Tag: taleb

A Covid Crossroads in the US

In the US, Covid has gotten much worse in the past four weeks, especially in the Upper Midwest. While there’s some good news, the odds of a non-linear disaster are the highest they’ve been since New York’s first surge.

In the past two weeks, the number of people I know with Covid in the US has gone up massively. As I write, 10 people in my close group of friends or their direct families have active Covid. Most of them took precautions. Luckily, most look like they will escape serious primary health issues. Two look to be pretty sick.

Since March, I’ve been lucky to be able to isolate during this pandemic. The longest I’d spent in one location in a row since from June 2015 until March 2020 was six weeks. Now I haven’t moved in 8 months.

I was going to fly to spend winter in a warmer location. I saw the new numbers, especially the sobering Covid Risk Map, which said that in Wisconsin, there’s a ~95% chance there’s at least one active Covid case in a random group of 25 people, implying ~3-5 active Covid cases on my flight. My friends parents got Covid flying from Florida to Wisconsin. I stayed in Wisconsin.


Lack Of Skin In The Game Is The Root Of Our Problems

You can trace nearly all of the problems in the world back to one cause: lack of skin in the game. From the financial crisis, to our broken government, to most wars, corruption, pollution and famine, you’ll find a lack of skin in the game as the foundational cause of nearly every one.

What is skin in the game? According to Nassim Nicholas Taleb, “skin in the game is about being harmed by an error if it harms others.” In finance, it means having personal monetary risk associate with any deal you make. A simple example: If I create an investment fund and invest my own capital so that I own 10% of the fund, I have skin in the game. If the fund loses money, I lose money. My decisions not only affect my investors, they affect me. If I don’t invest any of my own money, but make high fees just for managing the fund, whether it goes up or down, I don’t have skin in the game. Taleb believes that skin in the game is “the most important marker of credibility.” Without it, he continues, people are “frauds.”

When people share in the costs and benefits of their decisions that affect others, they are more likely to make good decisions than if they just impose their decisions on others. Taleb believes skin in the game is “a moral imperative” that should serve as the base of a functioning society. I agree wholeheartedly.

The financial crisis was caused by bankers who made incredible amounts of money whether their investments made money or not. The Iraq war happened because the people authorizing the war didn’t have to fight. Neither did the vast majority of their children. The war was fought by a small sliver of the US: our volunteer army. If George Bush or his supporters would have had to send their sons and daughters to war, I bet we wouldn’t invaded Iraq.

Our government doesn’t work because bureaucrats who make laws aren’t affected by them. Lawmakers don’t have skin in the game because massive gerrymandering has rendered their seats safe, unless they’re caught, as the saying goes, “with a dead girl or a live boy.” Global warming is an incredibly hard problem to solve because we don’t have actionable skin in the game. The consequences will happen far off in the future, likely to our grandchildren.

Lack of skin in the game causes the rich to not participate in their own communities because they believe their outcomes are no longer connected to their local communities. A massive student loan bubble because universities don’t have skin in the game to actually help students to get a job after they graduate. Journalists and bloggers to pontificate endlessly without any consequences for being wrong. Large companies and the top 1% to go to extreme lengths to avoid paying taxes because they feel decoupled from their communities: they can operate from anywhere, recruit employees worldwide and be citizens of the world.

More controversially, Jaron Lanier argues that many internet companies that are worshiped as paragons of having skin in the game in fact don’t. He contends that they’re wrecking our economy and that internet companies, via siren servers, are killing, not creating jobs and pushing too much economic activity off the books. They use the world’s most powerful servers to create defacto monopolies that earn money via arbitrage, solely because they have access to the most powerful computer, not because they are taking risks and creating value. (Read my previous posts for background.)

Taleb and Lanier are two of the most important thinkers of our time. It’s interesting that they both find a lack of skin in the game as the core cause of the world’s problems even though they write about completely different subjects.

So how can we start to fix our broken institutions? Simple. Add more skin in the game. Some examples from Taleb: In Roman times, bridge builders, or members of their family, had to sleep underneath newly built bridges for a time. If it collapsed, the builder lost too. He continues:

I feel much safer on a plane because the pilot, and not a drone, is at the controls. Similarly, cooks should taste their own cooking; engineers should stand under the bridges they have designed when the bridges are tested; the captain should be the last to leave the ship. The Romans even figured out how to deter cowardice that causes the death of others with the technique called decimation: If a legion lost a battle and there was suspicion of cowardice, 10 percent of the soldiers and commanders — usually chosen at random — were put to death.

Now I wouldn’t advocate for the Roman Legion’s solution, but what if we started to design public policy, laws and societal norms that required some amount of skin in the game as a moral imperative, along the lines of “thou shall not steal?” What if we said that it’s immoral to force decisions on others when you don’t have skin in the game?

What if we required bankers to personally invest in any deal they proposed to their own investors? Or their bonuses were tied to long term performances? Or if we devolved more power to local institutions instead of concentrating power at the federal level? What if we forced siren servers to have skin in the game and not make money solely on arbitrage? Or pushed the 1% to once again have skin in the game in their local communities? What if we had a partial military draft? Or some sort of selective service? Or forced banks to keep at least 50% of any loan they originated?

I don’t have many specific proposals yet, but all we need to do is use skin in the game as our guiding heuristic. We should be extremely skeptical of anyone who doesn’t have real skin in the game. The likelihood that they are a fraud is exponentially higher.

What do you think? Is skin in the game as important as I believe it is? Do you have any proposals to push for more skin in the game? What do you think we can do to help push for more skin in the game?

How The Future Might Look

favela luxuryOver the past few months I’ve been forming a thesis about where the world is heading. Much of my thinking comes from seven important books. Two of the most important authors who have influenced my thinking are Nassim Nicholas Taleb and Jaron Lanier. Many of the ideas that follow are theirs. And when Taleb’s and Lanier’s ideas intersect, you get very interesting hypotheses.

I’ll be expanding on my thinking over the next few blog posts, but I’ll start with some of the important ideas  that I think are at the core of where the world is heading. Understanding these ideas will be very important  if you want to succeed in the world going forward, or if you want to try to influence or change our future.

The Taleb Distribution – 99/1 instead of 80/20

The Pareto Distribution, better known as the 80/20 rule, states that 80% of the effects come from 20% of the causes. For example, in most businesses 20% of clients will generate 80% of the income, 20% of clients will generate the most customer service requests and so on. Taleb argues that we’re moving to a 99/1 distribution, away from 80/20. This shift has profound implications for our economy and society.

Little to No Skin in the Game

Entities are using big data and big computers to create businesses that introduce risk into the system, but don’t actually take on any of the risk. Instead they radiate it out to everyone else, taking all the benefits and leaving others with the downside. Think big banks, healthcare marketplaces, Facebook, outsourcing firms.

Siren Servers

Lanier coined this term to describe companies that use strong computers to suck up data and make money solely on information asymmetry, that have no skin in the game, radiating out new risk into the system. This new business model breaks with old entrepreneurial traditions: now the winners win solely because they have the strongest, fastest and most powerful computers, not because of innovation or value add. It’s arbitrage.

Strongest servers used for control

Whether its from governments like the US and the NSA or strong, overbearing policing, or large companies like wall street or web giants, the strongest servers will use their power to exert control.

Much of this control isn’t really done by algorithms, but people believe in technology, rather than humanism. For example, online dating sites claim they have an algorithm that matches people based on compatibility. In reality the algorithm “works” because it throws lots of people who want to get married together. Marriages are bound to happen. But people believe its the computer and give up control.

De Facto Monopolies

As power and money concentrate around the most powerful computer and radiate risk away from themselves, they create de facto monopolies. For example, Amazon automatically lowers its prices if there is a lower price anywhere it can find, then raises it if there isn’t a lower price anymore. They do this because they have the best data and the most powerful servers. They are willing to take a low or no margin on an item until you go out of business.

Amazon is not stopping you from starting a competitor. But you cannot compete on price. What used to be a monopoly is now just good business and competition. It’s moving toward a de facto monopoly. I expect this to happen in other industries.

Meritocracy used to excuse pretty much anything

As things go to 99/1 and de facto monopolies arise that radiate away risk from people who have little to no skin in the game, the winners will use merit and hard work to justify their outsized rewards. Since these companies are not using traditional, overt anticompetitive practices, the winners will justify their gains by meritocracy: anyone could have done it. It will be used to justify the commoditazation of work and the elimination of traditional levees.

Non Monetary Compensation

Facebook with 0 users is worth $0. Facebook with 1.1b users is worth $122b. It needs our free data to function. Yet its controlled by one guy and only a tiny percentage actually involved get monetary compensation. The rest get the equivalent of candy. The new bread and circus.

Taken one step further, in ten years robots are doing most basic surgeries. All benefits accrue to the software company that created the software. How’d they program this software? By watching real doctors perform hundreds of thousands of surgeries. But do these doctors get any compensation from the new data driven robots that needed their data to create the program? No. This will repeat across most industries.

Shrinking Markets

In a 99/1 world, where information is free and people aren’t paid for their data inputs, and as technology, powerful servers and de facto monopolies begin to emerge, markets will begin to shrink. These technologies cut out the middle men and people needed to do work. Sounds great and it is short term, but at scale, only the powerful handful have any monetary compensation and the rest have candy and no money to live, let alone purchase the winner’s goods.

Massive Inequality

The world will look more like South America, with massive physical, emotional, economic divisions between haves and have nots. In South America the top few percent almost never come in contact with the rest of the population, besides in service jobs. They don’t have the same culture. They don’t eat the same food. Follow the same sports. Watch the same tv shows. See the same movies. It might as well be two different worlds. Without a common experience, the haves lose empathy for their fellow man.

The metafication of everything

Everything we do is now broken down into tiny data pieces, mixed up and then put in a schema. Barriers go down, but we lose context. Do we lose truth with the lost context?

I understand this post sounds bleak and is very incomplete, but I don’t think all is lost. I’ll continue expanding on these ideas over the next few weeks in additional blog posts, including some ideas on how we can get off this track, and if we can’t get off the track, what some of the best strategies might be to survive in this type of a world.

Please add to the discussion.