Magazine | May 14, 2018, Issue

Risk and Business

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

If ever an intellectual has achieved “street cred” and the “cool factor,” it is Nassim Taleb, author of the best-sellers The Black Swan and Antifragile. Taleb’s reputation as a scholar, for his contributions to the subject of risk management, is well deserved, and his extraordinary popularity no less so. With over 264,000 Twitter followers and absolutely packed halls wherever he speaks, Taleb is known for provocation, iconoclasm, and confident repudiation of conventional thinking.

Taleb is no mere provocateur, but one of the most interesting thought leaders of our time. I once saw him debate former Obama economic director Larry Summers at the popular SALT hedge-fund symposium in Las Vegas. The subject was “the aftermath of the financial crisis,” and Summers came armed with ideas for enhanced regulation and other conventional Dodd-Frank–type measures. Taleb’s take? “I want justice!” Taleb was not interested in conventional regulatory prescriptions — he wanted to see those who benefited from the financial crisis “brought to justice.” (He is particularly fond of using Robert Rubin as an example: The former Clinton treasury secretary made $100 million on Citibank stock shortly before the firm virtually blew up.) His blustery style makes him a popular guest on CNBC and elsewhere and surely pleases his Twitter followers, but behind the style does lie very serious substance.

His book Antifragile: Things That Gain from Disorder (2012) offered profound insights on the need for systems and structures that go beyond mere resilience and instead actually benefit from shocks, volatility, and disruption. The book was well received for its substance, though not always for its style; it promised readers more in subsequent works, by way of application. The latest work from Taleb, Skin in the Game: Hidden Asymmetries in Daily Life, makes good on that promise. It seeks to apply Taleb’s fundamental principles not merely to “risk and reward, but also to politics and religion, finance and personal responsibility.”

The book is similar in style to Taleb’s other books, including the use of fictional characters to help illustrate concepts. There is a certain shorthand prose (as opposed to fully developed paragraphs) that leads to pithy nuggets of wisdom. Readers are likely to have a binary response to this prose: Some will love it, others hate it. The same can be said of Taleb’s obvious grandiosity. Readers who take it seriously are likely to hit a point where he exceeds their tolerance for self-congratulatory erudition. But on the other hand, for readers willing to be entertained by it, or those few who can even ignore it, there will no doubt exist a decision moment in reading Taleb that transcends questions of style and ego: the moment when you have to determine whether he is right.

I approached Skin in the Game the way I imagine many will: excited for a discussion of basic incentive structures that have long been accepted by economists and academics but are now reassessed by a provocative and trendy writer. The book is not merely a reiteration of the long-understood notion that those who will receive reward have more incentive. The “skin in the game” of which Taleb writes is profoundly different and introduces readers to concepts that cannot be ignored or dismissed.

We are used to thinking of “skin in the game” as a traditional incentive structure: If this project proves profitable, I will share in the profits of my employer. Taleb’s focus, instead, is on disincentives: Who will suffer the consequences if a project proves damaging? In many of the bad financial situations Taleb discusses, operators, managers, stakeholders, and decision-makers had the incentive side of skin in the game; he points out that it was the lack of the disincentive — of having to suffer the consequences of bad decisions — that was crucial. And he believes that the lack of disincentives, in this sense, is the fundamental “asymmetry” in society generally. (“Asymmetry” is simply the concept that things are not in equilibrium: Either the reward is larger than the risk — good asymmetry — or the risk is larger than the reward, in the kind of asymmetry that destabilizes entire systems and is at the heart of Taleb’s scholarship.) In a practical sense, perhaps many (clearly not enough) already are skeptical of advice-givers who lack any “skin in the game” about the advice they are giving (the consultant and coach class run amok). But identifying how this lack of disincentives has been the source of so much social, economic, and cultural angst is not only eye-opening, it is transformative.

The profundity of Taleb’s book is not in the notion that those with disincentives are likely to make better decisions. It lies rather in how he elaborates this notion to create a societal narrative wherein skin in the game creates greater antifragility because of the basic concept of survival: When operators are forced to adopt the negative implications of their decisions, poor decision-makers do not survive, asymmetries are eliminated, and the result is a system that is devoid of poor decision-makers. In other words, skin in the game does not just cause better decision-making because of disincentives; its evolutionary forces eliminate those fools or shysters who are the source of great systemic damage.

Taleb’s elaborations and applications are at times brilliant and at times incoherent, but they are always interesting. He surely knows that applying the concept of skin in the game to the real world is complex and easier said than done; but readers surely know that the society Taleb prescribes would be one far less prone to financial collapse and social corrosion. Like every Taleb book I have read, Skin in the Game was difficult to put down, as I found the prose entertaining and the pithy nuggets provocative.

And the asymmetry of any effort to criticize Taleb’s ego or style led me to just ignore them altogether. This book should be read and, even better, its systems applied wherever possible to our organizations, businesses, institutions, and societal structures. After reading Taleb’s profound work, you won’t be content to “listen to what others think.” Rather you will demand to know: “What is in their portfolio?”

David L. Bahnsen is the managing partner of a wealth-management firm, a trustee of the National Review Institute, and author of the book, Crisis of Responsibility: Our Cultural Addiction to Blame and How You Can Cure It.

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Redeeming the Miracle

Yuval Levin reviews Suicide of the West: How the Rebirth of Tribalism, Populism, Nationalism, and Identity Politics Is Destroying American Democracy, by Jonah Goldberg.




Richard Rustad responds to Yuval Levin & Ramesh Ponnuru’s article “A New Health-Care Debate.”

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