One of my favourite authors and thinkers is Nassim Taleb he wrote a book in 2001 called Fooled by Randomness that has dictated the way I view the world. Most of us attribute our successes to our skill and our failures to bad luck. The uncomfortable truth is that in most cases our success is nothing but random luck dressed up with post fact narratives describing the reason why we are so great.
Taleb is a grumpy, sarcastic loud mouth and I just love him. He is a maverick, unafraid of who he upsets with his straight insightful talk. His style of writing for many is jumbled and incoherent. If you “get” Taleb then his prose is like reading Shakespeare. His latest book is called, “Skin in the Game” and is a must read.
Taleb brings hundreds of examples, here are two:
(1) Robert Rubin a former Secretary of the United States Treasury collected more than $120 million from Citibank in the decade preceding the banking crash of 2008. When Citibank was technically insolvent he didn’t have to write a cheque to help bail it out. No he hid behind what they all say, it was a black swan, a statistically improbable event that nobody could have predicted. By government interfering with the free markets they have created asymmetries that have stripped the system of its skin in the game.
Contrast that with hedge fund manager or trader who has most of their net-worth tied up in their funds. Who would you prefer to give your money to manage. The guy who is working on a job with little skin in the game if things go wrong or the guy who loses most of his wealth if things turn bad?
(2) As a cancer doctor you are judged by your patients 5yr survival rate. You are presented with a patient who has 2 options. Laser treatment with a lower 5yr survival rate in comparison to a patient who undergoes radiation treatment with better 5yr survival rates. The problem with this approach is, medicine knows that radiation increases the probability of secondary tumors caused from the radiation with far more people dying over 20yrs than from laser treatments.
As the doctor is not a family member they are likely to go with the protocol that will most likely keep them from litigation, that is the 5yr result – radiation. The lack of skin in the game moves one away from creating the optimal result.
I feel like I am only scratching the surface with this topic. There are so many facets to this principle. If you want to learn or you want to place your self in the safest choice, always follow the principle of seeking “Skin in the Game”.