Notes: Skin in the Game, by Nassim N. Taleb

“Skin in the Game” by the great (& libertarian) Nassim Nicholas Taleb. Book dedicated to Ron Paul (“a Roman among Greeks”) and Ralph Nader (“Greco-Phoenician saint”), is combination of practical discussions (in the spirit of the discussions with your old man, that you don’t get it how much are valuable until you get older) and commentaries on the problems of randomness and making decisions under uncertainty.

Notes

(the more important ones are with under quotations)

Introduction

The entire point of the book is that in the real world it is hard to disentangle ethics on one hand from knowledge and competence on other.

Skin in the game, applied as a rule, reduces the effects of the following divergences that grew with civilization: those between action and cheap talk (tawk), consequence and intention, practice and theory, honor and reputation, expertise and charlatanism, concrete and abstract, ethical and legal, genuine and cosmetic, merchant and bureaucrat, entrepreneur and chief executive, strength and display, love and gold-digging, Coventry and Brussels, Omaha and Washington, D.C., human beings and economists, authors and editors, scholarship and academia, democracy and governance, science and scientism, politics and politicians, love and money, the spirit and the letter, Cato the Elder and Barack Obama, quality and advertising, commitment and signaling, and, centrally, collective and individual.

It is not just that skin in the game is necessary for fairness, commercial efficiency, and risk management: skin in the game is necessary to understand the world.

…in academia there is no difference between academia and the real world; in the real world, there is.

Do not mistake skin in the game as defined here and used in this book for just an incentive problem, just having a share of the benefits. No. It is about symmetry, more like having a share of the harm, paying a penalty if something goes wrong.

Prologue, part 1 — Antheus Whacked

We retain from this first vignette that, just like Antaeus, you cannot separate knowledge from contact with the ground. Actually, you cannot separate anything from contact with the ground. And the contact with the real world is done via skin in the game — having an exposure to the real world, and paying a price for its consequences, good or bad.

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.

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.

Even today, monarchs derive their legitimacy from a social contract that requires physical risk-taking. The British Royal family made sure that one of its scions, Prince Andrew, took more risks than “commoners” during the Falkland war of 1982, his helicopter being in the front line. Why? Because noblesse oblige; the very status of a lord has been traditionally derived from protecting others, trading personal risk for prominence — and they happened to still remember that contract. You can’t be a lord if you aren’t a lord.

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

And, one may ask, what can we do since a centralized system will necessarily need people who are not directly exposed to the cost of errors? Well, we have no choice but to decentralize or, more politely, to localize; to have fewer of these immune immune decision makers. Decentralization is based on the simple notion that it is easier to macrobull***t than microbull***t. Decentralization reduces large structural asymmetries. But not to worry, if we do not decentralize and distribute responsibility, it will happen by itself, the hard way: a system that doesn’t have a mechanism of skin in the game, with a buildup of imbalances, will eventually blow up and self-repair that way. If it survives.

Bob Rubin Trade: payoff in a skewed domain where the benefits are visible (and rewarded with some compensation) and the detriment is rare (and unpunished owing to absence of skin in the game). Can be generalized to politics, anything where the penalty is weak and the victims are abstract and distributed (say taxpayers or shareholders).

[with example] Robert Rubin, a former Secretary of the United States Treasury, one of those who sign their names on the banknote you just used to pay for coffee, collected more than $120 million in compensation from Citibank in the decade preceding the banking crash of 2008. When the bank, literally insolvent, was rescued by the taxpayer, he didn’t write any check — he invoked uncertainty as an excuse. Heads he wins, tails he shouts “Black Swan.” Nor did Rubin acknowledge that he transferred risk to taxpayers: Spanish grammar specialists, assistant schoolteachers, supervisors in tin can factories, vegetarian nutrition advisors, and clerks for assistant district attorneys were “stopping him out,” that is, taking his risks and paying for his losses. But the worst casualty has been free markets, markets, as the public, already prone to hating financiers, started conflating free markets and higher order forms of corruption and cronyism, when in fact it is the exact opposite: it is government, not markets, that makes these things possible by the mechanisms of bailouts. It is not just bailouts: government interference in general tends to remove skin in the game.

The interventionista case is central to our story because it shows how absence of skin in the game has both ethical and epistemological effects (i.e., related to knowledge). We saw that interventionistas don’t learn because they are not the victims of their mistakes, and, as we hinted at with pathemata mathemata: The same mechanism of transferring risk also impedes learning.

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

There is no evolution without skin in the game. Skin in the game keeps human hubris in check.

Prologue, part 2 — A brief tour of symmetry

Skin-in-the-game-style symmetry, until the recent intellectualization of life, had been implicitly considered the principal rule for organized society, even for any form of collective life in which one encounters or deals with others more than once.

The Hamurabi code (passed 3,800 years ago in Babylon) has one central theme: it establishes symmetries between people in a transaction, so nobody can transfer hidden tail risk, or Bob Rubin–style risks. Yes, the Bob Rubin trade is 3,800 years old, as old as civilization, and so are the rules to counter it. What is a tail? Take for now that it is an extreme event of low frequency. It is called a “tail” because, in drawings of bell-curve style frequencies, it is located to the extreme left or right (being of low frequency), and for some reason beyond my immediate understanding, people started calling that a “tail” and the term stuck. Hammurabi’s 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.” 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 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. More robust? How? Why is the Silver Rule more robust? Simple, 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. The Silver Rule can be seen as the Negative Golden Rule,

Universal behavior is great on paper, disastrous in practice. Why? 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. We should focus on our immediate environment; we need simple practical rules. Even worse: the general and the abstract tend to attract self-righteous psychopaths similar to the interventionistas of Part 1 of the Prologue.

…if bankers’ profits accrue to them, while their losses are somewhat quietly transferred to society (the Spanish grammar specialists, assistant schoolteachers …), there is a fundamental problem by which hidden risks will continuously increase, until the final blowup. Regulations, while appearing to be a remedy on paper, if anything, exacerbate the problem as they facilitate risk-hiding.

Skin in the game helps to solve the Black Swan problem and other matters of uncertainty at the level of both the individual and the collective: what has survived has revealed its robustness to Black Swan events and removing skin in the game disrupts such selection mechanisms.

By definition, what works cannot be irrational…

Intellectualism is the belief that one can separate an action from the results of such action, that one can separate theory from practice, and that one can always fix a complex system by hierarchical approaches, that is, in a (ceremonial) top-down manner. Intellectualism has a sibling: scientism, a naive interpretation of science as complication rather than science as a process and a skeptical enterprise. Using mathematics when it’s not needed is not science but scientism.

The rule is: Those who talk should do and only those who do should talk with some dispensation for self-standing activities such as mathematics, rigorous philosophy, poetry, and art, ones that do not make explicit claims of fitting reality. 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.

Things designed by people without skin in the game tend to grow in complication (before their final collapse). Now skin in the game brings simplicity — the disarming simplicity of things properly done.

People have two brains, one when there is skin in the game, one when there is none. Skin in the game can make boring things less boring. When you have skin in the game, dull things like checking the safety of the aircraft because you may be forced to be a passenger in it cease to be boring. If you are an investor in a company, doing ultra-boring things like reading the footnotes of a financial statement (where the real information is to be found) becomes, well, almost not boring.

For there are always parasites benefiting from regulation, situations where the businessperson uses government to derive profits, often through protective regulations and franchises. The mechanism is called regulatory recapture, as it cancels the effect of what a regulation was meant to do.

The other solution is to put skin in the game in transactions, in the form of legal liability, and the possibility of an efficient lawsuit. The Anglo-Saxon world has traditionally had a predilection for the legal approach instead of the regulatory one: if you harm me, I can sue you. This has led to the very sophisticated, adaptive, and balanced common law, built bottom-up, via trial and error.

Now, even if regulations had a small net payoff for society, I would still prefer to be as free as possible, but assume my civil responsibility, face my fate, and pay the penalty if I harm others. This attitude is called deontic libertarianism (deontic comes from “duties”): by regulating you are robbing people of freedom. Some of us believe that freedom is one’s first most essential good. This includes the freedom to make mistakes (those that harm only you); it is sacred to the point that it must never be traded against economic or other benefits.

A Book 2 — First Look At Agency

Chapter 1: Why Each One Should Eat His Own Turtles — Equality in Uncertainty

You who caught the turtles better eat them, goes the ancient adage. The origin of the expression is as follows. It was said that a group of fishermen caught a large number of turtles. After cooking them, they found out at the communal meal that these sea animals were much less edible than they thought: not many members of the group were willing to eat them. But Mercury happened to be passing by — Mercury was the most multitasking, sort of put-together god, as he was the boss of commerce, abundance, messengers, the underworld, as well as the patron of thieves and brigands and, not surprisingly, luck. The group invited him to join them and offered him the turtles to eat. Detecting that he was only invited to relieve them of the unwanted food, he forced them all to eat the turtles, thus establishing the principle that you need to eat what you feed others.

The ethical is always more robust than the legal. Over time, it is the legal that should converge to the ethical, never the reverse. Hence: Laws come and go; ethics stay.

Which brings us to asymmetry, the core concept behind skin in the game. The question becomes: to what extent can people in a transaction have an informational differential between them? No person in a transaction should have certainty about the outcome while the other one has uncertainty.

Being somewhat tribal is not a bad thing — and we have to work in a fractal way in the organized harmonious relations between tribes, rather than merge all tribes in one large soup. In that sense, an American-style federalism is the ideal system.

Blaming people for being “sectarian” — instead of making the best of such a natural tendency — is one of the stupidities of interventionistas. Separate tribes for administrative purposes (as the Ottomans did), or just put some markers somewhere, and they suddenly become friendly to one another.

What Ostrom found empirically is that there exists a certain community size below which people act as collectivists, protecting the commons, as if the entire unit became rational. Such a commons cannot be too large. It is like a club. Groups behave differently at a different scale.

Book 3: That Greatest Asymmetry

Chapter 2, The most Intolerant Wins — The Dominance of the Stubborn Minority

The main idea behind complex systems is that the ensemble behaves in ways not predicted by its components. The interactions matter more than the nature of the units. Studying individual ants will almost never give us a clear indication of how the ant colony operates. For that, one needs to understand an ant colony as an ant colony, no less, no more, not a collection of ants. This is called an “emergent” property of the whole, by which parts and whole differ because what matters are the interactions between such parts. And interactions can obey very simple rules.

The rule we discuss in this chapter is the minority rule, the mother of all asymmetries. It suffices for an intransigent minority — a certain type of intransigent minority — with significant skin in the game (or, better, soul in the game) to reach a minutely small level, say 3 or 4 percent of the total population, for the entire population to have to submit to their preferences. Further, an optical illusion comes with the dominance of the minority: a naive observer (who looks at the standard average) would be under the impression that the choices and preferences are those of the majority.

Among other things, many other things, the minority rule will show us how all it takes is a small number of intolerant, virtuous people with skin in the game, in the form of courage, for society to function properly.

An honest person will never commit criminal acts, but a criminal will readily engage in legal acts. Let us call such minority an intransigent group, and the majority a flexible one. And their relationship rests on an asymmetry in choices.

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.

A Few More Counterintuitive Things About the Collective

Antifragile has been about the failure of the average to represent anything in the presence of nonlinearities and asymmetries similar to the minority rule. So let us go beyond: The average behavior of the market participant will not allow us to understand the general behavior of the market. You can examine markets as markets and individuals as individuals, but markets are not sums of average individuals.

Human nature is not defined outside of transactions involving other humans. Remember that we do not live alone, but in packs, and almost nothing of relevance concerns a person in isolation — which is what is typically done in laboratory-style works.

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.

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. The researchers Dhananjay Gode and Shyam Sunder came to a surprising result in 1993. You populate markets with zero intelligence agents, that is buying and selling randomly, under some structure such that a proper auction process matches bids and offers in a regular way. And guess what? We get the same allocative efficiency as if market participants were intelligent. Friedrich Hayek has been, once again, vindicated. Yet one of the most cited ideas in history, that of the invisible hand, appears to be the least integrated into modern psyche.

It may be that 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. More critically for the “rationalist” crowd, Individuals don’t need to know where they are going; markets do. Leave people alone under a good structure and they will take care of things.

Book 4: Wolves Among Dogs

Chapter 3 — How to Legally Own Another Person

Someone who has been employed for a while is giving you strong evidence of submission. Evidence of submission is displayed by the employee’s going through years depriving himself of his personal freedom for nine hours every day, his ritualistic and punctual arrival at an office, his denying himself his own schedule, and his not having beaten up anyone on the way back home after a bad day.

The longer the person stays with a company, the more emotional investment they will have in staying…

By the 1990s, however, people started to realize that working as a company man was safe … provided the company stayed around. But the technological revolution that took place in Silicon valley put traditional companies under financial threat. For instance, after the rise of Microsoft and the personal computer, IBM, which was the main farm for company men, had to lay off a proportion of its “lifers,” who then realized that the low-risk profile of their position wasn’t so low risk. These people couldn’t find a job elsewhere; they were of no use to anyone outside IBM. Even their sense of humor failed outside of the corporate culture.

Freedom entails risks — real skin in the game. Freedom is never free.

Another aspect of the dog vs. wolf dilemma: the feeling of false stability. A dog’s life may appear smooth and secure, but in the absence of an owner, a dog does not survive. Most people prefer to adopt puppies, not grown-up dogs; in many countries, unwanted dogs are euthanized. A wolf is trained to survive. Employees abandoned by their employers, as we saw in the IBM story, cannot bounce back.

The more you have to lose, the more fragile you are.

Chapter 4: The Skin of Others in Your Game

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

Intellectual and ethical freedom requires the absence of the skin of others in one’s game, which why the free are so rare.

Book 5: Being Alive Means Taking Certain Risks

Chapter 6— The Intellectual Yet Idiot

The Intellectual Yet Idiot (IYI) is a product of modernity, hence has been proliferating since at least the mid-twentieth century, to reach a local supremum today, to the point that we have experienced a takeover by people without skin in the game.

The IYI pathologizes others for doing things he doesn’t understand without ever realizing it is his understanding that may be limited. He thinks people should act according to their best interests and he knows their interests, particularly if they are “rednecks” or from the English non-crisp-vowel class who voted for Brexit. When plebeians do something that makes sense to themselves, but not to him, the IYI uses the term “uneducated.” What we generally call participation in the political process, he calls by two distinct designations: “democracy” when it fits the IYI, and “populism” when plebeians dare to vote in a way that contradicts IYI preferences.

The IYI … speaks of “equality of races” and “economic equality,” but never goes out drinking with a minority cab driver (again, no real skin in the game, as, I will repeat until I am hoarse, the concept is fundamentally foreign to the IYI).

Typically, the IYI get first-order logic right, but not second-order (or higher) effects, making him totally incompetent in complex domains.

Chapter 7: Inequality & Skin in the Game

There is inequality and inequality. The first is the inequality people tolerate, such as one’s understanding compared to that of people deemed heroes, say, Einstein, Michelangelo, or the recluse mathematician Grisha Perelman, in comparison to whom one has no difficulty acknowledging a large surplus. This applies to entrepreneurs, artists, soldiers, heroes, the singer Bob Dylan, Socrates, the current local celebrity chef, some Roman Emperor of good repute, say, Marcus Aurelius; in short, those for whom one can naturally be a “fan.” You may like to imitate them, you may aspire to be like them, but you don’t resent them. The second is the inequality people find intolerable because the subject appears to be just a person like you, except that he has been playing the system, and getting himself into rent-seeking, acquiring privileges that are not warranted — and although he has something you would not mind having (which may include his Russian girlfriend), you cannot possibly become a fan. The latter category includes bankers, bureaucrats who get rich, former senators shilling for the evil firm Monsanto, clean-shaven chief executives who wear ties, and talking heads on television making outsized bonuses. You don’t just envy them; you take umbrage at their fame, and the sight of their expensive or even semi-expensive car triggers some feeling of bitterness. They make you feel smaller.

Michèle Lamont, the author of The Dignity of Working Men, cited by Williams, did a systematic interview of blue-collar Americans and found a resentment of high-paid professionals but, unexpectedly, not of the rich.

Further, in countries where wealth comes from rent-seeking, political patronage, or regulatory capture (which, I remind the reader, is how the powerful and the insiders use regulation to scam the public, or red tape to slow down competition), wealth is seen as zero-sum.

In this chapter, I will propose that what people resent — or should resent — is the person at the top who has no skin in the game, that is, because he doesn’t bear his allotted risk, he is immune to the possibility of falling from his pedestal, exiting his income or wealth bracket, and waiting in line outside the soup kitchen.

Skin in the game prevents systems from rotting.

Visibly, a problem with economists (particularly those who never took risk) is that they have mental difficulties with things that move and are unable to consider that things that move have different attributes from things that don’t.

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. You do not create dynamic equality just by raising the level of those at the bottom, but rather by making the rich rotate — or by forcing people to incur the possibility of creating an opening. The way to make society more equal is by forcing (through skin in the game) the rich to be subjected to the risk of exiting from the 1 percent. Our condition here is stronger than mere income mobility. Mobility means that someone can become rich. The no-absorbing-barrier condition means that someone who is rich should never be certain to stay rich.

The exact opposite of perfect ergodicity is an absorbing state. The term absorption is derived from particles that, when they hit an obstacle, get absorbed or stick to it. An absorbing barrier is like a trap, once in, you can’t get out, good or bad. A person gets rich by some process, then, having arrived, he stays rich. And if someone enters the lower middle class (from above), he will never have the chance to exit from it and become rich should he want to, of course — hence will be justified to resent the rich.

You will notice that where the state is large, people at the top tend to have little downward mobility — in such places as France, the state is chummy with large corporations and protects their executives and shareholders from experiencing such descent; it even encourages their ascent. And no downside for some means no upside for the rest.

We’ve made a big deal out of Piketty here because the widespread enthusiasm for his book was representative of the behavior of that class of people who love to theorize and engage in false solidarity with the oppressed, while consolidating their privileges.

The reason regular people are not as acrimonious as the “intellectuals” and bureaucrats is because envy does not travel long distance or cross many social classes. Envy does not originate with the impoverished, concerned with the betterment of their condition, but with the clerical class. Simply, it looks like it was the university professors (who have “arrived”) and people who have permanent stability of income, in the form of tenure, governmental or academic, who bought heavily into Piketty’s argument.

So I doubt Piketty bothered to ask blue-collar Frenchmen what they want, as Michelle Lamont did (as we saw earlier in the chapter). I am certain that they would ask for better beer, a new dishwasher, or faster trains for their commute, not to bring down some rich businessman invisible to them. But, again, people can frame questions and portray enrichment as theft, as was done before the French Revolution, in which case the blue-collar class would ask, once again, for heads to roll.

…people mistake empiricism for a flood of data. Just a little bit of significant data is needed when one is right, particularly when it is disconfirmatory empiricism, or counterexamples: only one data point (a single extreme deviation) is sufficient to show that Black Swans exist.

Chapter 8: An Expert Called “Lindy”

An observation about modernity. Change for the sake of change, as we see in architecture, food, and lifestyle, is frequently the opposite of progress…too high a rate of mutation prevents locking in the benefits of previous changes: evolution (and progress) requires some, but not too frequent, variation.

The theory of fragility directly leads to the Lindy effect. Simply, my collaborators and I managed to define fragility as sensitivity to disorder: the porcelain owl sitting in front of me on the writing desk, as I am writing these lines, wants tranquility. It dislikes shocks, disorder, variations, earthquakes, mishandling by dust-phobic cleaning service operators, travel in a suitcase transiting through Terminal 5 in Heathrow, and shelling by Saudi Barbaria–sponsored Islamist militias. Clearly, it has no upside from random events and, more generally, disorder. (More technically, being fragile, it necessarily has a nonlinear reaction to stressors: up until its breaking point, shocks of larger intensity affect it disproportionally more than smaller ones). Now, crucially, time is equivalent to disorder, and resistance to the ravages of time, that is, what we gloriously call survival, is the ability to handle disorder. That which is fragile has an asymmetric response to volatility and other stressors, that is, will experience more harm than benefit from it.

In probability, volatility and time are the same. 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. You can’t fool Lindy:

Effectively Lindy answers the age-old meta-questions: Who will judge the expert? Who will guard the guard? (Quis custodiet ipsos custodes?) Who will judge the judges? Well, survival will. For time operates through skin in the game. Things that have survived are hinting to us ex post 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: things may survive for no reason for a while, at some scale, then ultimately collapse, causing a lot of collateral harm.

That which is “Lindy” is what ages in reverse, i.e., its life expectancy lengthens with time, conditional on survival.

For in fact, by the Lindy effect, robustness to time, that is, doing things under risk-taking conditions, is checked by survival. Things work 1) if those who have been doing the doing took some type of risk, and 2) their work manages to cross generations.

If you hear advice from a grandmother or elders, odds are that it works 90 percent of the time. On the other hand, in part because of scientism and academic prostitution, in part because the world is hard, if you read anything by psychologists and behavioral scientists, odds are that it works at less than 10 percent, unless it is has also been covered by the grandmother and the classics, in which case why would you need a psychologist?

Book 6: Deeper Into Agency

Chapter 9, Surgeons Should Not Look Like Surgeons

When results come from dealing directly with reality rather than through the agency of commentators, image matters less, even if it correlates to skills. But image matters quite a bit when there is hierarchy and standardized “job evaluation.”

…skilled thieves at large should not look like thieves. Those who do are more likely to be in jail.

I’ve introduced this point in Antifragile, where I called it the green lumber fallacy. A fellow made a fortune in green lumber without knowing what appears to be essential details about the product he traded — he wasn’t aware that green lumber stood for freshly cut wood, not lumber that was painted green. Meanwhile, by contrast, the person who related the story went bankrupt while knowing every intimate detail about the green lumber. 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.

In any activity, hidden details are only revealed via Lindy.

Chapter 13: The Merchandising of Virtue

It is immoral to be in opposition to the market system and not live (somewhere in Vermont or Northwestern Afghanistan) in a hut or cave isolated from it. But there is worse: It is much more immoral to claim virtue without fully living with its direct consequences.

As we saw with the interventionistas, a certain class of theoretical people can despise the details of reality. If you manage to convince yourself that you are right in theory, you don’t really care how your ideas affect others. Your ideas give you a virtuous status that makes you impervious to how they affect others.

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.

Finally, when young people who “want to help mankind” come to me asking, “What should I do? I want to reduce poverty, save the world,” and similar noble aspirations at the macro-level, my suggestion is:
1) Never engage in virtue signaling;
2) Never engage in rent-seeking;
3) You must start a business. Put yourself on the line, start a business. Yes, take risk, and if you get rich (which is optional), spend your money generously on others. We need people to take (bounded) risks. The entire idea is to move the descendants of Homo sapiens away from the macro, away from abstract universal aims, away from the kind of social engineering that brings tail risks to society. Doing business will always help (because it brings about economic activity without large-scale risky changes in the economy); institutions (like the aid industry) may help, but they are equally likely to harm (I am being optimistic; I am certain that except for a few most do end up harming). Courage (risk taking) is the highest virtue. We need entrepreneurs.

Chapter 14: Peace, Neither Ink nor Blood

One of the problems of the interventionista — wanting to get involved in other people’s affairs “in order to help” — results in disrupting some of the peace-making mechanisms that are inherent in human affairs, a combination of collaboration and strategic hostility.

…leave people alone, they tend to settle for practical reasons.

Just as paganism cannot be pigeon-holed, the same applies to libertarianism. It does not fit the structure of a political “party” — only that of a decentralized political movement. The very concept doesn’t allow for the straitjacket of a strong party line and unified policy with respect to, say, court locations or relations with Mongolia. Political parties are hierarchical, they are designed in a way to substitute someone’s own decision making with a well-defined protocol. This doesn’t work with libertarians. The nomenklatura that is necessary in the functioning of a party cannot exist in a libertarian environment fraught with fractious and vehemently independent people. Nevertheless, we libertarians share a minimal set of beliefs, the central one being to substitute the rule of law for the rule of authority. Without necessarily realizing it, libertarians believe in complex systems. And, since libertarianism is a movement, it can still exist as splintered factions within other political parties.

Book 8: Risk & Rationality

Chapter 18: How to be Rational about Rationality

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

Simon formulated the notion now known as bounded rationality: we cannot possibly measure and assess everything as if we were a computer; we therefore produce, under evolutionary pressures, some shortcuts and distortions.

As for Ken Binmore, he showed that the concept casually dubbed “rational” is ill-defined, in fact so ill-defined that many uses of the term are just gibberish. 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.”

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.

The axiom of revelation of preferences (originating with Paul Samuelson, or possibly the Semitic gods), as you recall, states the following: you will not have an idea about what people really think, what predicts people’s actions, merely by asking them — they themselves don’t necessarily know. What matters, in the end, is what they pay for goods, not what they say they “think” about them, or the various possible reasons they give you or themselves for that. If you think about it, you will see that this is a reformulation of skin in the game.

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. (See Figure 3.) I have shown in Antifragile that making some types of errors is the most rational thing to do, when the errors are of little cost, as they lead to discoveries. For instance, most medical “discoveries” are accidental to something else. An error-free world would have no penicillin, no chemotherapy … almost no drugs, and most probably no humans. This is why I have been against the state dictating to us what we “should” be doing: only evolution knows if the “wrong” thing is really wrong, provided there is skin in the game to allow for selection.

It is therefore my opinion that religion exists to enforce tail risk management across generations, as its binary and unconditional rules are easy to teach and enforce. We have survived in spite of tail risks; our survival cannot be that random. Recall that skin in the game means that you do not pay attention to what people say, only to what they do, and to how much of their necks they are putting on the line. Let survival work its wonders.

The only definition of rationality that I’ve found that is practically, empirically, and mathematically rigorous is the following: what is rational is that which allows for survival. Unlike modern theories by psychosophasters, it maps to the classical way of thinking. Anything that hinders one’s survival at an individual, collective, tribal, or general level is, to me, irrational. Hence the precautionary principle and sound risk understanding.

This allows us to summarize: Rationality does not depend on explicit verbalistic explanatory factors; it is only what aids survival, what avoids ruin. Why? Clearly as we saw in the Lindy discussion: Not everything that happens happens for a reason, but everything that survives survives for a reason.

Chapter 19: The Logic of Risk Taking

To take stock: a situation is deemed non-ergodic when observed past probabilities do not apply to future processes. There is a “stop” somewhere, an absorbing barrier that prevents people with skin in the game from emerging from it — and to which the system will invariably tend. Let us call these situations “ruin,” as there is no reversibility away from the condition. The central problem is that if there is a possibility of ruin, cost-benefit analyses are no longer possible.

But things are even worse: in real life, every single bit of risk you take adds up to reduce your life expectancy. If you climb mountains and ride a motorcycle and hang around the mob and fly your own small plane and drink absinthe, and smoke cigarettes, and play parkour on Thursday night, your life expectancy is considerably reduced, although no single action will have a meaningful effect. This idea of repetition makes paranoia about some low-probability events, even that deemed “pathological,” perfectly rational.

The last chapter reframed rationality in terms of actual decisions, not what are called “beliefs,” as these may be adapted to stimulate us in the most convincing way to avoid things that threaten systemic survival. If superstition is what it takes, not only is there absolutely no violation of the axioms of rationality there, but it would be technically irrational to stand in its way. If superstition is what’s needed to satisfy ergodicity, let it be.

Let us return to Warren Buffett. He did not make his billions by cost-benefit analysis; rather, he did so simply by establishing a high filter, then picking opportunities that pass such a threshold. “The difference between successful people and really successful people is that really successful people say no to almost everything,” he said. Likewise our wiring might be adapted to “say no” to tail risk. For there are a zillion ways to make money without taking tail risk.

it doesn’t cost us much to refuse some new shoddy technologies. It doesn’t cost me much to go with my “refined paranoia,” even if wrong. For all it takes is for my paranoia to be right once, and it saves my life.

All risks are not equal. We often hear that “Ebola is causing fewer deaths than people drowning in their bathtubs,” or something of the sort, based on “evidence.” This is another class of problems that your grandmother can get, but the semi-educated cannot. Never compare a multiplicative, systemic, and fat-tailed risk to a non-multiplicative, idiosyncratic, and thin-tailed one.

We close this chapter with a few summarizing lines. 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

So let me finish 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.