NN Taleb talks to mother nature, translates for rest of us. Skin in the game, latest episode
Skin in the game (SITG) was one of my most anticipated book. @nntaleb is nothing short of genius, it is as if he has conversation with nature and then translates that for rest of us mortals.
The book is still very hard to read but keeping his ‘looking the part’ principle I am not going to judge this for readability. It must be said though this is certainly not for 10 year old but the sophisticated reader but they also need to remember past 3 books and concepts from there.
SKIN IN THE GAME (SITG) — One cannot understand ‘SKIN IN THE GAME’ unless ‘ANTIFRAGILE’ is understood. ANTIFRAGILE cannot be understood unless we know how we conflate luck and skill and are FOOLED by RANDOMNESS. One cannot appreciate RANDOMNESS unless BLACK SWANS are appreciated.
Lets first recap BLACK SWAN
It points out a key ILLUSION. Life is navigated by us as a blind person with rear view mirror used for steering forward in the journey. Rearview mirror of past experiences and belief shape the mirror and the picture we see.
That is why VISION IS MOST CLEAR IN REARVIEW IMAGE — A forward looking vision is most beautifully explained through the rear view mirror. This is also referred to as the hindsight, narrative bias. A successful startup will tell the story how clearly they had the vision of where they are today.
BEST STORY TELLERs are STILL BLIND — One must keep in mind that Leaders are people with charisma that can tell the best story showing the mirror but they may not have any skills in navigating forward, as ill-equipped as the rest of the folks.
It is OK TO BE INSPIRED but FOLLOW THE ACTION — Don’t be swayed by story tellers, take choices that expose you to treasure (upside) and avoid land mines (downsides). Must keep in mind treasure take longer, land mines explode immediately.
LEARNING IS THROUGH TRIAL AND TINKERING — Since one cannot see or perceive the future through any human sense organ, only way to navigate is through trial and error. [All great discoveries has happened only that way, not inside academia or government]
HUMILITY > KNOWLEDGABLE — Don’t become arrogant of absence of an unknown and when you encounter it do not fear it but bow in front of it and pray to it. Some of the oldest wisdom advocated that.
LABELLING HELPS COMPREHENSION — Any new thing can only be understood if there is no to reference it. Lets label the event or thing that we don’t know but can affect us in good or bad way a black swan and be humble about it.
BLACK SWANS exist and they can either benefit us immensely or kill us.
SYSTEM IS DIFFERENT THAN UNIT — There can be black swan at the individual level but also at the entire system (humanity) level. One of the key confusion about black swan has been the difference between the two.
Next lets go over FOOLED BY RANDOMNESS
FOOLED BY RANDOMNESS is mistaking luck for skill.
SURVIVORSHIP and ATTRIBUTION BIAS hurts LEARNING — What successful think they made happen could be because of role of luck and chance ? Self attribution boosts ego & self worth but blinds learning
Many PROFESSION are GOVERNED BY CHANCE — In many domain probability plays a huge role , ex — venture, movie, books. For every Shahrukh Khan, Brad Pitt, Mark Zuckerberg, Stephen King there are 100s of wannabe.
VOLATILITY, RISK, UNCERTAINTY & UNKNOWABLE — There is known known, known unknown and unknown unknown and the unknowable.
RISK as LABEL mean MANY THINGS — Different people have different definition of risk. For example using averages, relying on standard deviation as risk has had huge perils. Accountants have drown, funds like LTCM have blown nobel prize winners
RISK AND UNCERTAINTY are MENTAL MODELS — Label of ‘Risk’ for ‘known unknown’ and ‘uncertainty’ as unknown unknown are useful ones to navigate situations. This way it helps differentiating between betting on horse races and star trek races. No one has or can study star trek races.
SCIENCE less CAPABLE THAN ATTRIBUTED, POPPERISM — There are only two types of theories, one that is wrong and other yet to be proven wrong
REPEAT AFTER ME — Absence of evidence is not evidence of absence — Refer to black swan thread again
Think about GOOD or HARM not PRESENT or ABSENT when it comes to black swan — Randomness can be good, great and harmful, we like it when it is harmless.
USEFUL in TRICKY DECISIONS — Burdani’s donkey that was perfectly equidistant between water and food can be saved from dying if a small nudge is given
WHAT YOU SEE IS NOT WHAT IT IS — Randomness is not completely random, they can be explained through path dependence.
NOT ACCEPTING RANDOM makes ONE LEGGED MAN — Guy who does not know that life is random and live it through picture in the mirror shown by others is like one legged man in ass kicking contest
RANDOMNESS EXPERIENCED teaches BETTER than PROBABILITY THEORY — Folks like cab drivers, movie actors, entrepreneurs know it intuitively, academics call it the probability.
AWARENESS SUFFICIENT UNDERSTANDING NOT NEEDED, INFACT ONE CANT UNDERSTAND IT ALL — If you are aware enough to be not fooled by randomness you have better odd to survive and succeed, understanding not needed.
IN THE SPACE BETWEEN BAD LUCK and YOUR RESPONSE LIES you POWER — If you don’t succeed remember that you have have no control on how luck behaves with you but you have complete control on how you respond to luck (bad) when it meets you.
RECAP ON ANTI FRAGILE
WHAT SURVIVES or THRIVES — If life is so random and one can be fooled by it then how does one navigate it ? Anything that has survived and thrived over time can give heuristics. To better understand something it useful to give it a label, call this ANTIFRAGILE
MANY LIVING SYSTEM ARE ANTI-FRAGILE Humanity as whole has survived and thrived time thus labelled antifragile, other examples are hydra, entrepreneurship
HEURISTICS ARE NUANCED — Humanity is antifragile has survived, humans are not they are mortal. Broader takeaway is that heuristics that apply to the system do not directly apply to its unit.
SYSTEM IS NOT THE UNIT — True for any system, knowing a neuron does not tell about brain, knowing an ant movement does not explain the colony, knowing one human bias does not say how market will behave.
IT IS THE MAGNITUDE — Recounting lesson from randomness, it is not the presence, absence, frequency of random events but the magnitude that is more critical.
WHAT IS TIME INVARIANT in NATURE — Lindy effect, if something has survived for long then it is more likely to survive for longer. It is not a theory but phenology, empirical time invariant observation.
SCIENCE CAN’t see NATURE fully. — Lindy effect at surface sounds un-scientific yet it is quite the opposite, points to limitation of science & human understanding. Nature is right till proven wrong, a scientific theory is not right until proven otherwise
OLD WISDOM > RECENT INSIGHT mostly — Grand mother’s insights advice are way better than that of a doctor, banker or scientist but still grossly undervalued
HUMAN LANGUAGE AND UNDERSTANDING very LIMITED — Like the greek story of Pastoral’s tile why the dog prefers a certain tile, many things in life are beyond language and human understanding. Survival is > than Knowledge
FOR SYSTEM ANTIFRAGILE, UNIT MUST BE FRAGILE — Another key heuristics is that for humanity to be antifragile (survive) humans are fragile
FOR SYSTEM ANTIFRAGILE, UNIT MUST BE FRAGILE — Another key heuristics is that for humanity to be antifragile (survive) humans are fragile
HOW CAN I THE INDIVIDUAL BE ANTIFRAGILE — Remember humans are story telling monkey, learning via tinkering is the only learning, have optionality- change mind any time & expose to convexity (more upside than downside), any human group is complex system with 2nd order consequences
HOW CAN I THE INDIVIDUAL BE ANTIFRAGILE 2— via negativa (remove things) for complex systems, avoid via positiva (don’t add) as new creates iatrogenics (unintended harm), beware of risk transferers, look for skin in the game. pad with redundancy
HUMANS are STORING TELLING MONKEYS — Humans are story telling monkeys, referred in the green lumbar fallacy., a situation where one mistakes source of necessary knowledge (greenness of lumber) for another less visible from outside, less tractable and narratable.
SHAPE YOUR LIFE REAR VIEW mirror through EXPERIENCE for BEING ROBUST — As humans we experience life through rearview mirror of stories & past experience and not in touch with randomness of the future. Tinkering and learning is the real learning as that helps be more antifragile
BELIEVE A SINNER more than a VIRGIN — He who has never sinned is less reliable than he who has sinned and recovered
OPTIONALITY >> KNOWLEDGE — At individual level anytime you have the ability change options, it is optionality. If you have optionality then you don’t need knowledge, skills, insights.
EXPOSE TO CONVEX OPTIONS In any option if there is more upside than downside it is called convexity.
VIA NEGATIVA a POWERFUL TOOL for BECOMING ANTI FRAGILE — via negativa simply means for survival eliminate all things that would kill you. Greatest contribution in life is by removing what we think is wrong. In life antifragility is reached by not being a sucker
SKIN IN THE GAME for a CONVEX OPTION — In an interaction with others (family, work, market, life etc) when the other does not have skin in the game then it does not lead to a convex option for yourself.
RISK TRANSFERERS, people WITHOUT SKIN IN GAME have spread like PLAGUE in MODERN SOCIETY — In many aspects of life such risk transferors exist (bankers, academician, politicians, big company marketer/sales guy)
USE SKIN in THE GAME as COMPASS of LIFE, in INVESTING — Never ask anyone for their opinion, ask them what they have in their portfolio. SKIN IN THE GAME (in LIFE THREAT POSSIBILITIES) Don’t get on a plane without a pilot as that is without skin in the game.
SKIN IN THE GAME (in DAILY LIFE INTERACTION) Never let another person frame the question, in every question an answer is planted. Never respond to a question straight that does not make sense to you.
REDUNDANCY second PRINCIPLE for making SYSTEM ANTIFRAGILE — Next build redundancy, a margin of safety, avoiding optimization, mitigating (even removing) asymmetries in our sensitivity to risk
WEIGHTLIFTING , MUSCLEs BUILD through REDUNDANCY PRINCIPLE — Building muscle through weight lifting works because muscle develop more redundancy under condition of periodic stress and rest.
BEWARE OF Iatrogenics. Adding something to complex system creates un-intended harm. So as principle first do no harm, absence of evidence of harm does not mean no harm. Second the application of effects is non linear
BARBELL STRATEGY FOR CONVEXITY and THUS ANTIFRAGILITY — A dual attitude of playing it safe in some areas (negative black swan) and taking a lot of small risks in others (positive black swan) will help be antifragility. This approach is called barbell strategy
ANTIFRAGILITY is ABOUT SURVIVAL, to be individually be antifragile exposure is more important than knowledge, modify your exposure to treasures and learn to get out of trouble.
FINALLY SKIN IN THE GAME
SKIN IN THE GAME is a PRINCIPLE for DESIGNING ANTIFRAGILE SYSTEM. The book is a continuation from the book Antifragile (thing that survives and thrives with time), skin in the game is one of the two key heuristic introduce earlier, the other one was redundancy.
SURVIVAL IS THE ONLY RATIONALITY THAT EXISTS. Anything that hinders one’s survival at an individual, collective, tribal, or general level is irrational. With this enhanced definition skin in the game mean there being enough downside for individual that protects the system.
NATURE CARES FOR SURVIVAL, HUMANS CRAVE for MEANING — Not everything that happens happens for a reason, but everything that survives survives for a reason. Our body sense organs are optimized for survival not for sense making.
HUMANS ARE STORY TELLING MONKEYs — For them it is easer to sell a larger bigger than life than to describe the boringness of daily reality. Reality does not listen to stories but humans do most certainly investors do
OTHER MONKEY BIAS is RECENY BIAS — Also as humans we are prone to the availability heuristic, by which the salient is mistaken for the statistical.
STRESS TO FRAGILE UNITS MAKE THE SYSTEM ANTIFRAGILE — However any system that is not subjected to stress where individuals do not have skin in the game, the system does not become antifragile.
RISK TRANSFERERS are WINNING IN MODERNITY — We have been for long having system where people without skin in the game are winning by transferring risk. They are the biggest threat to system antifragility. You can never cure structural defects, system corrects itself by collapsing
LESSONS about SKIN IN THE GAME in examples of ONE SIDED ABSENCE, INTENSITY, CHANGE AGENT, EMOTION TRIGGERED — Employment and employee, religion, halal cut, gene adoption, language adoption, hatred of the privilege all teach about skin in the game
SKIN IN THE GAME, real CHANGE AGENT (MINORITY RULE) — A kosher (or halal) eater will never eat nonkosher (or nonhalal) food, but a nonkosher eater isn’t banned from eating kosher. It takes a small minority to have deep skin in game to bring change in a system
SKIN IN THE GAME, ABSENT SIDE can make SLAVE of the PRESENT SIDE — Someone who has been employed for a while is giving you strong evidence of submission. Employees stick to an employer because they have a reputation to protect.
SKIN IN THE GAME, ABSENT SIDE -> SLAVE of PRESENT SIDE — Dog vs wolf, the feeling of false stability. A dog’s life may appear smooth & secure but in absence of an owner, a dog does not survive. Most people prefer to adopt puppies, not grown-up dogs; unwanted dogs are euthanized.
SKIN IN THE GAME, ABSENT SIDE can make SLAVE of the PRESENT SIDE — The best slave is someone you overpay and who knows it, terrified of losing his status. One sided extreme skin in the game can lead the other to do total capture.
SKIN IN THE GAME , LONGEVITY OF SURVIVAL is proportional to INTENSITY — Religion (as a system of people) teaches that strength of a creed did not rest on “evidence” of the powers of its gods, but evidence of the skin in the game on the part of its worshippers.
SKIN IN THE GAME , LONGEVITY OF SURVIVAL is proportional to INTENSITY — People who had religion have survived, it brought cohesion: people who eat together hang together. The length of survival of something (an idea) is proportional skin in the game in it (some time literally)
PROGRESS WITHOUT SKIN IN GAME cause RESENTMENT — People resent when risk transferrers rise the top, they root for those that have had skin in the game.
SOLVE FOR ENVY DESIGN SYSTEM FOR RICH TO BECOME POOR — Therefore true equality is equality in probability. A dynamic (ergodic) equality takes into account the entire future and past life that is rich can become poor and poor can become rich
SKIN IN THE GAME,OLDER SYSTEM > MODERN SYSTEM less AGENCY — Older system designed skin in the game to preserve the system. Building falls, builder killed. Modernity has advisors, bureaucrats that are away from reality. Beware of someones advice if he does not has downside for it
SKIN IN GAME as COMPASS of LIFE, BELIEVE ACTIONS — In interacting with someone check what someone does rather than what he says as that is true indicator of skin in the game
SKIN IN GAME as COMPASS of LIFE, WATCH OUT FOR RISK TRANSFERERS — Whenever the cost takes longer to manifest but (small) benefit can be demonstrated people game the system. Example Bankers & CEO’s
SKIN IN GAME as COMPASS of LIFE, ACROSS TIME BE ETHICAL — When dealing with others below in a hierarchy as you would want above you to treat you you bring skin in the game across time.Treat your parent the way you would want your child to treat you, go to friends funeral
SKIN IN GAME as COMPASS of LIFE, REAL SKIN IS WHAT OTHER is AFRAID to LOSE, ASK FOR IT. In an interaction with others that get affected by skin in the game what matters isn’t what a person has or doesn’t have; it is what he or she is afraid of losing.
BACK TO CENTRAL QUESTION, NAVIGATING RANDOMNESS OF LIFE — Rationality does not depend on explicit verbalistic explanatory factors; it is only what aids survival, what avoids ruin.
USE SKIN IN THE GAME FOR SURVIVAL to navigate life that presents with a series of good and bad random events
SHED THE ‘SCIENCE LIKE’ FOCUS instead FOCUS on RANDOMNESS, SUPRESTITIOUS MAYBE BETTER THAN SCIENTIFIC — The scientific may criticize the superstitious however a superstition that survived is risk mitigation for a risk that has long been forgotten.
ONE MORE THING ABOUT RANDOMNESS is ERGODIC — A situation is deemed non-ergodic when observed past probabilities do not apply to future processes.
IF YOU DIE PLAYING, a billion dollar PRIZE MONEY is NOT WORTH IT — In a strategy that entails ruin, benefits never offset risks of ruin.
RATIONALITY THEREFORE is avoidance of SYSTEM ruin.
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.