Taleb’s books have long been in my recommended reads list. The reason for that is that they feel like eye-opening conversations with someone who’s seen it all. His books feel raw, almost unedited streams of consciousness right from his brain. I’ll take it.
His books are notoriously unsummarizable, just because there’s so much information in them. So think of this post as a few chosen servings from an otherwise very rich meal, not as a replacement for the book itself.
In Skin in the Game, Taleb opened my eyes to some of the hidden inbalances present in life, from the everyday to governments and more.
The key point he makes in Skin in the Game is that if you are going to receive rewards from the positive outcome of a certain action or decision you make, you must also bear the cost in case the outcome is negative. This seems obvious enough, except in the real world, there are countless examples of actors not having to bear the negative outcomes of their decisions.
When an actor gets the potential benefits of an action without having to bear the costs of its failure, Taleb calls that an asymmetry. We must avoid asymmetries.
Most of the book is dedicated to exploring examples of how this plays out in the real world. I will give some.
You want to buy an object, and you see it being sold on Amazon for a certain price. For a lower price, you can buy it second-hand on eBay from a reputable seller. And for an even lower price, you found it being sold on Craigslist by someone you don’t know. What would Taleb do?
If you buy the object and it turns out to be great, the seller gets the benefit of having gained money and a positive review as reputation boost, and you get the benefit of having gained the object. You’ll know the seller, so you might buy from them again. It’s a win-win.
But what if the object turns out to be broken, or it’s not what you expected? On Amazon and eBay, you will leave a negative review on the seller’s page, plus you’ll ask for a refund. The seller does not want their reputaton to be tarnished, so they’ll do whatever they can to provide you with a good experience. On those platforms, if the agent causes something negative to you, something negative will happen to them as well. Things are in symmetry.
On Craigslist, there are no reviews. There are no refunds. If the object turns out to be broken, and the seller used a temporary phone number, you have no way to get your money back, and you can’t inflict damage on the seller’s reputation. The seller is in asymmetry: they don’t have to bear the costs if they fail. This is why things are cheaper on Craigslist: you’re paying by being exposed to someone with asymmetry.
If you look hard enough, you can apply this to nearly every interaction you have and action you take. For example, I prefer having my house cleaned by someone whom I pay more but I know, rather than a more affordable stranger. This is because I know that the former cares about their reputation and wants to offer their services repeatedly. A stranger could (potentially) come, steal some stuff, and run away.1
Also, a couple of months ago I added my name and surname right under the title of this blog. This is to add skin in the game. If I write a terrible blog post, with a terrible opinion, or I create something abhorrent, the world will know that it’s Lorenzo Gravina who made it. Therefore, I am signaling that I have no intention of doing that. I now have something to lose (in reputation) if I make blunders. Similarly, after a streak of good blog posts, you’ll start to see my name under a better light, and I stand to gain from that.
This ties into a game theory concept Taleb mentions in his book, that of repeated games. One of the most “obvious” ways in which someone has skin in the game is if they are planning on encountering you again in the future. In other words, they want to play repeated games with you. If you aim for stability and want to avoid risk, you should try to play as many repeated games as you can.
Your local barber wants to have repeated games with you. He wants you to come to his shop as often as possible and for as long as possible. He understands that scamming you, or providing you with a bad experience, will lead you to look for another barber. But when you buy something from a stranger on Craigslist, you’ll never see them again. There won’t be any new games after this one. He is not interested in you purchasing more things from him.
In a nutshell, this is what Skin in the Game is about. Learn to see these “hidden” asymmetries in life and you won’t be able to un-see them.
I do recommend the full book. This was but a single serving.
Featured image credit @black_swan_man.
