No Skin in the Game: The Fragilistas

I really like the economist Nassim Taleb who wrote two very popular books Fooled By Randomness and The Black Swan.  He has a new book coming out and he spoke on EconTalk recently about it.   There is a transcript of his discussion with Russ Roberts but I extracted a small piece on the subject of skin in the game because I found it to be interesting.  I am a big fan of the skin in the game concept – I feel that fewer and fewer people have skin in the game when it comes to New Brunswick economic development.   To win there needs to be the potential of loss.

 

Taleb: I present antifragility and the last one I call “Skin in the Game: The Ethics of Antifragility.” What happens is that some people in society have the option, namely the bankers, the managers of businesses, they have other people’s skin in the game, the left column. No skin in the game other than they keep the upside and transfer the downside to others.You can see this, the stock market has lost about $5 trillion over the past 10 years, comparatively because a lot of stocks were at a higher level compared to cost of funds. Managers of companies made $400 billion. Why? Because you have the upside and no downside. So they actually own the option and they benefit from volatility.

So, no skin in the game–in that category I put bureaucrats, journalists, corporate executives, bankers of course, and other people I call Fragilistas.

Now, people with skin in the game are citizens, people who have the upside and downside of their actions. If they don’t pay their mortgage, they lose their house. Or, if I make a mistake, then you have skin in the game. And of course my rule of ethic is what I write about, is to have the corresponding position in the market, so I don’t really care about right or wrong; what matters is the payoff. Anyway, so this is the middle column, people with skin in the game.

And of course the right column is an interesting column of people who actually don’t have upsides. They are there to take the downside of others. And they have the highest status in society, traditionally. Compare a banker who has upside and no downside, because they don’t have negative bonuses, to someone in the military. He doesn’t have a bonus and he has his life on the line.

Roberts: It’s a very beautiful insight. Honor is bestowed on those who take the bullet for others. Exactly. These don’t have to be a saint, a knight, a warrior, a soldier, a prophet, or a philosopher in the pre-modern sense. Or a maverick. You can be just like the babysitter who pushes herself and lost her life because she had a responsibility for the baby she was holding.  And you argue that modernity is pushing more and more people into the left column, the Fragilistas who impose their downside on others, and we don’t spend as much time on that right column. Our culture doesn’t do that. In fact, we look at those people sometimes as fools–they could have avoided that harm; they are idiots.

Taleb: Exactly. And in fact it’s the first time we have power for people who don’t have courage. It’s the first time in history in which the people on top have power without courage. First time. You cannot find that in any society. Take the knights. The knights were people who, their trade was that they were risking their lives. This is why they or lords were supposed to die first. And of course the United States was supposed to be first in battle. Not someone pushing a button. It changes the incentives. So, the only way you can have a safe society is by moving the first column, the left column, moving these people out of there, making it more accountable. It’s hard to get there, though. You can, with the legal system you can in various ways. But I think society will explode because then you start having a growing wedge between what is ethical and what is legal. And I name names in here; I don’t know if you want me to name them.

Roberts: It’s your choice. I’m willing to take a lawsuit. It’s your book. I name people who to me–for example, some academics can cherry-pick; they can give contradictory advice and retain the one, because they don’t have skin in the game; they don’t go bankrupt from the bad trade, so to speak. They are always going to be there. The problem is a Nobel Prize in economics. People are not penalized for being wrong. You cannot have a proper functioning. I just wrote a paper in a policy journal in which I show that without accountability, risks will keep going because people will hide them, and we had a system in ancient societies for that. That’s Hammurabi’s Law. Hammurabi understood risks very well. And it was as follows: if the house collapses and kills the owner of the house, the architect is put to death. Why? Not because to punish people. As a deterrent, because no inspector, no regulator, nobody will ever know more about what’s in a foundation than the architect himself. So, you can hide risks from society, you can cherry-pick, you can do a lot of things unless you have a direct responsibility for the results of your action.

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3 Responses to No Skin in the Game: The Fragilistas

  1. D Young says:

    I have begun reading your blog (and newspaper columns)recently and while we don’t agree on everything, I am general sympathetic to the what “can the numbers tell us” approach to many things. And I’m always happy to learn your interpretation of things.
    I listen to Russ Roberts as well and was struck by the exact same passage about skin in the game.
    As the province grapples with its future I’m struck by the lopsided risk that come with service cuts. We almost always recommend cuts to services that we’re not affected by. Saint Johners are willing to sacrifice hospitals in Moncton, People in cities are willing to shut schools in rural New Brunswick. I remember in a conversation I had with a municipal politician years back that said citizens should first offer up a service that they use – a service where they have skin in the game. If they can think of none, then they have to offer up a greater share of their wealth (taxes fees, etc)

  2. That’s a heck of a good idea.

  3. Richard Reeleder says:

    “I just wrote a paper in a policy journal in which I show that without accountability, risks will keep going because people will hide them”

    Now that is quite a comment. I am not sure what is worse – the fact that someone would make such a statement and regard it as novel, or the fact that a journal would agree to publish such a commentary (editors and reviewers think it is novel). Is economics really such a sad discipline? Has the Age of Reason been replaced by the Age of Empty Rhetoric?

    I am not sure who you are pointing at wrt to those in NB with no ‘skin in the game’ – seniors, bureaucrats, journalists? One very influential group with no ‘skin’ would be the stink tanks and their smelly relatives (Frasier, Frontier, CTF, CFIB); they are full of advice (regularly reprinted in the local press) to NBers with respect to taxes and red tape, but won’t be around to suffer from the fall out.

    The ‘cut the other guy’ phenomenon is not restricted to NB, by the way. It’s common everywhere. In most other regions, however, there is either enough economic growth to keep most people happy, or there is a leadership that pushes through some tough but fair decisions like it or not. NB has neither. Instead we seem to be lead by a badly trained bookkeeper and a premier-in-hiding.

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