Nassim Nicholas Taleb on Skin in the Game

you should never let the person have doubts about the quality of the product so if you're not sure about something you say I'm not Stuart's not my specialty don't voice an opinion you value yourself or don't produce anything that devalues your product hemorrhoids Ogden global finance skills and alcala de austin sputter slow and I okay victim of a Dwyer ante fragile you I have made Nassim Taleb mr. Postum hands knocks me at a skin in the game victim of the allowed risk central thank you so much for taking the time to speak with me I'm gonna jump straight in I want to ask you why should one never hire a well-dressed trader ah okay no that was in I wrote that in dynamic hedging 21 years ago and my first first first book which was technical textbook and later on I I figure out the idea was a metaphor when you have two people the same rank in professionally one of them looks apart and the other does not the one who doesn't look the part must have more skills why because an environment where you have skin in the game the cosmetic doesn't matter much so for example at the example I give that of a surgeon you have a serger looks like a surgeon the other one looks like a butcher the surgeon feel it looks refine the other one looks rough course now who is more likely to be a better surgeon if they're the same rank at a hospital and you have both options are presented as being equivalent you should take the one who doesn't look like a surgeon because the one that person had to fight a lot to reach that level so let's I mean this is a financial conversation unless translated finance if you know if you read a investment proposal that looks like an investment don't invest mm-hmm odds are someone a business plan or a proposal or term see that someone is taking advantage of you because if it's narrated and Chris play odds are it's not gonna work right okay so skin in the game the title of this book so yes often when well before your book when people talked about skin in the game that government incentives rightist yes I have an incentive and I'm gonna I have skin in the game so I'm gonna work harder to make this work yes that's not your understanding of of the of the term yes so for foreign finance basically is having something to lose in case something goes wrong and it was basically the reverse of incentive or being exposed for example in finance if you if what people who lose money go go bust and leave the system which happens there's some kind of filtering investment management then necessarily it maybe not be fair but still it's there's a filtering so those who stay have a higher quality on balance not always you can be fooled by randomness but in general then those who have left the pool and and of course some people may game the system you know to look good but everything else being adjusted so this is the IDF's kind of game as risk management that's the only way that works because people can always hide risk something we've known for four thousand years from Hammurabi thirty eight hundred years ago that people can always hide risk from you so when you invest in a fund and the owner or the managers of the fund had most of their net worth in it more than fifty percent of the net worth in it you know proportions and proportional to the net worth and I'll suffer 50 60 times more than you the skin in the game that's the best waste management and that's why hedge funds are better than banks hedge funds are better than you know other form of investment because they're independent small units that have skin in a game and and of course you have bankruptcies and failures of hedge fund and these are periodic and and they clean up the system just like you have failures in the restaurant business you see probably mmm so you'd also define rationality in this book as rationality is what makes something survive exactly I mean if something doesn't make sense to you but works vastly better than something makes sense to you it doesn't work and and people get it in a real world economics don't get it they they don't get hey well it makes sense what if it works in theory that's working practice you know it doesn't count so he has to explain to academics that in in theories there's no difference between academia in a real world and practice the risk see what's the definition of a vendor because that's an important terminology of the book it's someone whose holiday are full of hot air I mean let me give examples probably easier who document a good be as vendor I mean good French politician would be it would be candidate Paul Krugman okay the economist Paul Krugman would be a perfect one richness tailor you know the economists that you granted to whom you grabbed both of them got your medal there are good Muslim values and and let me tell you who who's a non lender is someone who has something on a line you see when so when something goes wrong he or she may lose money so the the idea is that unless there is something constraining you bring you in contact with reality if you're wrong so you exit the gene pool you can be a BS vendor now to give you an idea why the hedge fund world still works very well we had a bunch of Nobel Prize winners come to the hedge fund world okay last one is long-term capital management they want pasta 98 was he's got left the pool so the system functions hmm as well they went but exactly you have sometimes BS vendors in in corporate America and definitely corporate Europe be there these people often are there like actors the they game the corporate they don't know what's going on but at the top they don't have skills you have more skills evidence of skills at the level of the driver company driver than you do as a manager they write something they can rap a good narrative and they are they don't have to come the game in the sense that although they get the incentives they don't have this incentive something goes wrong so net net that community has made a lot of money how does one protect oneself against these vendors it's very easy don't ask someone what he or she thinks like like Krugman or something ask them to invest okay what's in your portfolio what's in your portfolio if you got you don't have an exposure of thanks and it has to be large enough to be harmful in case the best thing happens hmm why is honor or why should honor be such an important concept in the economy what I'm trying this is not it has to be constant economies have constant and everything but in your any I don't know if you realize in commercial transactions you only want to deal with people who don't transfer risk to others otherwise the system can function and that was from the days of Cicero they've been debates on what a person should reveal to you in a commercial transaction and what a person should not mmm you got to realize that unlike academia the world of business is highly collaborative so given that it's collaborative it's a now zero sum gain and if it's collaborative means I do not want to do transactions with you they're not independent transaction there's series of transactions and and it's an effectively in training there start forcing ethical rule like my word is my bond you see it Russ I mean it's remarkable how you see in real estate in a lot poor central London amongst the Ashkenazi's or among the traders sold they do a transaction verbally and then the lawyers take care of the details but they're committed the minute they said they shook hands is committed so and that's very important because in anti fragile I think towards the end of anti fragile I explained that the handshake was mayor luskey with the muff using my fuse Oh a big mobster for a lot of people was vastly more robust than a contract you know with vetted by lawyers because you can always mess with your contract but someone who has self-respect will never go back on an agreement so the market economy cannot work without honor and honor is defined it honor your commitments and don't nickel and dime people but also don't try to have transaction with people transferring too much risk yes so that's the definition of honor to not transfer risk towards others at least not in hidden ways hmm you can do it bankers have done it transfer risk to Japanese investors and a90 stuff like that and then rapidly you realize you cannot do business out of it you can only run a business with something that has some kind of long term and long term relationship and and and trust oh let me explain very simple you cannot the basic currency the basic course is I keep adding crap stuff inside of courtesy you know so progressively it loses its value and the market system sometimes does that but when you deal with an artisan you buy a product in Italy from the artisan a family's been operating for 200 years they make sure that you will never have doubts about the them you may not like maybe the aesthetics of it but you never had doubts about the quality of the product and and you always have to work that way so when you write books when you do anything you should never let the person have doubts about the quality of the product so if you're not sure about something you say I'm not Stuart's not my specialty don't voice an opinion you need to value yourself or don't produce anything that devalues your product likewise do not hide stuff like for example you start offering people gold and then you start adding metal to other metals to it you can do that a couple of times and then you've destroyed your reputation and the system because the system start pricing that so traditionally the basing of the currency is what I call my books cheapest to deliver don't give people that she was deliver give the product and the long run will sustain a normal relationship business relationship with people so when I was a market maker people have come to me because I was I tried to be reliable and I was taught by market makers to be reliable not the best in other words but always there and never have huge margins but never have to tight margins see and and it's remarkable how it works because then if you're reliable people come back to you so you got to do business with someone as if you will do that for generations right as a principle and it works and that converges to a sense of honor you have while dealing with anyone hmm but it's gotten worse I mean that's the narrative I take out from your book I mean the concept of skin in the game is as old as its oldest it's time it's necessary it's been around but it's it's not there enough anymore well I miss coming back okay and the past of course is to hang backers hmm so people have skin in the game yes yeah they beheaded you know public square and then progressively we had limited liability animus did not like it he knew it was gonna be games but still I don't mind limited liability if it's gotta be limited but substantial not limited by small or almost non-existent so now people are starting to think it'll clone back bonuses risk in some form is still not enough and then sometimes forcing people to invest you want to work here you're gonna invest okay and and that sort of puts skin into their game but let's go back to society as a whole ninety-nine percent of the people you see in the street are calibrated they don't take risk from others they don't transfers to others they're neutral calibrated some people are transfers to others typically bureaucrats Thomas Friedman at the New York Times people like that it caused Wars and they don't pay for it they transfer it and a lot of people are victims all right but so in general so we have to focus on those who transfer risk to others and then of course there's class of saints who take risk from others all right such you know that's the way they want to be heroes so there's people have the notion of president option here ISM there's a fellow who took a bullet for someone a French person recently and he was a big hero in France because people understand right away taking risks particularly on behalf of others and dying that death is the most glorious thing entrepreneurs saw the classic risk takers we tend to think about them but you write in the book that they also nowadays often try to hide risk or transfer risk to others I took classes entrepreneurs someone who starts the company because they love starting a company say Steve Jobs when he started or all these other people's the famous people and then those who start companies to sell him okay and without even running him they look good and then they sell them to some to Luber or some someone else the second category is not honorable in my mind because they gave me the system and eventually I remember booked by Michael Lewis about a fellow and later on who started that scape or something and then he kept he kept getting rich selling creating and selling companies that would would would go out of business and he but he would get rich and and of course I think he could do it anymore so you have these categories so two classes of entrepreneurs the real entrepreneurs and those who have who are playing the game so distinguish between them like we must distinguish between the entrepreneur and the CEO cosmetic CEO MBA from Wharton that come so many of our viewers I'm sure sort of know you or know the barbel strategy of investment is barbell here and the on the cover of this book which sort of is the idea that you to protect yourself from black smoke okay I mean my idea barbell is not so much a recipe as a [Music] framework in risk-taking that the linear combination of high risk and no risk is medium risk is vastly more robust than just investing the medium risk mm-hmm right so I should put 90% well I mean you put the high segment of your funds and Norris securities ten percent in high risk it outperforms or is at least more robust than putting 100 percent in medium risk hmm so the separation funds separation method is much more powerful mmm-hmm because of Black Swan events because the medium risk we don't can go to zero we have no idea of the price risk but zero risk we understand what it is efficient protected something and high risk we know what it is you're never gonna be fooled by her risk you can be fooled by medium risk so behavioral economics is something that you know very keen on yes John you talk about it in this book and so if I understand your critique has a lot to do with the fact that basically group behavior can't be derived from okay so the one is scaling the others dynamic scaling in other words if you study the behavior of everything will not explain the market hmm why can I explain because the mark is not some of individual that they are minority rules asymmetry is that that like for example market that worth 30 trillion can drop one percent that's one percent that's the three billion I mean yeah in valuation based on a big order that's 50 million and then it has happened in examples I document so it's very nonlinear so the understanding and visual doesn't help you understand markets that's first one the second problem with behavioral economics is they have the illusion that you take a risk once per lifetime they say they look at risk return in fact it's a sequence say you smoke you smoke now don't smoke okay but that the they would it be rational to smoke one cigarette if I told you the risk of one cigarette it's tiny compared to the in Germany we have and we rational no no this is what because you have to think of if you enjoy it you're gonna do it again yes I'm the repetition so and I've shown that no individual will ever get the market return because you do not have the same risk profile you can never stay constant and you will vary your portfolio and you may be forced to reduce a lot of people divorced a lot of people have events and so you cannot get the market return the only strategy that allow you to get the market return is a Kelly criterion methods mmm-hmm which is you know a specific strategy other than that you will never get the market return do you've also written that one is only true true one is rich only when the money you refuse tastes better than the money you accept exactly yes okay in other words you will never be rich if instead of going you're going on on a cruise and then someone offers you a huge amount of money to do something if you cancel your cruise to do that then you're not rich right so a lot of lot of rich people are not rich and a lot of more modest people are rich mmm and you also talked about the risk of sort of making your when you're rich making your life too complex yeah they variable that people get rich makers are not complicated so they could not they grow the restaurant have complicated meals and nouveau so it looks fancier in fact an experimental and expensive and then you start writing private jets rather than have the warmth of other people and a nice terminal so the there are a lot of there are a lot of aspects of these lives of rich people but first of all you buy a big mansion and these mentions these 15 bedroom mansions look like a morgue you know what they're empty especially in America yeah but what happens they're not built the problem as these in the past we're full of maids and people and couriers and and and and second cousins and stuff so they're not made to be empty so and so people don't understand the processes very well and there's better thoughts any preferences then you know be rich what's what does it mean to have soul in the game it's me is having an artisan has soul in a game the best expression is required called me rocky mmm and it means you're not doing something for the enjoying it's something even beyond is you love what you're doing so I was not I'm not a fan of a mind but at some point I remember a sentence and in Rand where she said people hate you if you love what you're doing that's sort of soul in the game so you're doing something but you have profound love of it and and it's remarkable you notice that if I enjoy my writing people will enjoy reading it but then I have to make sure there's nothing I don't like about my writing so it has to do with the pure passion and to do that you have to be disciplined about your writing and that's what I don't write emails I don't read emails because it devices you're writing your writing has to be I mean I try to have half a sentence emails and even if the expense of being rude because people send you 22 page emails expecting 22 page answers and I'm not a business of writing emails I write books and usually the questions addressed in emails is present or present in my book but so but I noticed that those if you write a lot of emails it's not enjoyable you debase your writing so he's there's no more this passion of writing the same with with anything if you do something you don't like it will it will sort of corrupt your personality so you've got to always be doing something you really won't enjoy soul of the game is is for example at the example some of the game I gave his once was with what's-his-name yeah you know cabinetmakers it was the weather the the guy from Apple Steve Jobs Steve Jobs like cabinetmakers will they make cabinet there's a visible and the hidden part the hidden part they care about as much as the visible that's all the computer has to be that's for him it has to be as attractive inside although you have no business opening it yeah for him that was it's all in the game and this is why we have this it's working beautifully it's still working ten years after its Pyrrhus and people respond to products made with soul in the game because but both parties are happy with their smaller game the artisan and and and the consumer so and then you have to write books that way have soul into what you're doing and I can tell now it's an instinct if someone has you know and any kind of the second order commitment to what they're doing hmm and you just tell that instinctively acceptably you know if you can tell in Japan how when they want to serve your water how they have this ceremonial and you realize it trained themselves to do it better so even serving you a glass of water they try to have that that's in Japan the Japanese have the sense of details and pride into what they're doing and they do it for that soul of the game so you've criticized sort of unfettered globalization before in the Black Swan I think and you should have come back to it a bit in this book because to protect soul soul in the game we might need to be a bit protectionist in the economy yeah we have to protect yourself from when if they all take all effects because they are brutal they're unfair and they cost you something in the long run so but not too much also I can easily justify that you have small town Switzerland and it's so nice that you're gonna have people from Saudi Arabia buying big mansions in there and then people are gonna be corrupted by a lot of money and your children will be priced out of the market so it is conceivable that is acceptable to say okay we're not gonna sell to foreigners you see so some protectionism makes sense if it helps you protect yourself from that winner-take-all effect particularly when you have a nice place to expose event and it was further in the past things to have that room their apartments they can only sell to Nationals people commit it to the place so they don't have you know rich foreigners by without having any commitment to the place and also if I understand you correctly protect people want to maybe make their own shoes right and there's a value in that and they prefer that from sort of being able to buy really cheap flat-screen TVs from from China and we need to take this into account policy exactly if you identify as a shoemaker in Pittsburgh mmm and now on the globalization it's better to let the Chinese make the shoes and you do something else and but the science of living would rise and we'll buy cheaper product from China overall so okay you lost your identity as a shoemaker you lost your soul and you say by transferring things to others in return for some conversation it's very dangerous and lastly why is love not possible without sacrifice nothing exists without sacrifice because if you cannot have things for free otherwise it would be a like and a movie if you don't have anything to lose this is why I think you had an engagement ring when you got engaged okay so you'd rather have that then I love you you do not have black like to have both but between this and I love you this this has more value in money because it has to cost it's in proportion to the income of the fellow yeah so the same concept with worshiping God's God the gods don't like sheep signaling no no they won't commitment yes yes thank you thank you so much thanks for love for inviting thanks [Music]

Channel: EFN

Views: 76,576

Rating: 4.9334865 out of 5

Keywords: Affärsnyheter, Nyheter, Ekonomi, Finans, Aktier, Fonder, Näringsliv, Karriär, News, Business

Id: a3YOMe4PnKE

Length: 27min 35sec (1655 seconds)

Published: Tue Oct 01 2019

Reddit Comments

[u/[deleted]]

Taleb the writer. Good stuff. Taleb on Twitter, a bickering teenager.

[u/TheBayanWay]

Taleb hates everyone in the IDW.

He hates Shermer, Pinker, Peterson, and Claire most of all. What sucks the most is, despite his shitty attitude, his criticisms on where they fall short are not wrong. And the reason I say it sucks is that if he weren't such an ass about it, an interesting conversation between them could take place.

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I find the idea of Skin in the Game to be great! Imagine if every politician had Skin in the Game for every decision they made.

In my experience, every great leader had skin in the game. If you're to make a decision to affects other people, you better be affected by it too and deal with the negative consequences of your decision.