Skin in the Game

4 min read

There are some books that are bad, and you know they're bad immediately. They're long-winded, or they make factual errors or they mistake the complex for the complicated. Once you realise they're bad, you can write off the book and move on.

Then there are bad books that appear good. They have all the markers of good books. They have a simple idea, they use the same simple idea to explain multiple issues. They lay out those arguments with care and every word is clear and coherent. Skin in the Game is one such book. At first glance, it appears great. He has one simple idea - the only way to guage the worth of what anyone says or does is based on how much skin they have in being right.

It's a great idea. He starts with a simple example - wealth advisors. If a wealth advisor is paid a fixed salary regardless of how well she does, she isn't fully invested in seeing the client's money grow. Avoid taking advice from someone who gives advice for a living, unless there is a penalty for their advice, he says. Makes sense, I thought.

He should have stopped there. He develops this idea into a framework for attacking people, rather than ideas. Any time a person disagrees with you, fling the insult "you don't have skin in the game" at them. You don't need to engage with their ideas, because you've invalidated their credibility.

For example, he insults "interventionistas", meaning those who advocate military interventions in other countries. He calls them stupid, of being ignorant of reality. He doesn't need to actually examine the facts for and against foreign intervention. He doesn't need to look into past interventions that have been succeessful (WW I and II come to mind) and compare them to interventions that were disasters (Libya). Nah, all that isn't necessary. We've already dismissed these idiotic interventionistas with insults and have won the argument.

He criticises the folks who regulated the financial industry before and after the 2008 crisis. No doubt you'd expect that he would analyse some of the salient features of the Dodd-Frank Act. He would point out how some of it's rules were flawed and how he would have improved it. You'd expect that he'd explain how he would shepherd this legislation through Congress while satisfying all stakeholders. No. He does none of those things. He dismisses all financial regulation by saying they "avoided considering skin in the game". That's it.

This aren't even isolated incidents. He devotes large sections of the book to demonising/satirizing "Intellectual Yet Idiots" (IYIs). He spends an entire chapter constructing a strawman of an IYI. Then he brands people IYIs and leaves it at that, like it's a complete, standalone, irrefutable argument. I've never read any books by Steven Pinker, so I have no opinion on him. But seeing Taleb repeatedly fling mud in his direction without dissecting Pinker's opinions was a red flag for me. The way I see it, if you agree with Taleb, you're good. If you disagree, you're an idiot. Tough luck for IYIs like Richard Thaler, Thomas Piketty, "Hilary Monsanto-Malmaison" and countless others.

All of his arguments are backed only by cherry-picked examples, if any at all. Taleb will claim that the best quanititative finance journal is so good because the person running it has their name on the cover. Apparently, this gives them SITG. But for me, data wins arguments. If he could point out even a vague correlation between explicit authorship and quality, that would be great. If he could address a notable example of a publication doing the opposite, hiding all authors' names like the Economist does that would also be great. But he doesn't. He simply states his opinion as gospel truth. Disagree? Cool, you're an IYI.

Worst of all is the complete lack of evidence. He makes the extraordinary claim that "10 percent of Americans will spend at least a year in the top 1 percent, and more than half of all Americans will spent a year in the top 10 percent". You'd think he'd link to a source that proves this. He does not. He doesn't even clarify if he's talking about income or wealth. This isn't an oversight, it's deliberate. As he explains, "just a little bit of significant data is needed when one is right". Of course Taleb is right, so he absolves himself of the need to prove his claims. He simply needs to state them for them to be true.

All of this could be forgiven if his central thesis was infallible. That applying the principle of skin-in-the-game will always yield the right results. But I can think of examples where it doesn't work. Take for example, the case of a hedge fund manager convincing you that a certain stock should be shorted. He has personally invested a lot of money to short that stock, so he has skin in the game. According to Taleb, this is the only factor that matters, so you should trust the hedge fund manager (famous last words). However, the case study of Fairfax Financial shows that it isn't enough for a person to display skin in the game, even if they're betting millions of dollars of their own money. My take would be - do your own research, focus on actual evidence, not on signals like SITG that are meaningless in cases like this one.

But remember, I said this book has the appearance of a great book. Taleb manages it by making the reader feel intelligent and special. He subtly boosts the ego of the reader. Other folks are IYIs, but not you dear reader. You've shown great taste in picking up this masterwork, and you're getting smarter by the minute as you wallow in Taleb's wisdom. And people actually apply Taleb's tactics in the real world. I've seen "you don't have SITG" and "you're an IYI" being thrown around when it has no relevance or when applying it is illogical.

I worry that the popularity of this book will lead to this style of argument becoming more popular. Forget talking about ideas. Simply attack people instead. Don't provide any sources. Simply claim something, and it will be true.