Listen to People With Some Skin in the Game

Skin In The Game, Goodreads
Nassim Taleb, Twitter

Nassem Taleb’s Skin in the Game argues, among other things, that much of our knowledge about people comes from small scale studies and is then generalized to “Americans”, or even “humans”. Taleb exposes some of the flaws behind this method of reasoning. He argues that instead of listening to social scientists, we’d be better listening to people with something to risk: with some skin in the game.

The first point to draw out is about scale. Taleb argues that dimensionality and complexity make it impossible to take knowledge from one scale and apply it to another.

One example is neuroscience. Understanding how neurons work will never allow us to understand how the brain works. For psychology, an understanding based on small-group studies tells us nothing about either individuals or society.

The second takeaway is about risk. Taleb argues that there are fundamental problems with how psychology and economics (as academic disciplines) understand risk. These stem from the fact that you live a life involving repeated individual risks, so are understandably reticent to take them; social scientists study a group of people and assign “rational” behavior to group-based probabilities. Cost-benefit analyses are worthless, for anything carrying a risk of personal ruin.

The final point worth considering, stems from the application of a mathematical technique called renormalization to social issues. Taleb conjectures that the formation of moral values in society doesn’t come from an evolution in the consensus. It comes instead from the intolerant minority, as demonstrated by the low variance and simplicity of most moral codes. That can have both good and bad outcomes, improving the general morality of society, or not.

Want to know more?

This blog post is part of a series I am making called Reading For The Aspirational Self. Don’t think of this as book summaries – I’m not doing that. Instead, I’m drawing out specific lessons that I find particularly interesting. And which I think could act, together, to help people who share my aspirations. If you, too, want to be present, family-centric, intrinsically motivated and polymathic, I can help.

  • The most distilled version of what I’m offering is a free mailing list designed for learning, “Think On Thursday” – each e-mail will include a lesson designed around the content. Click here for some information on that.
  • The series is also on YouTube in the form of 7-12 minute videos. Here’s the channel link – the video and transcript are below.
  • I’m tweeting excerpts from the videos, as well as some of the story of this project, how we’re doing it, and where it is going, on Twitter. @DaveCBeck

If you want to know more about Skin In The Game take a look at Taleb’s website here: https://nassimtaleb.org/tag/skin-in-the-game/.

Starboard reflections,

Dave.

This weeks video:-

Transcript

Much of the recently created knowledge about people comes from small scale studies, which are then generalized to all Americans or even all humans. Nassim Taleb’s Skin In The Game exposes the flaws behind this type of reasoning. He argues that instead of listening to social scientists, we’d be better listening to people who have something to risk, people with skin in the game.
In this video, I’ll discuss three of the things that Taleb argues make scaling studies of individuals to society or humanity. Impossible.
Firstly as the number of interconnected people, we are studying increases the number of connections between them and therefore variables involved, explodes.
Secondly, renormalization or what he calls the minority veto, which gives intransigent minorities, outsize power in how life changes within a democratic or a capitalist society.
Thirdly, Taleb talks about a problem with our understanding of people’s attitudes to risk. People are far more rational about risk than they’re given credit for.
As the number of people each in their own social networks that we’re studying increases, the number of variables involved in their actions increases dramatically. And the higher, the scale, what we’re talking about, the bigger this problem becomes really, and the less well simplistic aggregation can work mathematically to understand just about anything.
So two examples that Taleb gives about this are markets. Markets are not a representation of the average behavior of individuals. It’s the most motivated buyer and the most motivated seller, the ones who want to do something now who want to act, they’re the ones who move the price in the short term, the same goes for human psychology, things like cognitive biases.
Sciences drawing on larger data sets are not immune to this problem either. So genetics has already, Taleb argues, met its complexity limits. After the sequencing of the human genome, there were huge advances in our understanding of syndromes linked to one or two or three genes, that kind of thing can be identified and then potentially in the future, treated with things like CRISPR.
However, it comes to the more complex traits that we possess as individuals that are probably influenced by dozens or hundreds of genes. We are simply miles away from understanding those. And it’s because of the complexity that comes when you introduce multiple variables into an equation.
Secondly, neuroscience. So neuroscientists are studying the actions of particular parts of the brain. Others are working from neurons up to try and understand how our brain works, anything like that Taleb argues will lead nowhere, or it will lead to advances in the short term, and then a limit will be reached at point where complexity is involved.
In a democratic society talent shows an intransigent minority – one who won’t shift from that position – has great power. So, the day-to-day example that he used is a group of people agreeing on what to eat. If somebody really doesn’t want to eat something, you probably won’t be eating that thing as a group. And that’s why he says things like McDonald’s and pizza are so popular because most people will go along with that. The same he argues goes with kosher drinks in the U S where manufacturers don’t want to lose the 2 to 3% of the market who require kosher drink. So, companies like Coca-Cola make all of their drinks kosher, because it’s easier for them
Minority rule produces a low variance in outcomes because the most intransigent end up getting their way. That’s the basic message behind this section with the book.
Most of them or laws that we can generalize across societies, across different societies that is, are fairly simple. Theyre black and white in nature or binary they have a yes and a No, a right and a wrong, and a clear line somewhere in between. Taleb argues that this shows they probably came from intransigent minorities. He does this showing math and something called renormalization that means that a single person saying no the intransigent minority at a small scale then generalized it across a whole society. The same happens in a way in markets where averages don’t really matter. it’s the motivated buyer and seller that do They’re the ones determine the prices .
Society that is doesn’t evolve by consensus or by a majority coming to an agreement. It’s the actions of a few people who are particularly motivated or intransigent who disproportionately moved the needle. And that applies whether to markets or to morals Taleb argues, and much else. He refers to this as an asymmetry because the power that that minority wield is outsized because of that intransigence.
When it comes to risk both economics and psychology ignore the difference between path dependent and conventionally understood probability .
So to explain that think about a hundred people going to a casino as conventionally understood probability, a hundred people taking the same action and one person going to a casino a hundred times as path dependent probability. That’s probability with time added in. Nearly all social science conflates the two, whether it’s economic, psychology or much else indeed. And it’s only remotely true and he he stresses the remotely there for ensemble probability for conventionally understood probability.
So psychologists as a result of this kind of misunderstanding of probability, call our innate tendency to overestimate small risks a paranoia or risk aversion or a bias against taking risks
They’re assuming that our attitudes to risk are formed by the one off event that they’re studying and asking us about, not by the continued exposure to risk, which we all live in our everyday lives
Taleb refers to this as a tail risk – something that has a low probability of occurring but a high chance of a high impact.
And what that leads psychologists to concluding is that we’re averse to risks that seem rational and those risks seem rational when you study them from an ensemble point of view.
But actually when you think of it from a path dependent point of view it makes perfect sense .
He uses the example of Warren buffet who has shown avoiding this kind of tail risk, the risk of ruin, saying no a lot and having a very firm filter are the best ways to grow wealth in a consistent manner over a long period of time.
Conventionally understood risk and ruin or tail risk are two very different things. And what Taleb argues that when it comes to decisions that are made on a societal level we should recognize that. So people involved in making decisions that impact how the markets move shouldn’t look to depress the volatility. Volatility and the failure of individual businesses is good, it increases our antifragility, it increases our resilience as a society in the face of real risks of tail risks or things that might threaten everybody simultaneously.
He’s arguing here that societies should learn from individuals. So we all have an innate tendency to avoid things which we know could be tail risks and that’s what the psychologists call paranoia or risk aversion. But Taleb argues that refined paranoia at a societal level is actually a good thing, it means that we prepare for disaster and are more resilient in the face of ongoing challenges, whether it’s climate change or Covid.