Saturday, May 5, 2018

Skin In The Game

I quite enjoyed the book Skin in the game: The Hidden Asymmetries in Daily Life. It talks about the consequences of asymmetries of risk in systems. For example, the problem with our current systems is that the decision makers don't bear any of the consequences. And because of this difference, there is no learning, no evolution.
"Bureaucracy is a construction by which a person is conveniently separated from the consequences of his or her actions."
Having decision makers immune to risk is a bad thing for the system. Since the decision makers are not taking on any risk, those decision makers will cause the system to build more and more asymmetric. Good news (maybe) is that if it is not force-ably decentralized, the system will eventually balance itself, possibly by collapse.

One of the examples of this was the 2008 crises. The bankers were immune to any risk. So they passed the risk onto the common people. Eventually the risk built up enough where it collapsed. The bankers blamed a "Black Swan" event. But really in a system like this a collapse was inevitable.

Without being the victims of their (bad) decisions, there is no learning and the trend should continue. In order to evolve there needs to be skin in the game. And this was true for our ecosystem for millions of years. Each species is here because they survived in a system where they had direct skin in the game. Death was the consequence of not adapting. Today however, those bad banks are still alive in our system because we artificially bailed them out. This goes against the skin in the game principle. Did the bankers learn a lesson? Of course not. Will it happen again? Of course.

The skin in the game principle is seen not just in the business world. Taleb goes on to write about how academia is full of people who theorize and make decisions but don't do anything else and thus not take any of the risk. What is supposed to work is not the same as what actually works and the reverse is true. What works but sounds stupid is not actually stupid.
"Avoid taking advice form someone who gives advice for a living, unless there is a penalty for their advice"
Make sure you understand what kind of risk people are taking when dealing with them. So much bad advice is given when there is no risk, when interests are not aligned. Whole industries are sprung up on giving advice but taking no risk (eg. financial advice, education).

One of the more interesting parts was about risk and how it relates to employees. The salaried employee was invented so that employees would have skin in the game. Employers need employees to have penalties for not showing up on time, not being reliable. Thus employees are indoctrinated to dress the part and talk the part. They have fear of upsetting not only their employer, but all other potential employers. A person who is employed for a while is showing a type of domestication, an evidence of submission because they are willing to give up their personal freedom for the cushy office life.

There's an Aesop's fable where a dog is boasting to a wolf about all the luxury and comforts it has. The wolf considers joining but after realizing what the dog's collar is for he runs a way. However, in the previous fable it was a wild ass and then that ass ends up being eaten by a lion. So skin in the game cuts both ways.

Overall great book. Its one of those books that everything is "obvious" but so insightful.