Key Takeaways from Skin in the Game

I recently read Nassim Taleb's "Skin in the Game" and highly recommend it for its unique and powerful insights.

It's striking to me how at certain parts of the book I was blown away by the genius of the insights while at others I was confounded by the strange and apparently false conclusions that Taleb was able to lead himself to.

Despite this, the book has brilliant teachings you won't get anywhere else so for that it is definitely worth a read.

Here are my main takeaways:

Skin in the Game

Nassim Taleb emphasizes how skin in the game is often misunderstood and misused.

It's regularly cited as the importance of giving people upside in transactions and situations.

Taleb, however, shows how this is not enough. Symmetric upside is actually quite commonplace, but symmetric downside is not.

Ensuring skin in the game means that both symmetric upside and symmetric downside must be present.

Power of the Intolerant Minority

Nassim Taleb introduces the concept of the intollerant minority and demonstrates how they can weild power over the majority in cases where the majority is apathetic to the issue at hand.

He gives kosher and halal meat as an example, where almost every piece of meat sold in the US is both kosher and halal because the minority absolutely demands it while the majority doesn't mind either way.

The same goes for GMOs, where a minority demands non-GMO food while the majority doesn't mind either way. Thus, many foods in the US are non-GMO, especially where customers are able to discern one way or another.

The Lindy Effect

The Lindy effect is a concept that the future life expectancy of technologies and ideas is proportional to their current age.

That means every additional period of survival implies a longer remaining life expectancy.

Tail Risk in Your Life

Consider a procedure that gives you a 99% chance of improving your life but a 1% chance of death.

Let's say a high risk surgery that greatly improves your vision, even beyond what current lasic offers.

Is it rational to take this procedure?

Maybe, maybe not. It depends on how you view the risk and the reward of the procedure.

Now consider the option to take on 100 different procedures that each have the same 99% probability of success and 1% probability of death.

Let's say that each separate procedure greatly improves some aspect of your body. Your vision, your hearing, your running speed, your resistance to alcohol poisoning, your resistance to dementia, etc.

Do you take the bundle of procedures?

If you do, you'd have a 37% chance of survival.

So it's clearly not a worthwhile risk to take the bundle.

Now, imagine the 1% chance of death was instead replaced with a 1% chance of a non-life-threatening occurance akin to a broken leg. And imagine that you had a 0% chance of dying.

Do you take the bundle?

This seems much more palatable, and many people would take the bundle.

This is the concept of ruin.

In a game, a negative outcome that sets you back but allows you to keep playing is categorically different from a negative outcome that prevents you from ever playing again.

Thus, we should treat tail risks that result in a form of ruin like death as categorically different from tail risks that do not result in ruin (mere injury).

And we should treat tail risks of ruin as extremely serious because they can add up and they can often be bundled together naturally.

For example, certain risk-seeking people can bundle the tail risks of drinking, fighting in bars, riding motor cycles, skydiving, etc.

Even though the tail risk of each of those behaviors is low (or not huge), the tail risks add up and lead to a larger tail risk of ruin or death that is obviously impossible to recover from.

Ruin/death should be viewed as categorically different from setback/injury.