number of duplicated innovations has been increasing with time, and simultaneous discovery is happening more often. This is the idea of synchronocity.
• Scientists at AT&T Bell Labs won a Nobel Prize for inventing the transistor in 1948, but two German physicists independently invented a transistor two months later in Paris.
• Popular accounts credit John von Neumann with the invention of a programmable binary computer during the last years of World War II. But the idea and a working punched-tape prototype were developed quite separately in Germany a few years earlier in 1941, by Konrad Zuse.
• Food for thought: are our ideas, and inventions, truly unique?
• By far the strongest evidence for ubiquitous simultaneity of invention are scientists’ own impressions. In one study, almost half of 1,718 US academic research scientists believe that their work had been anticipated “once or twice”.

Inevitablity

• There is an air of inevitability about these simultaneous discoveries. When the necessary web of supporting technology is established, then the next adjacent technological step seems to emerge as if on cue.
• If inventor X does not produce it, inventor Y will. But the step will come in proper sequence.
• A light based on a coil of tungsten strung within an oval vacuum bulb is not inevitable, but the electric incandescent lightbulb is.

• 

Customer Solution Profit

• Invest time and energy in learning all there is to know about your customers. Then use that knowledge to create specific solutions for them. Lose money for a short time. Make money for a long time.
• Examples I can think of: Most consumer products, consulting, etc.

Pyramid Profit

• Use this strategy when your customers form a hierarchy, with different expectations and different attitudes towards price.
• There are customers who have a non-negotiable price; and there are others who’ll pay top dollar for a unique product. But not every marketplace can be stratified in the same way.
• A true pyramid system is a system in which the lower-priced products are manufactured and sold with so much efficiency that it’s virtually impossible for a competitor to steal market share by underpricing you. The lowest tier is therefore also called the firewall. Profit generators are at the top of the tier.
• Examples I can think of: Barbie dolls

Multi-Component Profit

• Coca-cola is one product, but several businesses. Grocery component; restaurant component; vending machine component. Most profits flow from restaurant and vending machine sales.
• The difference between this model and the pyramid model is that you buy the exact same product at multiple price points. A can of Coca-Cola at the vending machine costs much less than a glass in a restaurant.
• Hotels are another example. The same building can sell you ‘a single room for one night’, ‘a one-day meeting for twenty people’, or ‘a three-day convention for three thousand people’.
• Last example would be bookstores. Same inventory of books, but many components. Sell individual books, subscriptions to high-purchase individuals, bundled access to corporate libraries, or even services to local book groups to hold events.

Switchboard Profit

• Michael Ovitz started his career as a talent agent in television, where the practice of packaging talent was common.
• Because the margins in TV weren’t large enough to absorb the inefficiencies of the typical Hollywood process for developing a movie project, talent agents would put together a package that included a screenwriter, stars, a director, and supporting actors, and bring the entire package to a studio to produce.
• But packaging =/= building a true switchboard.
• Ingredients for a film:
  1. Source of stories
  2. Package of talent
  3. Critical mass
• For a true switchboard model to succeed in the film industry, you need a critical mass of talent in your package offerings. Simply because the sea is so vast—if you only have 1% of talent, studios, actors, writers etc. can choose not to work with you.
• At some arbitrary number, say 40%, people would find it hard to not work with you. At that point, things get noticeably easier. Profit per unit of effort skyrockets.
• This model works with products as well. Telecommunications company offering equipment, software, services—and everything else—packaged and customised for different needs.
• The temptation here is for the switchboard company to start manufacturing their own products. Then, they’d fail to make objective choices in the best interest of the customer. It also erodes trust from suppliers. Everything falls apart. This is the price of admission for this game.

Time Profit

• Terry was working in a small but very successful boutique firm staffed by brilliantly innovative folks. The business sells innovations in financial instruments, which would often be copied 9-12 months after they were introduced into the market.
• Like Intel, their profits could only be made in a certain time frame before competitors catch on. Unlike Intel, they had a much shorter time frame to milk something. The key then is to speed up the acquisition of new customers rapidly. Basically squeeze it dry first before time is up.

Profit-multiplier Model

• Taking one skill and making money from it five or six times. Disney characters—cartoon series, movies, figurines, theme parks etc. This is different from multi-component profit.
• The Coca-Cola you get in a can from a vending machine is the same can you get in a restaurant. However, the Mickey Mouse you get on a DVD Box Set is different from the Mickey Mouse Ride in a theme park.
• It’s about variations on a theme—finding alternative ways of extracting value from the same asset.

General priority of human desires

• ERG—existence, relatedness, and growth
• 5 Core Human Drives
  • The Drive to Acquire
  • The Drive to Bond
  • The Drive to Learn
  • The Drive to Defend
  • The Drive to Feel
• At their core, all businesses sell some combination of money, status, power, love, knowledge, protection, pleasure, and excitement.
• “Status seeking”—People care intensely about what others think of them.
• (Not from the book, but relevant) When a person sees someone driving a Ferrari, they don’t go, “wow, this person is cool. I want to be like him”. They see themselves driving the Ferrari and go, “People will thank that I am cool”. Consciously build social signals into your offer to target market.

10 ways to evaluate a market

1. Urgency—how badly do people want or need this right now? Old movies for rent vs new movie on opening night, or e.g. iPhones on release day
2. Market size—how many people are actively purchasing things like this?
3. Pricing Potential—highest price a typical purchaser would be willing to pay?
4. Cost of Customer Acquisition—how easy is it to acquire a new customer?
5. Cost of Value Delivery—how much would it cost to create and deliver the value offered, both in money and effort?
6. Uniqueness of Offer—how unique in the market, and how easy is it for potential competitors to copy?
7. Speed to Market—how quickly can you create something to sell?
8. Up-front Investment—how much investment is needed before you’re ready to sell? Infra, equipment etc.
9. Upsell Potential—are there related secondary offers you could present to purchasing customers?
10. Evergreen Potential—once the initial offer has been created, how much additional work will you have to put into it in order to continue selling?

12 standard forms or value

1. Product—create a single tangible item, then sell and deliver it for more than what it costs to make
2. Service—provide help or assistance, then charge a fee for the benefits rendered
3. Shared resource—create a durable asset that can be used by many people, then charge for access
4. Subscription—offer a benefit on an ongoing basis, and charge a recurring fee
5. Resale—acquire an asset from a wholesaler, then sell that asset to a retail buyer at a higher price
6. Lease—acquire an asset, then allow another person to use that asset for a predefined amount of time in exchange for a fee
7. Agency—market and sell an asset or service you don’t own on behalf of a third party, then collect a percentage of the transaction price as a fee
8. Audience Aggregation—get the attention of a group of people with certain characteristics, then sell access in the form of advertising to another business looking to reach that audience
9. Loan—lend a certain amount of money, then collect payments over a predefined period of time equal to the original loan plus a predefined interest rate
10. Option—offer the ability to take a predefined action for a fixed period of time in exchange for a fee
11. Insurance—take on the risk of some specific bad thing happening to the policy holder in exchange for a predefined series of payments, then pay out claims only when the bad thing actually happens
12. Capital—purchase an ownership stake in a business, then collect a corresponding portion of the profit as a one-time payout or ongoing dividend

• #3 would comprise museums, gyms and fitness clubs, although they are often bundled together with subscriptions. Not enough customers to spread out the cost of assets = bad. Too many will diminish experience and decrease customers, reputation and even increase maintenance costs. Find the sweet spot!
• #4 actual benefits can be either tangible or intangible.
• #10 can refer to buying things with volatile prices at a fixed price. If not, it’s a principle that’s all around us, like movie tickets. Buying one is buying an option to use your seat at a predefined time, at a particular show. You can even sell this option.

Economic Values

1. Efficacy—how well does it work?
2. Speed—how quickly does it work?
3. Reliability—can I depend on it to do what I want?
4. Ease of Use—how much effort does it require?
5. Flexibility—how many things does it do?
6. Status—how does this affect the way others perceive me?
7. Aesthetic Appeal—how attractive or otherwise aesthetically pleasing is it?
8. Emotion—how does it make me feel?
9. Cost—how much do I have to give up to get this?

Tips

• Asking people what they want doesn’t work. People want everything. If you showed them all 9 of the economic values and asked them to rate them on a scale, they’d want everything. The thing is, the moment they walk out of your study, they’d be perfectly fine buying something that is not free and not perfect.
• Entering a market with existing competition means there is a market of paying customers.
• Iron Law of the market—there must be people wanting what you have to offer. Entering a market with competitors means you spend less time proving a market exists, and more time developing your offer.
• A word on customer feedback: the worst response is not emphatic dislike—it’s total apathy.
• Alternatives—as you develop your business offerings, you can’t do everything. Neither can you avoid making choices between competing alternatives. Add a particular feature, or not? Optimise for target audience A or B, or please both to a lesser extent? Examine alternatives from customers’ perspectives.
• Trade-offs—time, energy and resources are finite. Even if you have enough money to buy an island, you still need to decide which island to buy. Predicting how people make trade-offs is tricky because values changes all the time. Values are preferences. The key is to look for patterns—how specific groups of people tend to value some characteristic in a certain context.
• As a rule, people never accept Trade-offs unless they’re forced to make a decision. Since there is no perfect offering, people are happy to settle for the Next Best Alternative. The best way to discover what people value is to ask them to make explicit Trade-offs during the research process.