Skin In The Game

Recently I listened to audiobook version of Nassim Nicholas Taleb’s (NNT) book Skin In The Game. Here is a brief understanding.

Taleb has been a trader/ hedge fund manager. His books on uncertainty, risks, luck, randomness, etc. are bundled as Incerto. I have only read Fooled By Randomness before Skin In The Game. His books seem to have a sort-of philosophical idea at the center with some statistics, Greek/ Roman/ European classics/ philosophy, experiences in trading in the background.

The idea behind Skin In The Game is that people who decide policy should have to share the risks if the policy does not yield intended results. If you don’t have a stake in the system, you should not be allowed to decide about the system. “For social justice, focus on symmetry and risk sharing. You cannot make profits and transfer the risks to others, as bankers and large corporations do… Forcing skin in the game corrects this asymmetry better than thousands of laws and regulations.”

I think at a high level everyone knows the concept. It’s somewhat like accountability. But a lot of systems we see, participate in or are part of don’t seem to have this mechanism built in. The idea of having accountability built in may generate mixed emotions. People are generally ok with reaping the benefits of success but may be uncomfortable in suffering due to failures. Having it built in into systems like politics may make you happy. But- and sorry if the next few lines make you uncomfortable (they made me uncomfortable while writing)- suppose you are a programmer or a project manager and the project fails, budget overruns or the code has production defects, how would you like to share the burden? You can sense if someone does not have skin in the game. A Monica (Friends) tends to break up with Richard who prefers having fun over having children or a Jim (US version of The Office) is forced to give up on Pam if he gets the feeling that ‘I kinda put it all on the line. Twice, actually. And she said No.’

Now, one may say that we don’t participate in many such Jim-Pam systems. But then your stake in systems could be proportionate. An architect, a manager and a coder need not and will not have same amount of the skin in the game if the system they built fails. One of the finer concept NNT writes about in the book is that the risk you end up sharing does not have to as big as the failure. It can be proportionate with some scaling down.

The idea is to commit. The system may fail. You have to have something to lose if the system fails. If you are playing it safe, you do not have skin in the game. In spite of uncertainty- known and unknown unknowns- you have to commit. If someone is drowning in the river then you- sitting on the riverbank- have no right to teach them how to swim. And if you are the person who is drowning, should you listen to someone who is shouting instructions from the bank or place yourself in the care of the not-so-expert swimmer who jumps into the river to save you? Of course, if the swimmer who jumps in is an expert one, then it’s the happy path. But then neither you nor the savior has skin in the game. Because successful outcome is guaranteed. If the project succeeds, everybody from coder to manager may get rewards. The concept of skin in the game is more prominently apperant in the not-exactly-ideal-outcome scenarios.

A couple of examples of skin in the game: (Based on my reading)

1. Rahul Bajaj was an industrialist in Pune and led the Bajaj Group. Bajaj Auto- one of the big companies in the group- set up school for children of their workers. And Rahul Bajaj’s children studied there.
2. Anil Awachat was a medical doctor turned social worker. He stayed near the slum like area in Pune where he worked and both his daughters went to the same school which the children from the neighborhood went to.
3. The fugu fish possesses a potentially fatal poison so the chef preparing a dish has to eat from the prepared dish before serving to others. (Not sure if this is true these days.) Talking about the fish reminds me of the Columbo episode.

And now something related but not conceptually related: The known unknown, unknown unknown reminds me of Iraq invasion. NNT is quite critical by naming names of war mongering people. Also, to quote from wikipedia, ‘Robert Rubin, a highly-paid director and senior advisor at Citigroup, paid no financial penalty when Citigroup had to be rescued by U.S. taxpayers due to overreach. Taleb calls this sort of a trade, with upside gain but no or limited downside risk, a “Bob Rubin trade”.’ I agree with the ideas. But this sort of naming and shaming did not appeal to me. If I remember correctly he has done same for Soros in Randomness.

Another thing that that I did not like was the lack of scientific rigor. NNT’s style seems to be take an idea, have some anecdotal tales, personal experiences, statistical ideas, philosophical background thrown around the central idea, criticize some people and mindsets, etc. But one of the tenets of science is saying that we were wrong, our experiments did not prove anything conclusive, our new drug does not perform significantly better than a placebo, etc. NNT’s writing does not seem to have the smallest of self-doubt. He even preempts it by telling us to be wary of scientism. Another thing he says evolution or passage of time is the best evaluator of results/ ideas. And yet he says western invasions (Iraq, Syria) did not work out. Why doesn’t he allow the same passage of time there? I am not saying that any of these/ such wars are good. My point is that there seems to be double standards to ideas he advocates and the ones he opposes. Why read his books then? Because his ideas are important, appealing and seem to make sense. Whether they will make sense when subjected to scientific rigor/ debate is not for me to say as I am not knowledgeable enough. But the lack of rigor is visible. However, his statistical knowledge/ understanding seems deep.

A couple of more points- and these are my shortcomings- due to which there was some impedance mismatch between his books and myself: 1. Most of his writing features his background as a trader. And due to lack of my interest in that area some of his discussion is lost. 2. Many of the references are from Greek Roman myths, Western European thinkers and some of those being foreign to me- at this stage- have lesser appeal. Contrast this to Yuval Noah Harari whose references include Vedas as well as Code of Hammurabi.