Our new paper on aggregate perceptions of hurricane risks has been published on the Annals of American Association of Geographers.
Despite his blunt but abrasive style, Nassim Taleb is a master of conveying complicated ideas and revealing hidden patterns that would otherwise easily escape many people’s eyes. Using observations, historic stories and anecdotes with satire and ridicule, he aptly describe statistics and risks in a way that is not elusive and confusing to laymen. A voracious reader, he is able to integrate great ideas from philosophy, statistics, religion, economics, psychology, political science, medicine into his telling of Incerto. His first two books Fooled by Randomness and Black Swan surround around the theme of fat tail risks that most people are likely to ignore during “normal” times and therefore tremendously underestimate these risk. These risks nevertheless have enormous impacts on societies. If these two books are meant to identify the problem, his latest two books Antifragile and Skin in the Game are concerned with strategies to mitigate the problem. The metaphor “skin in the game” is used to describe any disincentive that exist in a system to prevent individuals from adopting certain reckless measures that would incur damages. It seems to be the optimal way he offers to cope with any systematic risks.
In modernity, many enormous risks go unnoticed for many years because these risks are created, managed, and in some cases intentionally veiled by an ever growing class that has no skin in the game nevertheless makes crucial decisions for others. According Taleb, bureaucrats, policy wonks, politicians, bankers, corporate executives, journalists, and academics all belong to this class. That many hidden fat tail risks end up blowing up to the faces of these so-called elites is precisely due to their safe insulation from these risks. One can only learn from bearing the direct consequences of one's own mistakes. No personal consequences, no sincerity; no skin in the game, no effective risk management. In order to mitigate these risks, disincentives thus need to be put in place in the system. Everyone needs to put their skin in the game. This prescription seems to resonate with the prospect theory that one is more averse the risk than embracing the reward of equal amount. This asymmetry is reminiscent of evolution.To put it plainly, we can only be so happy but the other side is the end of our existence. Evolution is an emotionless, cruel (from an individual life's perspective), but super effective machinery. Systems improve by eliminating the weak. He further suggests that the only way for society to function well has got to be from bottom up, not top down. That's why globalization, interventionism, hierarchical bureaucracy have not and will not work. He also explains Elinor Ostrom's pioneering work on self-governance to address the "tragedy of the commons" as follows, "the skin-in-the-game definition of a commons: a space in which you are treated by others the way you treat them, where everyone exercises the Silver Rule." If such a commons gets established by explicit or implicit rules, the resources can be managed well to avoid a tragedy of the commons caused by individuals' pursuit of self interests while ignoring others' welfare. It seems that Taleb interprets Ostrom’s work as evidence for decentralization of governance. But Ostrom’s theory is characterized as “polycentricity.” The optimal scale of governance should correspond to the problem of the same scale. For instance, the global scale of climate change essentially requires international cooperation.
In this book, he debunks the myths of “majority rule,” “Pascal Wager,” among others. He ridicules the “Intellectual Yet Idiots.” He instructs that we should choose surgeons that do not look like surgeons. He distills the wisdom of time into the expert called Lindy. The reason why it is the stubborn minority that dominates is because this smaller group has more at stake, in other words, skin in the game. He uses the example that how one family member with peanut allergy can spread the “no peanut” rule first to the household and later to whichever social circle this member happens to be at. The reason why “Pascal Wager” is not true is because it cost a lot for someone to believe in God. Faith is not cheap talk. Religious people have put their necks on the line to be truly faithful unless they are hypocrites.
Some quotes from the book:
"You will never fully convince someone that he is wrong; only reality can."
"There is no evolution without skin in the game."
"The curse of modernity is that we are increasingly populated by a class of people who are better at explaining than understanding."
"What is rational is what allows the collective - entities meant to live for a long time - to survive."
"Things designed by people without skin in the game tend to grow in complication (before their final collapse)."
"The main idea behind complex systems is that the ensemble behaves in ways not predicted by its components. The interactions matter more than the nature of the units."