Skin In The Game by Nassim Taleb

Summary

Taleb dives deep into (1) skin in the game, (2) Lindy Effect, (3) Minority Rule, (4) static vs dynamic equality. For fans of Taleb or books on risk and asymmetry. Read Antifragile first.

Key Takeaways

• If you give an opinion, and someone follows it, you are morally obligated to be exposed to its consequences.
• Flaws of interventionists:
  • They think in statics not dynamics, 
  • They think in low, not high, dimensions, 
  • They think in terms of actions, never interactions.
• Historically, societies were run by risk takers, not risk transferors – noblesse oblige.
• Bureaucracy is a construction by which a person is conveniently separated from the consequences of his or her actions.
• You will never fully convince someone that he is wrong; only reality can.
• Curse of modernity: explaining > understanding or doing.
• Systems learn by removing parts, via negativa.
• Actions that remove are more robust than those that add because addition may have unseen, complicated feedback loops.
• Avoid taking advice from someone who gives advice for a living, unless there is a penalty for their advice.
• What matters in life isn’t how frequently one is “right” about outcomes, but how much one makes when one is right.
• Asymmetry in risk bearing leads to imbalances and, potentially, to systemic ruin.
• If you can’t put your soul into something, give it up and leave that stuff to someone else. (reminds me of Circle of Competence)
• The ethical is always more robust than the legal.
• No amount of advertising will match the credibility of a genuine user.
• The Minority Rule and Veto Effect: when there are few choices, McDonald’s appears to be a safe bet.
• An intolerant minority can control and destroy democracy. Actually, it will eventually destroy our world.
• To evolve society, all one needs is an asymmetric rule somewhere—and someone with soul in the game.
• Beware: ‘biases’ do not allow us to understand collective behaviour or the behaviour of groups.
• Leave people alone under a good structure and they will take care of things.
• Action without talk supersedes talk without action.
• You do not create dynamic equality just by raising the level of those at the bottom, but rather by making the rich rotate.
• The problem is never the problem; it is how people handle it.
• Envy and empathy (the opposite) are something you are more likely to encounter in your own kin: lower classes are more likely to experience envy toward their cousins or the middle class than toward the very rich.
• Things that have survived are hinting to us ex post that they have some robustness—conditional on their being exposed to harm.
• One should give more weight to research that, while being rigorous, contradicts other peers.
• In any activity, hidden details are only revealed via Lindy.
• What can be phrased and expressed in a clear narrative that convinces suckers will be a sucker trap. The people you understand most easily were necessarily the bull***tters.
• Never discount anything that allows you to survive. What is rational is that which allows for survival.
• How much you truly “believe” in something can be manifested only through what you are willing to risk for it.
• Not everything that happens happens for a reason, but everything that survives survives for a reason.

What I got out of it

A nice closing book to Nassim Taleb’s Incerto series (for now?). It’s not as comprehensive or revolutionary as Antifragile, but a worthwhile read nonetheless. Ryan Boissonneault’s review on Goodreads summarizes my feelings well.

New ideas and changes in actions or beliefs as a result of this book:

• The importance of skin in the game:
  • Do others have it? Ignore anything one without skin in the game says. I might miss something, but I’ll more than likely cut 90+% of BS from my life.
  • How can I add it to anything I do, talk about or want to learn about? Particularly with skill or language acquisition I see a lot of merit in adding skin in the game for myself.
• Maybe my biggest takeaway from the Incerto series – Via Negativa: actions that remove are more robust than those that add because addition may have unseen, complicated feedback loops. Taleb has raised this point multiple times in the series.
  • My action point: ask first what can be eliminated or simplified, before (if at all) considering addition.
• Talk less, do more. Do less, do better. Craft & experience > theory and platitudes.
• The Minority Rule, low-variance, its impact and the increased odds of survival of binary rules vs non-binary ones. Book 3 – my favourite in Skin In The Game – goes in-depth. I’ll have to study this topic in more depth to fully internalize the points Taleb makes and turn it into something actionable.
• Static vs dynamic equality and the impact of skin in the game in both. Book 5 goes in-depth on this topic.
  • One of my favourite lines: You do not create dynamic equality just by raising the level of those at the bottom, but rather by making the rich rotate.

Summary Notes

Book 1: Introduction

Skin in the Game is about four topics in one: 

1. uncertainty and the reliability of knowledge (both practical and scientific, assuming there is a difference), or in less polite words bull***t detection, 
2. symmetry in human affairs, that is, fairness, justice, responsibility, and reciprocity, 
3. information sharing in transactions, and 
4. rationality in complex systems and in the real world. 

If you give an opinion, and someone follows it, you are morally obligated to be, yourself, exposed to its consequences.

Prologue, Part 1: Antaeus Whacked

Interventionistas lack practical sense, never learn from history, and even fail at pure reasoning. Their three flaws: 

1. They think in statics not dynamics, 
2. They think in low, not high, dimensions, 
3. They think in terms of actions, never interactions.

The first flaw is that they are incapable of thinking in second steps and unaware of the need for them.

The second flaw is that they are also incapable of distinguishing between multidimensional problems and their single-dimensional representations.

The third flaw is that they can’t forecast the evolution of those one helps by attacking, or the magnification one gets from feedback.

This idea of skin in the game is woven into history: historically, all warlords and warmongers were warriors themselves, and, with a few curious exceptions, societies were run by risk takers, not risk transferors.

Noblesse oblige: the very status of a lord has been traditionally derived from protecting others, trading personal risk for prominence—and they happened to still remember that contract. You can’t be a lord if you aren’t a lord.

Bureaucracy is a construction by which a person is conveniently separated from the consequences of his or her actions.

If we do not decentralize and distribute responsibility, it will happen by itself, the hard way: a system that doesn’t have a mechanism of skin in the game, with a buildup of imbalances, will eventually blow up and self-repair that way. If it survives.

Interventionistas don’t learn because they are not the victims of their mistakes, and, as we hinted at with pathemata mathemata: The same mechanism of transferring risk also impedes learning.

More practically: You will never fully convince someone that he is wrong; only reality can.

Reality doesn’t care about winning arguments: survival is what matters.

For The curse of modernity is that we are increasingly populated by a class of people who are better at explaining than understanding, or better at explaining than doing.

Evolution can only happen if risk of extinction is present.

Systems learn by removing parts, via negativa.

Via negativa: the principle that we know what is wrong with more clarity than what is right, and that knowledge grows by subtraction. Also, it is easier to know that something is wrong than to find the fix.

Actions that remove are more robust than those that add because addition may have unseen, complicated feedback loops.

Prologue, Part 2: A Brief Tour of Symmetry

By applying symmetry to relations between individual and collective, we get virtue, classical virtue, what is now called “virtue ethics.”

Avoid taking advice from someone who gives advice for a living, unless there is a penalty for their advice.

What matters in life isn’t how frequently one is “right” about outcomes, but how much one makes when one is right.

The inverse problem in mathematics, which is solved by—and only by—skin in the game. I will simplify: it is harder for us to reverse-engineer than engineer; we see the result of evolutionary forces but cannot replicate them owing to their causal opacity. We can only run such processes forward.

Intelligence of Time (a manifestation of the Lindy effect) and by which 

1. Time removes the fragile and keeps the robust, and 
2. The life expectancy of the nonfragile lengthens with time.

Those who talk should do and only those who do should talk.

Specialization comes with side effects, one of which is separating labor from the fruits of labor.

Skin in the game brings simplicity. People who see complicated solutions do not have an incentive to implement simplified ones.

Things designed by people without skin in the game tend to grow in complication (before their final collapse).

Artisans have their soul in the game:

1. Artisans do things for existential reasons first, financial and commercial ones later. Their decision making is never fully financial, but it remains financial.
2. They have some type of “art” in their profession; they stay away from most aspects of industrialization; they combine art and business. 
3. They put some soul in their work: they would not sell something defective or even of compromised quality because it hurts their pride. 
4. They have sacred taboos, things they would not do even if it markedly increased profitability.

Having an assistant (except for the strictly necessary) removes your soul from the game.

Think of the effect of using a handheld translator on your next trip to Mexico in place of acquiring a robust vocabulary in Spanish by contact with locals. Assistance moves you one step away from authenticity.

Prologue, Part 3: The Ribs of the Incerto 

Asymmetry in risk bearing leads to imbalances and, potentially, to systemic ruin.

If you can’t put your soul into something, give it up and leave that stuff to someone else.

Learning is rooted in repetition and convexity: the reading of a single text twice is more profitable than reading two different things once, provided of course that said text has some depth of content.

Book 2: A First Look At Agency 

Avoid at all costs those who call you to tout a certain product disguised with advice.

Diogenes held that the seller ought to disclose as much as civil law requires. As for Antipater, he believed that everything ought to be disclosed—beyond the law —so that there was nothing that the seller knew that the buyer didn’t know.

Clearly Antipater’s position is more robust—robust being invariant to time, place, situation, and color of the eyes of the participants. 

The ethical is always more robust than the legal. Over time, it is the legal that should converge to the ethical, never the reverse.

Laws come and go; ethics stay.

It may not be ethically required, but the most effective, shame-free policy is maximal transparency, even transparency of intentions.

Whenever the “we” becomes too large a club, things degrade, and each one starts fighting for his own interest. I advocate political systems that start with the municipality, and work their way up (like Switzerland), rather than the reverse, which has failed with larger states. Being tribal is not a bad thing. In that sense, an American-style federalism is the ideal system.

We don’t have to go very far to get the importance of scaling. You know instinctively that people get along better as neighbors than roommates.

That is what plagues socialism: people’s individual interests do not quite work well under collectivism. But it is a critical mistake to think that people can function only under a private property system.

What Ostrom found empirically is that there exists a certain community size below which people act as collectivists, protecting the commons, as if the entire unit became rational. 

Groups behave differently at a different scale. This explains why the municipal is different from the national. It also explains how tribes operate: you are part of a specific group that is larger than the narrow you, but narrower than humanity in general. Critically, people share some things but not others within a specified group.

Both the doctor and the patient have skin in the game, though not perfectly, but administrators don’t—and they seem to be the cause of the troubling malfunctioning of the system. Administrators everywhere on the planet, in all businesses and pursuits, and at all times in history, have been the plague.

No amount of advertising will match the credibility of a genuine user.

Book 3: That Greatest Asymmetry 

The Minority Rule:

• A kosher (or halal) eater will never eat nonkosher (or nonhalal) food, but a nonkosher eater isn’t banned from eating kosher.
• A disabled person will not use the regular bathroom, but a nondisabled person will use the bathroom for disabled people.
• Someone with a peanut allergy will not eat products that touch peanuts, but a person without such an allergy can eat items with peanut traces in them.
• An honest person will never commit criminal acts, but a criminal will readily engage in legal acts.

A “renormalization group,” a powerful apparatus in mathematical physics that allows us to see how things scale up (or down).

You think that because some extreme right-or left-wing party has the support of ten percent of the population, their candidate will get ten percent of the votes. No: these baseline voters should be classified as “inflexible” and will always vote for their faction. But some of the flexible voters can also vote for that extreme faction, just as nonkosher people can eat kosher. These people are the ones to watch out for, as they may swell the number of votes for the extreme party.

What we saw in the renormalization group was the “veto” effect, as a person in a group can steer choices. This is why some fast-food chains, such as McDonald’s, thrive. It’s not because they offer a great product, but because they are not vetoed in a certain socio-economic group—and by a small proportion of people in that group at that. When there are few choices, McDonald’s appears to be a safe bet. It is also a safe bet in shady places with few regulars where the food variance from expectation can be consequential

Pizza is the same story: it is a commonly accepted food, and, outside a gathering of pseudo-leftist caviar eaters, nobody will be blamed for ordering it.

“Once you have 10 percent or more women at a party, you cannot serve only beer. But most men will drink wine. So you only need one set of glasses if you serve only wine—the universal donor, to use the language of blood groups.”

Genes follow majority rule; languages minority rule. Languages travel; genes less so.

My heuristic is that the more pagan, the more brilliant one’s mind, and the higher one’s ability to handle nuances and ambiguity.

Purely monotheistic religions such as Protestant Christianity, Salafi Islam, or fundamentalist atheism accommodate literalist and mediocre minds that cannot handle ambiguity.

Another attribute of decentralization, and one that the “intellectuals” opposing an exit of Britain from the European Union (Brexit) don’t get: if one needs, say, a 3 percent threshold in a political unit for the minority rule to take its effect, and on average the stubborn minority represents 3 percent of the population, with variations around the average, then some states will be subject to the rule, but not others. If, on the other hand, we merge all states in one, then the minority rule will prevail all across. This is the reason the U.S.A. works so well. As I have been repeating to everyone who listens, we are a federation, not a republic. To use the language of Antifragile, decentralization is convex to variations.

Wherever you look across societies and histories, you tend to find the same general moral laws prevailing, with some variations. And we can see these rules evolved over time to become more universal, expanding to a broader set, to progressively include slaves, other tribes, other species (animals, economists), etc.

And one property of these laws: they are black-and-white, binary, discrete, and allow no shadow. You cannot steal “a little bit” or murder “moderately”—just as you cannot keep kosher and eat “just a little bit” of pork at Sunday barbecues.

It is vastly more likely that these values emerged from a minority than a majority. 

Outcomes are paradoxically more stable under the minority rule—the variance of the results is lower and the rule is more likely to emerge independently across separate populations.

What emerges from the minority rule is more likely to be black-and-white, binary rules.

An example. Consider that an evil person, say an economics professor, decides to poison the collective by putting some product into soda cans. He has two options. 

1. The first is cyanide, which obeys a minority rule: a drop of poison (higher than a small threshold) makes the entire liquid poisonous. 
2. The second is a “majority-style” poison; it requires more than half the ingested liquid to be poisonous in order to kill. 
3. Now look at the inverse problem, a collection of dead people after a dinner party. The local Sherlock Holmes would assert that, conditional on the outcome that all people drinking the soda having been killed, the evil man opted for the first, not the second option. 
4. Simply, the majority rule leads to fluctuations around the average, with a high rate of survival. Not the minority rule. The minority rule produces low-variance in outcomes.

“Should a society that has elected to be tolerant be intolerant about intolerance?”

This is in fact the incoherence that Kurt Gödel (the grandmaster of logical rigor) detected in the United States Constitution while taking the naturalization exam. Legend has it that Gödel started arguing with the judge, and Einstein, who was his witness during the process, saved him. The philosopher of science Karl Popper independently discovered the same inconsistency in democratic systems.

An intolerant minority can control and destroy democracy. Actually, it will eventually destroy our world.

We can say that markets aren’t the sum of market participants, but price changes reflect the activities of the most motivated buyer and seller. Yes, the most motivated rules. Indeed this is something that only traders seem to understand: why a price can drop by ten percent because of a single seller. All you need is a stubborn seller. Markets react in a way that is disproportional to the impetus.

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.

Alexander said that it was preferable to have an army of sheep led by a lion than an army of lions led by a sheep. Alexander understood the value of the active, intolerant, and courageous minority.

“There is one thing that’s more wonderful than their numbers…in all that vast number there is not one man called Gisgo.” – on the power of the minority/individual.

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, or polling; only a few people suffice to disproportionately move the needle. All one needs is an asymmetric rule somewhere—and someone with soul in the game.

The psychological experiments on individuals showing “biases” do not allow us to automatically understand aggregates or collective behavior, nor do they enlighten us about the behavior of groups.

Curse of dimensionality.

Understanding how the subparts of the brain (say, neurons) work will never allow us to understand how the brain works. A group of neurons or genes, like a group of people, differs from the individual components—because the interactions are not necessarily linear.

Yaneer Bar-Yam has applied the failure of mean-field to evolutionary theory of the selfish-gene narrative. He shows that local properties fail and the so-called mathematics used to prove the selfish gene are woefully naive and misplaced. There has been a storm around work by Martin Nowack and his colleagues (which include the biologist E. O. Wilson) about the terminal flaws in the selfish gene theory.

Under the right market structure, a collection of idiots produces a well-functioning market.

It may be that be that some idiosyncratic behavior on the part of the individual (deemed at first glance “irrational”) may be necessary for efficient functioning at the collective level.

Leave people alone under a good structure and they will take care of things.

Book 4: Wolves Among Dogs 

Every organization wants a certain number of people associated with it to be deprived of a certain share of their freedom. How do you own these people?

1. By conditioning and psychological manipulation; 
2. By tweaking them to have some skin in the game, forcing them to have something significant to lose if they disobey authority.

Welcome to the modern world. In a world in which products are increasingly made by subcontractors with increasing degrees of specialization, employees are even more necessary than before for some specific, delicate tasks. If you miss one step in a process, often the entire business shuts down—which explains why today, in a supposedly more efficient world with lower inventories and more subcontractors, things appear to run smoothly and efficiently, but errors are costlier and delays are considerably longer than in the past. One single delay in the chain can stop the entire process.

The Skin of Others in Your Game 

Society likes saints and moral heroes to be celibate so they do not have family pressures that may force them into the dilemma of needing to compromise their sense of ethics to feed their children. The entire human race, something rather abstract, becomes their family.

The vulnerability of heads of households has been remarkably exploited in history: 

• The samurai had to leave their families in Edo as hostages, thus guaranteeing to the authorities that they would not take positions against the rulers. 
• The Romans and Huns partook of the practice of exchanging permanent “visitors,” the children of rulers on both sides, who grew up at the courts of the foreign nation in a form of gilded captivity.
• The Ottomans relied on janissaries, who were extracted as babies from Christian families and never married. Having no family (or no contact with their family), they were entirely devoted to the sultan.

It is no secret that large corporations prefer people with families; those with downside risk are easier to own, particularly when they are choking under a large mortgage.

To make ethical choices you cannot have dilemmas between the particular (friends, family) and the general.

Cato’s injunction: he preferred to be asked why he didn’t have a statue rather than why he had one.

Book 5: Being Alive Means Taking Certain Risks 

You’d even rather have a failed real person than a successful one, as blemishes, scars, and character flaws increase the distance between a human and a ghost. Scars signal skin in the game.

People can detect the difference between front-and back-office operators.

Some Fat Tony wisdom: always do more than you talk. And precede talk with action. For it will always remain that action without talk supersedes talk without action.

The Intellectual Yet Idiot 

Much of what the Cass Sunstein and Richard Thaler types—those who want to “nudge” us into some behavior—much of what they would classify as “rational” or “irrational” comes from their misunderstanding of probability theory and cosmetic use of first-order models. They are also prone to mistake the ensemble for the linear aggregation of its components—that is, they think that our understanding of single individuals allows us to understand crowds and markets, or that our understanding of ants allows us to understand ant colonies.

Reading recommendations:

• Frédéric Dard
• Libanius Antiochus
• Michael Oakeshott
• John Gray
• Ammianus Marcellinus
• Ibn Battuta
• Saadia Gaon
• Joseph de Maistre

Inequality and Skin in the Game 

In countries such as the U.S., where wealth can come from destruction, people can easily see that someone getting rich is not taking dollars from your pocket; odds are he is even putting some in yours. On the other hand, inequality, by definition, is zero sum.

I will propose that what people resent—or should resent—is the person at the top who has no skin in the game, that is, because he doesn’t bear his allotted risk, he is immune to the possibility of falling from his pedestal, exiting his income or wealth bracket, and waiting in line outside the soup kitchen.

We first need to introduce the difference between two types of approaches, the static and the dynamic, as skin in the game can transform one type of inequality into another:

• Static inequality is a snapshot view of inequality; it does not reflect what will happen to you in the course of your life.
• Dynamic (ergodic) inequality takes into account the entire future and past life.

True equality is equality in probability.

Skin in the game prevents systems from rotting.

Blindness to ergodicity is in my opinion the best marker separating a genuine scholar who understands something about the world from an academic hack who partakes of ritualistic paper writing.

You do not create dynamic equality just by raising the level of those at the bottom, but rather by making the rich rotate—or by forcing people to incur the possibility of creating an opening.

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. Our condition here is stronger than mere income mobility. Mobility means that someone can become rich. The no-absorbing-barrier condition means that someone who is rich should never be certain to stay rich.

Dynamic equality is what restores ergodicity, making time and ensemble probabilities substitutable.

Perfect ergodicity means that each one of us, should he live forever, would spend a proportion of time in the economic conditions of the entire cross-section: out of, say, a century, an average of sixty years in the lower middle class, ten years in the upper middle class, twenty years in the blue-collar class, and perhaps one single year in the one percent. 

The exact opposite of perfect ergodicity is an absorbing state. The term absorption is derived from particles that, when they hit an obstacle, get absorbed or stick to it. An absorbing barrier is like a trap, once in, you can’t get out, good or bad. A person gets rich by some process, then, having arrived, he stays rich.

And if someone enters the lower middle class (from above), he will never have the chance to exit from it and become rich should he want to, of course—hence will be justified to resent the rich. You will notice that where the state is large, people at the top tend to have little downward mobility—in such places as France, the state is chummy with large corporations and protects their executives and shareholders from experiencing such descent; it even encourages their ascent.

No downside for some means no upside for the rest.

Piketty’s theory about the increase in the return of capital in relation to labor is patently wrong, as anyone who has witnessed the rise of what is called the “knowledge economy” (or anyone who has had investments in general) knows.

Clearly, when you say that inequality changes from year one to year two, you need to show that those who are at the top are the same people—something Piketty doesn’t do. But the problem doesn’t stop there. Soon, I discovered that—aside from deriving conclusions from static measures of inequality—the methods he used were flawed: Piketty’s tools did not match what he purported to show about the rise in inequality. There was no mathematical rigor.

The more inequality in the system, the more the winner-take-all effect, the more we depart from the methods of thin-tailed Mediocristan in which economists were trained. The wealth process is dominated by winner-take-all effects. Any form of control of the wealth process—typically instigated by bureaucrats—tends to lock people with privileges in their state of entitlement. So the solution is to allow the system to destroy the strong, something that works best in the United States.

The problem is never the problem; it is how people handle it.

Envy does not originate with the impoverished, concerned with the betterment of their condition, but with the clerical class.

Aristotle postulated that envy is something you are more likely to encounter in your own kin: lower classes are more likely to experience envy toward their cousins or the middle class than toward the very rich.

The same applies to empathy (the reverse of envy). You can see that people feel more for those of their class.

Data is not necessarily rigour.

People mistake empiricism for a flood of data. Just a little bit of significant data is needed when one is right, particularly when it is disconfirmatory empiricism, or counterexamples: only one data point (a single extreme deviation) is sufficient to show that Black Swans exist.

For many environments, the relevant data points are those in the extremes; these are rare by definition, and it suffices to focus on those few but big to get an idea of the story.

When you buy a thick book with tons of graphs and tables used to prove a point, you should be suspicious. It means something didn’t distill right!

An Expert Called Lindy 

The Lindy effect is one of the most useful, robust, and universal heuristics.

Time is equivalent to disorder, and resistance to the ravages of time, that is, what we gloriously call survival, is the ability to handle disorder.

That which is fragile has an asymmetric response to volatility and other stressors, that is, will experience more harm than benefit from it.

Who will judge the expert? Who will guard the guard? (Quis custodiet ipsos custodes?) Who will judge the judges? Well, survival will.

Things that have survived are hinting to us ex post that they have some robustness—conditional on their being exposed to harm. For without skin in the game, via exposure to reality, the mechanism of fragility is disrupted: things may survive for no reason for a while, at some scale, then ultimately collapse, causing a lot of collateral harm.

There are two ways things handle time:

1. There is aging and perishability: things die because they have a biological clock, what we call senescence. 
2. There is hazard, the rate of accidents.

What we witness in physical life is the combination of the two.

That which is “Lindy” is what ages in reverse, i.e., its life expectancy lengthens with time, conditional on survival.

Periander of Corinth wrote, more than twenty-five hundred years ago: Use laws that are old but food that is fresh.

Alfonso X of Spain, nicknamed El Sabio, “the wise,” had as a maxim: Burn old logs. Drink old wine. Read old books. Keep old friends.

The Romans judged their political system by asking not whether it made sense but whether it worked.

Being reviewed or assessed by others matters if and only if one is subjected to the judgment of future—not just present—others.

One should give more weight to research that, while being rigorous, contradicts other peers, particularly if it entails costs and reputational harm for its author.

Someone with a high public presence who is controversial and takes risks for his opinion is less likely to be a bull***t vendor.

Science is fundamentally disconfirmatory, not confirmatory.

While our knowledge of physics was not available to the ancients, human nature was. So everything that holds in social science and psychology has to be Lindy-proof, that is, have an antecedent in the classics; otherwise it will not replicate or not generalize beyond the experiment.

More reading recommendations:

• Cicero
• Seneca
• Marcus Aurelius
• Epictetus
• Lucian
• The poets: Juvenal, Horace
• The later French so-called “moralists”
  • La Rochefoucauld
  • Vauvenargues
  • La Bruyère
  • Chamfort
• Bossuet is a class on his own. 
• One can use Montaigne and Erasmus as a portal to the ancients: Montaigne was the popularizer of his day; Erasmus was the thorough compiler.

A BRIEF TOUR OF YOUR GRANDPARENTS’ WISDOM 

Let us close by sampling a few ideas that exist in both ancient lore and are sort of reconfirmed by modern psychology. These are sampled organically, meaning they are not the result of research but of what spontaneously comes to mind, then verified in the texts.

• Cognitive dissonance: a psychological theory by Leon Festinger about sour grapes, by which people, in order to avoid inconsistent beliefs, rationalize that, say, the grapes they can’t reach got to be sour.
• Loss aversion: a psychological theory by which a loss is more painful than a gain is pleasant. Men feel the good less intensely than the bad.
• Negative advice (via negativa): We know the wrong better than what’s right; recall the superiority of the Silver over the Golden Rule. The good is not as good as the absence of bad.
• Skin in the game: We start with the Yiddish proverb: You can’t chew with somebody else’s teeth. “Your fingernail can best scratch your itch,”
• Antifragility: Cicero – “When our souls are mollified, a bee can sting.”
• Time discounting: “A bird in the hand is better than ten on the tree.” 
• Madness of crowds: Nietzsche – “Madness is rare in individuals, but in groups, parties, nations, it is the rule.” 
• Less is more: Truth is lost with too much altercation, in Publilius Syrus.
• Overconfidence: “I lost money because of my excessive confidence,” Erasmus inspired by Theognis of Megara (Confident, I lost everything; defiant, I saved everything) and Epicharmus of Kos (Remain sober and remember to watch out).
• The Paradox of progress, and the paradox of choice: There is a familiar story of a New York banker vacationing in Greece, who, from talking to a fisherman and scrutinizing the fisherman’s business, comes up with a scheme to help the fisherman make it a big business. The fisherman asked him what the benefits were; the banker answered that he could make a pile of money in New York and come back to vacation in Greece; something that seemed ludicrous to the fisherman, who was already there doing the kind of things bankers do when they go on vacation in Greece.
  • The story was well known in antiquity, under a more elegant form, as retold by Montaigne: When King Pyrrhus tried to cross into Italy, Cynéas, his wise adviser, tried to make him feel the vanity of such action. “To what end are you going into such enterprise?” he asked. Pyrrhus answered, “To make myself the master of Italy.” Cynéas: “And so?” Pyrrhus: “To get to Gaul, then Spain.” Cynéas: “Then?” Pyrrhus: “To conquer Africa, then…come rest at ease.” Cynéas: “But you are already there; why take more risks?” Montaigne then cites the well-known passage in Lucretius’ De Rerum Natura (V, 1431) on how human nature knows no upper bound, as if to punish itself.

Book 6: Deeper Into Agency  

The one who doesn’t look the part, conditional on having made a successful career in his profession, had to have much to overcome in terms of perception. And if we are lucky enough to have people who do not look the part, it is thanks to the presence of some skin in the game, the contact with reality that filters out incompetence, as reality is blind to looks.

Hire the successful trader, conditional on a solid track record, whose details you can understand the least.

The green lumber fallacy: what one may need to know in the real world does not necessarily match what one can perceive through intellect: it doesn’t mean that details are not relevant, only that those we tend to believe are important can distract us from more central attributes of the price mechanism. In any activity, hidden details are only revealed via Lindy.

What can be phrased and expressed in a clear narrative that convinces suckers will be a sucker trap.

The people you understand most easily were necessarily the bull***tters.

People who are bred, selected, and compensated to find complicated solutions do not have an incentive to implement simplified ones. There is absolutely no gain for someone in such a position to propose something simple: you are rewarded for perception, not results. Meanwhile, they pay no price for the side effects that grow nonlinearly with such complications.

The Facts Are True, The News Is Fake

One does not need complex models as a justification to avoid a certain action. If we don’t understand something and it has a systemic effect, just avoid it. Models are error-prone.

Most risks only appear in analyses after harm is done.

The more uncertainty about the models, the more conservative one should be.

The Merchandising of Virtue 

If your private life conflicts with your intellectual opinion, it cancels your intellectual ideas, not your private life.

Courage is the only virtue you cannot fake.

When young people who “want to help mankind” come to me asking, “What should I do? I want to reduce poverty, save the world,” and similar noble aspirations at the macro-level, my suggestion is:

1. Never engage in virtue signaling;
2. Never engage in rent-seeking;
3. You must start a business. Put yourself on the line, start a business. Courage (risk taking) is the highest virtue. We need entrepreneurs.

Peace, Neither Ink nor Blood 

People with no skin in the game who have read too much about the Treaty of Westphalia (and not enough on complex systems) still insist on conflating relations between countries with relations between governments.

Real people are interested in commonalities and peace, not conflicts and wars.

If the “law of the jungle” means anything, it means collaboration for the most part, with a few perceptional distortions caused by our otherwise well-functioning risk-management intuitions. Even predators end up in some type of arrangement with their prey.

We are fed a steady diet of histories of wars, fewer histories of peace. As a trader, I was trained to look for the first question people forget to ask: who wrote these books? Well, historians, international affairs scholars, and policy experts did.

1. There are problems of “overfitting,” overnarrating, extracting too much via positiva and not enough via negativa from past data.
2. These scholars, as non–rocket scientists, fail to get a central mathematical property, confusing intensity with frequency.
3. There is a problem of representativeness, or to what extent the narrated maps to the empirical. Historians who reach us are more motivated by stories of conflict than by organic collaboration on the ground between a broader set of noninstitutional players, merchants, barbers, doctors, money changers, plumbers, prostitutes, and others.
4. Accounts of past wars are fraught with overestimation biases. The lurid rises to the surface and keeps rising from account to account.

Book 7: Religion, Belief, And Skin In The Game 

We saw with the minority rule that the intolerant will run over the tolerant; cancer must be stopped before it becomes metastatic.

As Gibbon wrote: The various modes of worship, which prevailed in the Roman world, were all considered by the people, as equally true; by the philosopher, as equally false; and by the magistrate, as equally useful. And thus toleration produced not only mutual indulgence, but even religious concord.

Beware labels when it comes to matters associated with beliefs.

No Worship Without Skin In The Game 

The main theological flaw in Pascal’s wager is that belief cannot be a free option. It entails a symmetry between what you pay and what you receive. Things otherwise would be too easy. So the skin-in-the-game rules that hold between humans also hold in our rapport with the gods.

Love without sacrifice is theft.

Is the Pope Atheist? 

There are people who are atheists in actions, religious in words and others who are religious in actions, religious in words but I know of nobody who is atheist in both actions and words, completely devoid of rituals, respect for the dead, and superstitions.

Book 8: Risk And Rationality 

Survival comes first, truth, understanding, and science later.

Skin in the game means that you do not pay attention to what people say, only to what they do, and to how much of their necks they are putting on the line. Let survival work its wonders.

Never discount anything that allows you to survive.

How much you truly “believe” in something can be manifested only through what you are willing to risk for it.

What is rational is that which allows for survival.

When you consider beliefs in evolutionary terms, do not look at how they compete with each other, but consider the survival of the populations that have them.

Not everything that happens happens for a reason, but everything that survives survives for a reason.

Rationality is risk management, period.

The Logic of Risk Taking 

A situation is deemed non-ergodic when observed past probabilities do not apply to future processes. There is a “stop” somewhere, an absorbing barrier that prevents people with skin in the game from emerging from it—and to which the system will invariably tend. Let us call these situations “ruin,” as there is no reversibility away from the condition. The central problem is that if there is a possibility of ruin, cost-benefit analyses are no longer possible.

Individual ruin is not as big a deal as collective ruin. And of course ecocide, the irreversible destruction of our environment, is the big one to worry about.

Courage is when you sacrifice your own well-being for the sake of the survival of a layer higher than yours.

It doesn’t cost us much to refuse some new shoddy technologies. It doesn’t cost me much to go with my “refined paranoia,” even if wrong. For all it takes is for my paranoia to be right once, and it saves my life.

Never compare a multiplicative, systemic, and fat-tailed risk to a non-multiplicative, idiosyncratic, and thin-tailed one.

One may be risk loving yet completely averse to ruin.

The central asymmetry of life is: in a strategy that entails ruin, benefits never offset risks of ruin.

Ruin and other changes in condition are different animals. Every single risk you take adds up to reduce your life expectancy.

Epilogue: What Lindy Told Me

When the beard (or hair) is black, heed the reasoning, but ignore the conclusion. When the beard is gray, consider both reasoning and conclusion. When the beard is white, skip the reasoning, but mind the conclusion.