Skin in the Game

Antaeus was deemed to be invincible, but there was a trick. He derived his strength from contact with his mother, Earth. Physically separated from contact with Earth, he lost all his powers. Hercules, as part of his twelve labors (in one variation of the tale), had for homework to whack Antaeus. He managed to lift him off the ground and terminated him by crushing him as his feet remained out of contact with his mamma.

We retain from this first vignette that, just like Antaeus, you cannot separate knowledge from contact with the ground. Actually, you cannot separate anything from contact with the ground. And the contact with the real world is done via skin in the game—having an exposure to the real world, and paying a price for its consequences, good or bad. The abrasions of your skin guide your learning and discovery, a mechanism of  organic signaling, what the Greeks called pathemata mathemata

(“guide your learning through pain,” something mothers of young children know rather well). I have shown in Antifragile that most things that we believe were “invented” by universities were actually discovered by tinkering and later legitimized by some type of formalization. The knowledge we get by tinkering, via trial and error, experience, and the workings of time, in other words, contact with the earth, is vastly supe- rior to that obtained through reasoning, something self-serving institu- tions have been very busy hiding from us.

Next, we will apply this to what is miscalled “policy making.”

LIBYA AFTER ANTAEUS

Second vignette. As I am writing these lines, a few thousand years later, Libya, the putative land of Antaeus, now has slave markets, as a result of a failed attempt at what is called “regime change” in order to “re- move a dictator.” Yes, in 2017, improvised slave markets in parking lots, where captured sub-Saharan Africans are sold to the highest bidders.

A collection of people classified as interventionistas (to name names of people operating at the time of writing: Bill Kristol, Thomas Friedman, and others*) who promoted the Iraq invasion of 2003, as well as the removal of the Libyan leader in 2011, are advocating the imposition of additional such regime change on another batch of countries, which includes Syria, because it has a “dictator.”

These interventionistas and their friends in the U.S. State Department helped create, train, and support Islamist rebels, then “moderates,” but who eventually evolved to become part of al-Qaeda, the same, very same al-Qaeda that blew up the New York City towers during the events of September 11, 2001. They mysteriously failed to remember that al-Qaeda itself was composed of “moderate rebels” created (or reared) by the U.S. to help fight Soviet Russia because, as we will see, these educated people’s reasoning doesn’t entail such re- cursions.

So we tried that thing called regime change in Iraq, and failed miserably. We tried that thing again in Libya, and there are now active slave markets in the place. But we satisfied the objective of “removing a dictator.” By the exact same reasoning, a doctor would inject a patient with “moderate” cancer cells to improve his cholesterol numbers, and proudly claim victory after the patient is dead, particularly if the postmortem shows remarkable cholesterol readings. But we  know  that  doctors don’t inflict fatal “cures” upon patients, or don’t do it in such a crude way, and there is a clear reason for that. Doctors usually have some mod- icum of skin in the game, a vague understanding of complex systems, and more than a couple of millennia of incremental ethics determining their conduct.

And don’t give up on logic, intellect, and education, because tight but higher order logical reasoning would show that, unless one finds some way to reject all empirical evidence, advocating regime changes implies also advocating slavery or some similar degradation of the country (since these have been typical outcomes). So these interventionistas not only lack practical sense, and never learn from history, but they even fail at pure reasoning, which they drown in elaborate semiabstract buzzword- laden discourse.

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. We will see in more depth throughout the book this defect of mental reasoning by educated (or, rather, semi-educated) fools. I can flesh out the three defects for now.

The first flaw  is that they are incapable of  thinking in second  steps and unaware of the need for them—and about every peasant in Mongolia, every waiter in Madrid, and every car-service operator in San Francisco knows that real life happens to have second, third, fourth, nth steps. The second flaw is that they are also incapable of distinguishing between multidimensional problems and their single- dimensional representations—like multidimensional health and its stripped, cholesterol-reading reduction. They can’t get the idea that, empirically, complex systems do not have obvious one-dimensional cause-and-effect mechanisms, and that under opacity, you do not mess with such a system. An extension of this defect: they compare the ac- tions of the “dictator” to those of the prime minister of Norway or Sweden, not to those of the local alternative. The third flaw is that  they can’t forecast the evolution of those one helps by attacking, or  the magnification one gets from feedback.

LUDIS  DE  ALIENO CORIO*

And when a blowup happens, they invoke uncertainty, something called a Black Swan (a high-impact unexpected event), after a book by a (very) stubborn fellow, not realizing that one should not mess with a system if the results are fraught with uncertainty, or, more generally, should avoid engaging in an action with a big downside if one has no idea of the out- comes. What is crucial here is that the downside doesn’t affect the inter- ventionist. He continues his practice from the comfort of his thermally regulated suburban house with a two-car garage, a dog, and a small play area with pesticide-free grass for his overprotected 2.2 children.

Imagine people with similar mental handicaps, people who don’t understand asymmetry, piloting planes. Incompetent pilots, those who cannot learn from experience, or don’t mind taking risks they don’t understand, may kill many. But they will themselves end up at the bottom of, say, the Bermuda Triangle, and cease to represent a threat to others and mankind. Not here.

So we end up populating what we call the intelligentsia with people who are delusional, literally mentally deranged, simply because they never have to pay for the consequences of their actions, repeating modernist slogans stripped of all depth (for instance, they keep using the term “democracy” while encouraging headcutters; democracy is some- thing they read about in graduate studies). In general, when you hear someone invoking abstract modernistic notions, you can assume that they got some education (but not enough, or in the wrong discipline) and have too little accountability.

Now some innocent people—Ezidis, Christian minorities in the Near (and Middle) East, Mandeans, Syrians, Iraqis, and Libyans—had to pay a price for the mistakes of these interventionistas currently sitting in comfortable air-conditioned offices. This, we will see, violates the very notion of justice from its prebiblical, Babylonian inception—as well as the ethical structure, that underlying matrix thanks to which humanity has survived.

The principle of intervention, like that of healers, is first do no harm (primum non nocere); even more, we will argue, those who don’t take risks should never be involved in making decisions.

*   Playing with others’ lives.

Further,

We have always been crazy but weren’t skilled enough to destroy the world. Now we can.

We will return to the “peacemaking” interventionistas, and examine how their peace processes create deadlocks, as with the Israeli- Palestinian problem.

WARLORDS ARE STILL AROUND

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

Prominent people took risks—considerably more risks than ordi- nary citizens. The Roman emperor Julian the Apostate, about whom much later, died on the battlefield fighting in the never-ending war on the Persian frontier—while emperor. One may only speculate about Ju- lius Caesar, Alexander, and Napoleon, owing to the usual legend- building by historians, but here the proof is stark. There is no better historical evidence of an emperor taking a frontline position in battle than a Persian spear lodged in his chest (Julian omitted to wear protec- tive armor). One of his predecessors, Valerian, was captured on the same frontier, and was said to have been used as a human footstool by the Persian Shapur when mounting his horse. And the last Byzantine emperor, Constantine XI Palaeologus, was last seen when he removed his purple toga, then joined Ioannis Dalmatus and his cousin Theophi- lus Palaeologus to charge Turkish troops with their swords above their heads, proudly facing certain death. Yet legend has it that Constantine had been offered a deal in the event of a surrender. Such deals are not for self-respecting kings.

These are not isolated anecdotes. The statistical reasoner in this au- thor is quite convinced: less than a third of Roman emperors died in their beds—and one can argue that given that only few of these died of really old age, had they lived longer, they would have fallen either to a coup or in battle.

Even today, monarchs derive their legitimacy from a social contract that requires physical risk-taking. The British Royal  family made sure that one of its scions, Prince Andrew, took more risks than “commoners” during the Falkland war of 1982, his helicopter being in the front line. Why? Because 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.

THE BOB RUBIN TRADE

Some think that freeing ourselves from having warriors at the top means civilization and progress. It does not. Meanwhile,

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

And, one may ask, what can we do since a centralized system will necessarily need people who are not directly exposed to the cost of er- rors?

Well, we have no choice but to decentralize or, more politely, to lo- calize; to have fewer of these immune decision makers.

Decentralization is based on the simple notion that it is easier to macrobull***t than microbull***t.

Decentralization reduces large structural asymmetries.

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

For instance, bank blowups came in 2008 because of the accumulation of hidden and asymmetric risks in the system: bankers, master risk transferors, could make steady money from a certain class of concealed explosive risks, use academic risk models that don’t work except on paper (because academics know practically nothing about risk), then invoke uncertainty after a blowup (that same unseen and unforecastable Black Swan and that same very, very stubborn author), and keep past income—what I have called the Bob Rubin trade.

The Bob Rubin trade? Robert Rubin, a former Secretary of the United States Treasury, one of those who sign their names on the banknote you just used to pay for coffee, collected more than $120 mil- lion in compensation from Citibank in the decade preceding the bank- ing crash of 2008. When the bank, literally insolvent, was rescued by the taxpayer, he didn’t write any check—he invoked uncertainty as an ex- cuse. Heads he wins, tails he shouts “Black Swan.” Nor did Rubin ac- knowledge that he transferred risk to taxpayers: Spanish grammar specialists, assistant schoolteachers, supervisors in tin can factories, vegetarian nutrition advisors, and clerks for assistant district attorneys were “stopping him out,” that is, taking his risks and paying for his losses. But the worst casualty has been free markets, as the public, al- ready prone to hating financiers, started conflating free markets and higher order forms of corruption and cronyism, when in fact it is the exact opposite: it is government, not markets, that makes these things possible by the mechanisms of bailouts. It is not just bailouts: govern- ment interference in general tends to remove skin in the game.

The good news is that in spite of the efforts of a complicit Obama administration that wanted to protect the game and the rent-seeking bankers,* the risk-taking business started moving toward small inde- pendent structures known as hedge funds. The move took place mostly because of the overbureaucratization of the system as paper shufflers (who think work is mostly about paper shuffling) overburdened the banks with rules—but somehow, in the thousands of pages of addi- tional regulations, they avoided considering skin in the game. In the decentralized hedge fund space, on the other hand, owner-operators have at least half of their net worth in the funds, making them relatively more exposed than any of their customers, and they personally go down with the ship.

SYSTEMS LEARN BY REMOVING

Now, if you are going to highlight only one single section from this book, here is the one. The interventionista case is central to our story

* Rent-seeking is trying to use protective regulations or “rights” to derive income without adding anything to economic activity, not increasing the wealth of others. As Fat Tony (who will be intro- duced a few pages down) would define it, it is like being forced to pay protection money to the Mafia without getting the economic benefits of protection.

because it shows how absence of skin in the game has both ethical and epistemological effects (i.e., related to knowledge). We saw that inter- ventionistas don’t learn because they are not the victims of their mis- takes, 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.

Actually, to be precise, 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.

So learning isn’t quite what we teach inmates inside the high-security prisons called schools. In biology, learning is something that, through the filter of intergenerational selection, gets imprinted at the cellular level—skin in the game, I insist, is more filter than deterrence. Evolution can only happen if risk of extinction is present. Further,

There is no evolution without skin in the game.

This last point is quite obvious, but I keep seeing academics with no skin in the game defend evolution while at the same time rejecting skin in the game and risk sharing. They refuse the notion of design by a cre- ator who knows everything, while, at the same time, want to impose human design as if they knew all the consequences. In general, the more people worship the sacrosanct state (or, equivalently, large corpora- tions), the more they hate skin in the game. The more they believe in their ability to forecast, the more they hate skin in the game. The more they wear suits and ties, the more they hate skin in the game.

Returning to our interventionistas, we saw that people don’t learn so much from their—and other people’s—mistakes; rather it is the system that learns by selecting those less prone to a certain class of mistakes and eliminating others.