Transcription
I noticed early on that people were were always under the impression that traders were rich and all I knew was bankrupt traders, okay? Because I was from the inside. So I know so many traders in Chicago who are cab drivers. I say you see them on the floor and then 3 weeks later they're driving you to work. Okay.
So you can generalize to property distribution to a lot of things to a lot of more the unseen. So I analyze from it and this is where it gets more interesting how we tend to scorn the abstract even when it has clear statistical uh uh power. Okay. Okay. And that's where we were fooled by randomness. I generalized it beyond the survivorship bias. But survivorship bias is very big in a lot of things. It's like we have the impression that if you invested in stock market that you would have already done well. that someone in 1900 invested in stock market following the same reasoning would have invested in the Turkish stock market and the Russian stock market and the French stock market except for Anglo-Saxon countries the rest were bust completely bust often when we talk about statistical evidence we don't realize it's insufficient for risk management you need the probability of ruin which is complete different dimension to be very low and that's sort of embedded in in my work around the theme of uncertainty and the overall theme is we don't quite understand how the world works but that's not a problem because of a symmetry of decision if I don't know if I have uncertainty about the source of this water my decision is very simple what should I do not drink it not drink it so so if you're uncertain about the effect of uh fossil fuels on a climate don't use it if you're people say oh we're uncertain about the effect let's use it all right So you see the there is a asymmetry now that asymmetry is the engine behind fragility anti-fragility all of that. So embedding asymmetry in systems.
So and people don't realize the value the why small probability is very important. A lot of academic research falls for these errors. That's why a roach skin in the game because they don't trade. If you're causing injury you should be exposed to it. Okay? So you can't make a decision on Syria sitting in an air conditioned office in a Pentagon. You see, because in the past that's not how it happened. Uh war mongers were first in battle, first line in battle. Napoleon was already exposed. Although he wasn't the most ethical uh general, he fled twice. Twothird of Roman emperor died of violent died a violent death. Two/3. So you have to skin that game. And how how do you contrast that to today? I mean, okay. So today we lost it about 40 50 years ago because before that George Bush was Kennedy was in war and he was injured. George Bush was president of war the father not the son. But but another thing so there's an ethical dimension but there's an evolutionary dimension. Let me explain the evolution dimension first. Uh when you drive on highway you don't have crazy people because people who have these attributes are already dead. They're already filtered out. They're filtered out. So, so skin in the game is a filter in the system. You see, if if you can cause harm, okay, and receive harm, you're not going to do it for long because it will filter you out of the system. Mhm. You see, this is why we didn't have a lot of wars because war mongers were filtered out of the system. They couldn't survive as they do in Washington. You see, so that's one dimension. But there are other things there epistemological dimensions that you can't really capture a process intellectually without having contact with reality via skin in the game. So you tend to see a lot of incompetence among economists. The no contact with reality. So he's a great economist. Why? Well because he got the Nobel he gave them Nobel. This is why we have all these guys going bankrupt actually after the Nobel. Uh some committee. All right. It's like with a restaurant. M whereas a plumber you know it's impossible to be incompetent and survive. Absolutely. Okay. Dentist same thing same same thing for dentist it's the same uh you have to your skin are visible. So skin in the game is when a person has some kind of contact with reality which entails professional survival or other things and then not judge I mean a plumber doesn't get his bonus by committee of plumbers. Committee of plumbers. Exactly. Yeah. Or by journalists. Yeah. Okay. Yeah. Because some disciplines have skin in the game medicine because we're interested in survival people. Absolutely. There's other disciplines, economics, there's no scale of the game for the discipline in general because the effects are not visible. I like to think of engineering as one of those disciplines has but I mean it depends which engineering some civil engineering vis but some some kind of branches of engineering it's not immune of course but of overall engineering is respected whatever your grandmother respects that's kind of in the game.
So the first thing people don't understand about skin game it's not about incentive it's about alignment of disincentives but in some cases you have a lot more harm you take a lot more harm than needed for the sake of uh for a cause of doing something right exactly I have soul in the game in my books some people may may have soul in the game whatever they're producing beyond the cosmetic beyond the perception beyond anything just like it feels right for them So a good artist must have souls in game. But you but but it generalizes a lot of things. I gave the example of of Steve Jobs the the homey. Yeah. Right. And Steve Jobs you're not going to see what's inside. Right. But he had he was so compulsive that he wanted it to the aesthetics of what's inside that you're never going to open in this and your computer to match his his uh artistic you know sensities. So that's all in negate. Whereas if you look at buildings the way they're built in the west in New York, they look great from the outside and then you take the service uh elevator or you take those the stairs and you realize the shabiest construction for the stairs because nobody's going to see it. Absolutely. Whereas he would have had something else. So soul in the game is is one step beyond. I mean the Chinese when they work they have soul in the game. They seem to derive satisfaction. They separate the the the labors from the fruit of the labor. It's the labor that's the fruit.
It takes me a while to think of problems. All right. But I've looked at a scaling notion. Okay. Why is it that some people are more effective? Some societies composed of ages can have a greatly functioning system. And how societies composed of geniuses have terrible systems. terrible. So because how things scale and the intelligence of group isn't the same intelligence individual intelligence being defined at some kind of effectiveness and you know some no matter how you define intelligence. So in the east we're Mediterranean societies, good city states uh or villages and uh and things function better. Okay. At the individual level, you see houses are clean from the inside but the collective doesn't work very well. Mhm. Whereas in Europe it's a reverse. So we tend to be here overeducated but it doesn't work well. We don't I mean think of south of uh Milan. You don't have large corporations in Italy. See all the corporation are in the bell between Milan and and then as you go south you have fewer and fewer become artisan but so they're made to be artisans right small workshop uh whereas large corporation require different mentality you see so there's this effect I mean the Swiss work better at teams but individually you know I don't know they have a lot of skills I mean they were the least educated country in Europe there's a communal skill in game and and teamwork. Mhm.
But I spoke about risk sharing and that's uh that was imported from our practices both Phoenician and the Arab. The Greek is called Rodian law. It's based on Phoenician pra Phoenician practice that if a ship sinks, it's not just the owner of merchandise who loses uh property, but there's something called appropriation. the owner of the ship, the buyer, the seller and uh whoever has financial investment in it, they all share the cost. Mhm. So the the this thing distribution was uh communal. In other words, you communally bear the cost of a loss and that that some of it still exists in maritime law. Mhm. because you know the law is fuzzy but capitalism is trying to do away with it. Capitalism is about uh neatly defined self standing entities that are even separate from the owner because you can go bankrupt without having to go to death or jail which is good in a way but it has drawbacks that you got to be aware of. on Wall Street in 2008 2007 uh traders lost went bankrupt kept their bonuses like for example hedge fund don't have that problem because the owner of the hedge fund must be invested in her or his uh funds so therefore if they lose money it's higher proportion of their net worth than any of the investors so they have skin in the game but a a corporate uh I mean all these heroes of corporation what's his name this guy what's his name Jack Welsh he was a fraud But it took a long time for him to figure out he was a fraud. He would Why was he a fraud? He would he would manufacture u cosmetically uh good earnings. Uh you collect companies, right? You buy companies. Some of them make money, some of them don't. the one that make money because of the the accounting valuation, he would sell them for a profit and then he would keep the rest. So it's an adverse selection, right? So in the portfolio and then sure enough it showed up few years later and the companies went down by like more than 90%. And but he collected bonuses and became a billionaire based on some kind of package. So you have the upside without the downside. You play that game. Got it. Or what I call the Bob Rubin trade. Robert Rubin was vice chairman of City Bank, part of the system. He was treasury secretary, former partner on Goldman Sachs. Made $200 million in bonuses from $120 million from City Bank for trades. I call them selling tail events. And then of course they're going bound to go bust. He's paid an annual bonus for events that happen every 10 years. Just another mismatch between mediocrustan and extremeistan that was not understood during co. So something blows up every 10 years but he paid an annual bonus. All right. And then when City Bank blew up he got he he left it a bonus. He he kept his bonus. All they had to do is say, "Well, it was a black swan.