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20180826 – Skin in the Game

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MAIN IDEA:

The main idea of this book is that the skin in the game is necessary for effective functioning of any system containing humans and functioning via actions of these humans. The main cause of many societal problems is that people, whose action cause these problems, have no skin in the game so they act in their narrow interest causing system overall to fail.

DETAILS:

Book 1: Introduction

Prologue, Part 1: Antaeus Whacked

The main point of this part is that the knowledge and skills obtained in the real live by doing something is far superior to abstract formal knowledge obtained in class room, and author compares it to the Antaeus’ link to earth. After that author moves to discussing USA interventions in Middle East and defines deficiencies of people who designed it:

1) They think in statics not dynamics,

2) They think in low, not high, dimensions,

3) They think in terms of actions, never interactions.

Author especially points out that these people unlike warmongers of the past do risk their own lives and livelihood in these interventions and therefore have no skin in the game, which makes them reckless and dangerous. Similarly, in financial area author points out to Bob Rubin type of trades when government supported people’s financial operations, helping them to win every time because any lose was covered by taxpayers. The final point here is that skin in the game is the necessary condition for successful learning and without it error could be much costlier and even catastrophic.

Prologue, Part 2: A Brief Tour of Symmetry

Here author looks at his “skin in the game” from the point of view of symmetry. He starts with Hammurabi code that established symmetry between actions and counteractions even for extremely rare “tail” events. Author provides a nice table this:

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He also compares golden and silver rules, prefer latter over former:

The Golden Rule wants you to treat others the way you would like them to treat you. The more robust Silver Rule says do not treat others the way you would not like them to treat you.

After that author refer to Kant and his Universalism as unworkable in practice even if it looks great on the paper. As usual he brings Fat Tony (supreme common-sense personality) to expresses his philosophical approach in the series of aphorisms.

This follows by discussion on modernism that created a huge educational apparatus with its extension to consulting of all kinds about things that consultants never actually did, but rather learned in school. What makes it dangerous is absence of skin in the game. Author also discusses regulation vs. legal system noting that former has risk of regulator’s malfeasance because cost is always goes to somebody else. The next part is about soul in the game, which is honor that used to be important, sometimes even more than life. Author then discusses people who are by nature have skin in the game and it is more important for them and material returns: Artisans and Entrepreneurs. Finally, author talks about his American Citizenship that he consciously chosen, even if it means that he has to pay more taxes on his international income.

Prologue, Part 3: The Ribs of the Incerto

This part of prologue discusses author’s work over many years and a number of books all that he calls Incerto (kind of uncertainty).

Appendix: Asymmetries in Life and Things:

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Book 2: A First Look at Agency

This is a deeper exposition of symmetry and agency in risk sharing, bridging commercial conflict of interest with general ethics. It also introduces us briefly to the notion of scaling and the difference between individual and collective, hence the limitations of globalism and universalism.

Chapter 1: Equality in Uncertainty

It is reference to ancient adage and basically about advises given by people who themselves do not risk anything, but also about inequality of information access between sellers and buyers. Yet another point here is scaling when moving up or down the scale qualitative changes the game. Author makes important point here that “general kills particular”. Here is a nice example from political scaling:

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Book 3: That Greatest Asymmetry

This is about the minority rule by which a small segment of the population inflicts its preferences on the general population. The (short) appendix for Book 3 shows:

1) How a collection of units doesn’t behave like a sum of units, but something with a mind of its own, and

2) The consequences of much of something called social “science.”

Chapter 2: The Most Intolerant Wins: The Dominance of the Stubborn Minority

It starts with reference to kosher food that majority does not care about, but minority pushed through special designation on packaging. Author provides multiple other examples when minority gets accommodation because majority does not care. Author calls such minority intransient group and majority – flexible group. Author discusses renormalization and provides graphic representation of the process:

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Thenauthor discusses Popper-Goedel paradox of tolerance for intolerance. At the end author provides summary:

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.

Appendix to Book 3: A Few More Counterintuitive Things About the Collective:

  • The average behavior of the market participant will not allow us to understand the general behavior of the market.
  • The psychological experiments on individuals showing “biases” do not allow us to automatically understand aggregates or collective behavior, nor do they enlighten us about the behavior of groups.
  • Understanding how the subparts of the brain (say, neurons) work will never allow us to understand how the brain works.
  • Understanding the genetic makeup of a unit will never allow us to understand the behavior of the unit itself.
  • Under the right market structure, a collection of idiots produces a well-functioning market.
  • It may be that some idiosyncratic behavior on the part of the individual (deemed at first glance “irrational”) may be necessary for efficient functioning at the collective level.
  • Individuals don’t need to know where they are going; markets do

Book 4: Wolves Among Dogs

This deals with dependence and, let’s call a spade a spade, slavery in modern life: for example employees exist because they have much more to lose than contractors. It also shows how, even if you are independent and have f*** you money, you are vulnerable if evil corporations and groups can target people you care about.

Chapter 3: How to Legally Own Another Person

It starts with reference to church and monks and their relationship with monks being financially free for the lack of financial assets were controlled by the rules. Then author goes to contemporary world when employees are kind of owned by employers and discusses trade-offs between employment and contracting and other peculiarities of contemporary work places.

Chapter 4: The Skin of Others in Your Game

This is about personal responsibility or lack thereof for organization men. This mainly comes in the form of conflict between action of organization and individual’s acceptance/rejection of these action and cost of either option. Then author moves from individual to individual’s important persons and discusses their costs that could be caused by individual’s action. As example he uses suicide bombers who seemingly have nothing to lose, but still have family and/or something that is dear for them.

Book 5: Being Alive Means Taking Certain Risks

Chapter 5: Life in the Simulation Machine

This is about how risk taking makes you look superficially less attractive, but vastly more convincing. It clarifies the difference between life as real life and life as imagined in an experience machine, how Jesus had to be man, not quite god, and how Donaldo won the election thanks to his imperfections.

Chapter 6: The Intellectual Yet Idiot

This chapter “The Intellectual Yet Idiot,” presents the IYI who doesn’t know that having skin in the game makes you understand the world (which includes bicycle riding) better than lectures.

Chapter 7: Inequality and Skin In the Game

This chapter explains the difference between inequality in risk and inequality in salary: you can be richer, but then you should be a real person and take some risk. It also presents a dynamic view of inequality, as opposed to the IYI static one. The most egregious contributor to inequality is the condition of a high-ranking civil servant or tenured academic, not that of an entrepreneur.

Chapter 8: An Expert Called Lindy

This explains the Lindy effect, that expert of experts who can tell us why plumbers are experts, but not clinical psychologists, why The New Yorker commentators on experts are not themselves experts. The Lindy effect separates things that gain from time from those that are destroyed by it.

Book 6: Deeper into Agency

This book looks for consequential hidden asymmetries.

Chapter 9: Surgeons Should Not Look Like surgeons

This shows that, viewed from the standpoint of practice, the world is simpler and solid experts don’t look like actors playing the part. The chapter presents BS detection heuristics.

Chapter 10: Only the Rich Are Poisoned: The Preferences of Others

This shows how rich people are suckers who fall prey to people complicating their lifestyle to sell them something.

Chapter 11: Facta Non Verba (Deeds Before Words)

This explains the difference between threats and real threats and shows how you can own an enemy by not killing him.

Chapter 12: The Facts Are True. The News Is Fake

This presents the agency problem of journalists: they will sacrifice truth and build a wrong narrative because of the necessity to please other journalists

Chapter 13: The Merchandising of Virtue

This explains why virtue requires risk taking, not the reputational risk reduction of playing white knight on the Internet or writing a check to some nongovernmental organization (NGO) that might help destroy the world.

Chapter 14: Peace. Neither Ink nor Blood

This explains the agency problem of people in geopolitics, and historians who tend to report on wars rather than peace, leaving us with a deformed view of the past. History is also plagued with probabilistic confusions. If we got rid of “peace” experts, the world would be safer, and many problems would be solved organically.

Book 7: Religion, Belief, and Skin in the (same

This book explains creeds in terms of skin in the game and revealed preferences: how atheists are functionally indistinguishable from Christians, though not Salafi Muslims. Avoid the verbalistics like “religions” are not quite religions: some are philosophies, while others are just legal systems.

Chapter 15: They Don’t Know What They Are Talking About When They Talk About Religion

This starts with author’s motto: “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.”

It is an interesting observation that could help understand different approaches to reality and role that worlds play in politics and culture. Author proceeds to discuss the difference in meaning of “religion” for people with different cultural background.

Chapter 16: No Worship Without Skin in the Game

This is about another interesting approach to religion as the method of creating skin in the game, by using high-level demands on resources and dedication that person needs to demonstrate that he is true believer.

Chapter 17: Is the Pope Atheist?

This is very reasonable approach to the posed question: if the Pope really believer, why would he need medical services, security protection and other similarly secular things if everything is under control of the god anyway. In short, the real attitude is demonstrated by deeds, not words.

Book 8: Risk and Rationality

Book 8, “Risk and Rationality,” has the two central chapters, which author elected to leave for the end. There is no rigorous definition of rationality that is not related to skin in the game; it is all about actions, not verbs, thoughts, and tawk.

Chapter 18: How to Be Rational About Rationality

This chapter deals with human perception and its distortions. Author makes an interesting point that these distortions are necessary for survival. It seems to be obvious by definition, but his point is that distortions that exaggerate risks and consequently help to avoid loss much more useful than correct perception that would lead to loss, especially in cases of tail risks. He links it to the idea of bounded rationality that helps to heuristically process overwhelming amount of information at the levels good enough for survival. Here are 3 maxims that kind of formulate this idea:

  • Judging people by their beliefs is not scientific.
  • There is no such thing as the “rationality” of a belief, there is rationality of action.
  • The rationality of an action can be judged only in terms of evolutionary considerations.

Chapter 19: The Logic of Risk Taking

This chapter summarizes all author tenets about risk and exposes the errors concerning small-probability events. It also classifies risks in layers (from the individual to the collective) and manages to prove that courage and prudence are not in contradiction provided one is acting for the benefit of the collective. It explains ergodicity, which was left hanging. Finally, the chapter outlines what is called the precautionary principle. Here is author’s view of this:

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At the end author provides his summary:

  • One may be risk loving yet completely averse to ruin.
  • The central asymmetry of life is: In a strategy that entails ruin, benefits never offset risks of ruin.
  • Further: Ruin and other changes in condition are different animals. Every single risk you take, adds up to reduce your life expectancy.
  • Finally: Rationality is avoidance of systemic ruin.

Epilogue

The final wisdom:

When the beard (or hair) is black, heed the reasoning, but ignore the conclusion. When the beard is gray, consider both reasoning and conclusion.

When the beard is white, skip the reasoning, but mind the conclusion.

 So author finishes this book with a (long) maxim, via negativa style: No muscles without strength, friendship without trust, opinion without consequence, change without aesthetics, age without values, life without effort, water without thirst, food without nourishment, love without sacrifice, power without fairness, facts without rigor, statistics without logic, mathematics without proof, teaching without experience, politeness without warmth, values without embodiment, degrees without erudition, militarism without fortitude, progress without civilization, friendship without investment, virtue without risk, probability without ergodicity, wealth without exposure, complication without depth, fluency without content, decision without asymmetry, science without skepticism, religion without tolerance, and, most of all: nothing without skin in the game.

MY TAKE ON IT:

It is interesting to read something so close to my own thinking, expressed about 37 years ago, that caused some problems for me with KGB and eventually resulted in learning English, getting out from USSR, and drastically improving my live. It is obviously written by much more educated and erudite man, but the core is the same – without “skin in the game” or what I called real responsibility and proper feedback loop, no human system such as society could function efficiently. It does not mean that it would not be able function somewhat effectively, but with huge waste in resources and, most importantly, human lives. Even so this inefficiency would necessarily cause such society to lose competition with any other, even slightly more efficient society, at least over sufficient period of time. Correspondingly “skin in the game” or “proper feedback loop” could be represented as well functioning democracy with complete freedom of speech, association, movement, actions, and availability of enough resources to make all these freedoms real for practically all members of society. Contemporary Western world, especially USA is pretty good on declarative part and opportunities to obtain resources for individuals with average and higher abilities. However, since about half of population has abilities lower than average, it still has a lot to achieve so all declared freedoms become available for everybody.


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