Skin in the Game — Nassim Taleb on Asymmetry and the Minority Rule

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Skin in the game, life asymmetries, and the minority rule — Nassim Taleb

Incentives and symmetry

Skin in the game, Nassim Taleb writes, is more than an economic question of incentives. “It is about symmetry” — to share in the pain or punishment when things go south. It is necessary not only as a filter for gibberish, but for promoting fairness, reciprocity, and efficiency. Skin in the game is often the difference between snake oil and fruit juice.

As Taleb explains: 

“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,… expertise and charlatanism,… ethical and legal,… entrepreneur and chief executive,… human beings and economists,… democracy and governance, science and scientism,… quality and advertising, commitment and signaling, and, centrally, collective and individual.”

Nassim Taleb. (2017). Skin in the Game.

Symmetry and skin in the game are not new ideas, of course. The saying, “an eye for one eye”, has its origins in Babylonian times under Hammurabi’s law nearly four millennia ago. And the Golden Rule likewise — to “treat others the way you would like them to treat you” — dates as far back as Ancient Egypt.

Crooks and fools, filters and sieves

Look inside any workplace, and you will find good and bad employees. Despite having the same pay grade, some managers will go well beyond their job description, while others seek to do the bare minimum. People differ in their attitudes and aspirations. So economic models of homogenous agents can be misleading. Money by its lonesome is not always the silver bullet.

Indeed, why is it that most dentists do not feel inclined to secretly lace their tools with sugar? Surely it would help to generate demand and new business. True, the fear of reprimand is an effective deterrent. But the bigger driver, I suspect, is a sense of moral duty. This here is a product of norms and institutions that we’ve cultivated over many generations.

Environments that lack such norms and institutions tend to provide a rich habitat for crooks and fools. The crook, Taleb warns, “has warped incentives”. They shift risk onto others. The fool, meanwhile, “takes risks he doesn’t understand”. Even worse are the hybrids. Foolish crooks and crooked fools run amok. This is especially so in finance and politics.

We cannot have evolution or progress “without skin in the game”, Taleb says. Nature understands this well. Animals literally live and die by the skin of their teeth. And the end product that emerges from this cumulative line of evolution, of heritable variation and natural selection, is indeed remarkable.

Modern society, however, frequently forgets this rule. People “don’t learn because they are not the victims of their mistakes”. Consultants and managers are happy to run companies into the ground. To them, the veneer of productivity is good enough because if or when the company fails, they can skip merrily along to their next pay check and fancy job title.

Pilots, by contrast, have to be good at their jobs. They cannot afford not to be. And the bad pilots? Well, they don’t tend to stick around for very long. Unlike most consultants or politicians, they have all of their skin in the game. The subtraction process in aviation is no joke. Death can be a powerful motivator.

Asymmetry and maximal transparency

Taleb wants people to see the asymmetries in everyday interactions and transactions. Changes in market prices, for example, “aren’t the sum of market participants”. They “reflect the activities of the most motivated buyer and seller”. It moves with adjustments and changes in asymmetry. 

“The market is like a large movie theater with a small door… The average behavior of the market participant will not allow us to understand the general behavior of the market… [Similarly, science] isn’t the sum of what scientists think, but exactly as with markets, it is a procedure that is highly skewed. Once you debunk something, it is now wrong. Had science operated by majority consensus, we would be still stuck in the Middle Ages, and Einstein would have ended as he started, a patent clerk with fruitless side hobbies.”

Nassim Taleb. (2017). Skin in the Game.

“Asymmetry”, Taleb writes, “[is] the core concept behind skin in the game”. Consider, for example, the case of information asymmetry. Is it ethical to peddle a product you have no confidence in to others? You wouldn’t sell snake oil to your mother or children. Yet people are happy to trade in it with millions of other strangers on the stock market.

The “shame-free policy”, Taleb suggests, “is maximal transparency”. People say such signals are implied in market activities. Or maybe they tell themselves that as they make a quick buck on the mistakes of others. The more probable explanation is that they just don’t care. Why would they when they don’t have skin in their stranger’s game?

As Taleb writes:

“If you give an opinion, and someone follows it, you are morally obligated to be, yourself,  exposed to its consequences. In case you are giving economic views: Don’t tell me what you “think,” just tell me what’s in your portfolio.”

Nassim Taleb. (2017). Skin in the Game.  

The minority rule

Asymmetries are more general than that. Its dynamics are best illustrated in what Taleb calls “the minority rule”. “A kosher (or halal) eater”, for example, “will never eat nonkosher (or nonhalal) food, but a nonkosher eater isn’t banned from eating kosher”. That’s one instance of asymmetry and minority rule.

That is, the degrees and proportions by which people are “intransigent” or “flexible”, can tell us a lot about the system itself. In the case of asymmetry in foods, we’d expect restaurants to trend over time towards kosher and halal friendly foods, given the demand and supply advantages this confers. 

“How do books get banned? Certainly not because they offend the average person — most persons are passive and don’t really care or don’t care enough… From past episodes, it looks like all it takes is a few (motivated) activists for the banning of some books, or the blacklisting of some people.”

Nassim Taleb. (2017). Skin in the Game.

Cascades and critical mass

Of course, among the most serious cases of minority rule is found in politics and voting. We often hear of candidates that concentrate their efforts on swing voters. Why waste time on intransigent voters whose views are fixed? In these systems, tipping points exist. Switches among the flexible can lead to wildly different outcomes and political world lines.

Note, however, that skin in the game and asymmetries exist in degrees and interdependencies. In revolutions, for example, intransigent rebels can inspire the flexible few to switch. This can galvanize other previously intransigent non-protestors to join the fray — kindling that turns into wildfire. Cascades and critical mass can add dimensions to asymmetry.  

Similarly, cultural and moral systems are often the product of an intransigent or intolerant few. Their position reshapes the malleable majority around them. History tells, for example, of many religious and imperial orders that were led by the few and imposed on the many. Sometimes, this results in progress. In others, it leads to degeneration. 

As Taleb explains:

“Revolutions are unarguably driven by an obsessive minority. And the entire growth of society, whether economic or moral, comes from a small number of people. … Society doesn’t evolve by consensus, voting, majority, committees, verbose meetings, academic conferences, tea and cucumber sandwiches… Only a few people suffice to disproportionately move the needle. All one needs is an asymmetric rule somewhere…”

Nassim Taleb. (2017). Skin in the Game.

Skin in the game and systems for change

Taleb’s assessment might sound a bit like another great-man theory. And it’s tempting to agree when you look at the indifference and ineptitude that persists to this day. We should remember, however, that while change is often propelled by the few, the system itself is a collective product.

Yes, political outcomes may swing to extremes with the flexible few. But the democratic process must be respected and upheld by the many. Standards of morality, likewise, might begin with the minority. But true progress is reflected in the collective’s practice of good sense. 

And while invention is sometimes the domain of a brilliant few, it is also a fraction of the cumulative knowledge and failures that led to that point. It is a larger pie than what an autobiography might otherwise suggest. Knowledge diffusion, in particular, requires the hard work of the many. 

Taleb could not write all his insightful books without the average masses to maintain the economy on which his income and acclaim depends. That is, you cannot have change without a system for change. We cannot extricate the intransigent or the flexible from the network in which they form. The emperor might declare war, but it is the soldiers who win the battle.

Either way, it is difficult to deny the role of skin-in-the-game and the asymmetries in life as one of the drivers of social and economic dynamics. As Taleb reminds, they extend well beyond the problems of the market. From fairness to accountability, they shape the course of things around us.

Sources and further reading