RISK OF RUIN
Karl Arnold Belser
25 August 2017
| Nassim Nicholas Taleb is working on a new book called Skin in the Game: The Thrills and Logic of Risk Taking (Link to some chapters that I have read so far).
I want to summarize and comment on what I have read because I
fear that the link will be pulled when the book becomes available.
My life management philosophy is in agreement with what Taleb is saying, namely that one should avoid at all costs the risk of ruin while otherwise maintaining a good quality of life. The events to be feared are the black swans that Taleb has talked about in his previous books Antifragile, The Black Swan and Fooled by Randomness. I adamently try to avoid ruin as I expressed in my post Tail Risk.
Taleb's introduction to having skin in the game is that asymmetric information in a transaction should be minimized. For example, if a car dealer sells a car with known defects he is cheating. However, if the car is old and both parties know that there will be some items that are worn and might fail, then there is no issue. If you know the dealer personally and he is motivated to maintain his reputation he will be reluctant to cheat you. This is skin in the game. However if the dealer is a faceless sales person that you will never see again, then buyer beware. That is, beware of the person that has no skin in the game.
An ensemble of individuals may not behave the same as the individuals in the ensemble. For example, most cars will have automatic transmissions because most people can't drive a stick shift car. If the difference in price or the decrease in fuel economy is small, then the community as a whole will not object that all cars have automatic transmissions. This is a type of emergent behavior the individuals would not totally follow. Taleb gives examples of broad acceptance of Kosher food and broad fear of GMO foods. If a minority says that something is good or bad and the cost is small, then the minority position will win. This is the Minority Rule. The minority rule explains mob behavior and truthiness. See my post on Truthiness (the illusion of truth effect).
This type of thinking also explains the opportunity that occurs in investing when an issue has a bad quarter and sells off to the point that it undershoots, then there might be a buying opportunity. However, one should not bet the farm on such an event because the undershoot may be justified. SO it is best to take only a small bite of any potential opportunity so that a loss does not result in ruin. It is best to just win some and loose some such that on the average a gain occurs.
The idea of human and animal sacrifice was an early attempt to cause a person or a community (by killing scape goats) to have skin in the game. The problem even today is "how can society at large cause everyone, especially people in government and others who affect society, to have skin in the game. I observe that elected officials really do not have skin in the game for the benefit of everyone in society. They are often faceless, unaccountable bureaucrats concerned with enriching themselves and staying in office..
With respect to risk of ruin, one must be clear what is being ruined. Loosing ones money is ruin. Loosing ones life is worse. But loosing the lives of your family, your community, your nation, or of humanity as a whole is worse yet. it is a matter of degree. Even worse would be eliminating all life on Earth. It is a matter of point of view. For example men and women are willing to fight in a war and get killed to save their nation. The precautionary principle might bests be applied to the worst case scenario, ecocide, the avoidance of the ruination of everything. This big picture point of view apparently escapes most people.
It is hard to see this big picture if one has a family or a very close personal relationship. One will probably put these people first above the greater good. This is probably why priests are supposed to be celibate. In addition employees are compromised because they want to keep their jobs to support their families. Hence they may not be a whistle blower when things are really wrong in a company or other organization that they work for
Beliefs are not what one says, rather they are about what one does. When one acts one has skin in in the game. One can be under social pressure to answer certain questions on a survey, but act entirely differently in action. This is human behavior,
The question about how society can be structured so that everyone has skin in the game remains unanswered. Maybe this is why Taleb has not finished his book.
Note: The obvious solution is to limit the scope of government so that most issues are solved locally. For example, I did not sign up for or agree to a social welfare state in which three quarters of the gross domestic product and my taxes are used for transfer payments to other people. I see this as charity with a gun to my head. rather I am in favor of enriching and developing the commons that everyone benefits from. I am also in favor of helping my neighbor with whom I have a relationship and can personally influence. I think that this was how the US was before the birth of the welfare state in the 1930s and it is certainly what Tocqueville said when he wrote Democracy in America (see my post).
Last updated August 27, 2017
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