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A thriving society needs its decision-makers to have something at stake. April 20, 2018
Economy, finance, and budgets

Skin in the Game: Hidden Asymmetries in Daily Life, by Nassim Nicholas Taleb (Random House, 304 pp., $30)

Nassim Taleb is not likely to think much of a think-tank fellow reviewing his new book, Skin in the Game. Taleb considers think-tankers a prime example of what he calls the “intellectual yet idiot”—the people who’ve been making a hash of it in leadership positions at our major institutions, while suffering no consequences for their repeated failures. Taleb traces many of the ills of modern society to a lack of “skin in the game”—in other words, having something to lose. The powerful have arranged things such that they enjoy the upside from their actions but avoid the downside if things go wrong.

One example: what Taleb calls the “Bob Rubin trade,” after former Treasury secretary Robert Rubin. After leaving government, Rubin took up a senior position at Citigroup, where he racked up $120 million in pay. When the 2008 financial crash hit, Citigroup got bailed out—and Rubin kept his money. He wasn’t alone; bankers across the financial sector benefited mightily from government rescues. Unlike the 1980s Savings and Loan Crisis, which resulted in some nominal prosecution of banking executives, the subprime meltdown put no financial executives in jail.

Taleb is also critical of intellectuals who advocate military intervention abroad from the safety of their suburban Washington homes and offices. Many foreign policy elites urged the overthrow of Muammar el-Qaddafi in Libya. Today, Qaddafi is gone, but the country is in shambles, a terrorist haven with actual slave markets. Undeterred, Libya regime-change backers have argued for the overthrow of Bashir Assad in Syria, too, appearing to pay no price for their disastrous recommendations over the years.

Taleb’s answer to the problem of accountability is to create an environment where people, especially those at the top, have more skin in the game. He believes that this approach will, for example, lessen income inequality. “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,” he writes. How do we do that? One way is to end bailouts, which by necessity means shrinking the state. “It is government, not markets, that makes these things possible by the mechanisms of bailouts,” says Taleb. “It is not just bailouts: government interference in general tends to remove skin in the game.” He continues, “in general, the more people worship the sacrosanct state (or, equivalently, large corporations), the more they hate skin in the game.” Decentralization can shrink the influence of big government. “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 decision makers.” Taleb admires political systems, like Switzerland’s, that “start with the municipality, and work their way up, rather than the reverse, which has failed with larger states.”

He champions entrepreneurs. “Entrepreneurs are heroes in our society. They fail for the rest of us”—in contrast with the non-owner, interchangeable, big-company CEO. “Counter to the common belief,” Taleb argues, “executives are different from entrepreneurs.” He prefers simplicity to complexity, noting that “people who have always operated without skin in the game . . . seek the complicated and centralized, and avoid the simple like the plague. Practitioners, on the other hand, have opposite instincts, looking for the simplest heuristics.”

Taleb takes on behavioral economists, on whom he seems to have soured over the years. In particular, he critiques the idea popularized by Richard Thaler and Cass Sunstein that government should leverage behavioral insights to “nudge” people into making better decisions. Taleb considers the example of casino gambling. If 100 people go into a casino and place all-or-nothing roulette bets, one gambler going bankrupt doesn’t affect the other 99. You can calculate the expected return in the casino by simply combining all the results; this is ensemble probability. By contrast, if a single person places 100 bets, one after another, then the fact that he goes bankrupt on one bad bet determines his entire outcome; he is now broke and there are no more future bets to place; this is linear probability. Avoiding these “uncle points,” as Taleb labels them, is what anyone who wants to survive for the long term needs to do first.

This contrarian example validates common heuristics that behaviorists frown on, such as mental accounting. For example, many gamblers, if they hit a winning streak, take the original amount that they brought to the casino off the table and put it back in their pocket, then proceed to play with “house money.” Behavioral economists would mock this choice, but Taleb says that it’s rational, because by doing so the gambler ensures that he can’t go bust. The nudgers don’t understand this; they have no skin in the game for when their “better” solutions turn sour.

The range of topics Taleb tackles keeps the reader engaged but also deprives the book of a coherent narrative. It feels at times like a collection of essays. In fact, many of the chapters were posted online as essays prior to the book’s publication. Additionally, Taleb covered the “skin in the game” concept previously in 2012’s Antifragile. But as he himself might say, it can be better to read the same thing twice than to read two different things one time each. His punchy style, strong opinions, and willingness to name names make him a compelling read and should give anyone in the opinion-making business a gut check. Taleb’s writings are profound in their implications, if often discomforting.

Photo of Nassim Nicholas Taleb by Sean Gallup/Getty Images

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