Skin in the Game

Skin in the Game by Nassim Nicholas Taleb is a really big influence on how I do business. It helps to explain some moral concepts I’ve thought about for a long time. Particularly within the journalism and the finance industry.

It is also a really good framework for knowing when someone is selling advice that sells, as opposed to selling advice with some consequence of how that advice plays out.

Similar to the main message in both The Comfort Crisis and The Road Less Stupid, Taleb drills “in order to succeed, you must first survive.”

I particularly loved the viewpoint that political views can and should change with scale. Taleb claims to be libertarian at the country level, Republican at the state level, Democrat locally and socialist with his family.

Below are some of my favourite excerpts from the book:

No muscles without strength, friendship without trust, opinion without consequence, change without aesthetics, age without values, life without effort, water without thirst, food without nourishment, love without sacrifice, power without fairness, facts without rigor, statistics without logic, mathematics without proof, teaching without experience, politeness without warmth, values without embodiment, degrees without erudition, militarism without fortitude, progress without civilization, friendship without investment, virtue without risk, probability without ergodicity, wealth without exposure, complication without depth, fluency without content, decision without asymmetry, science without skepticism, religion without tolerance, and, most of all: nothing without skin in the game.

If you give an opinion, and someone follows it, you are morally obligated to be, yourself, exposed to its consequences. In case you are giving economic views: Don’t tell me what you “think,” just tell me what’s in your portfolio.

The principle of intervention, like that of healers, is first do no harm (primum non nocere); even more, we will argue, those who don’t take risks should never be involved in making decisions. Further, We have always been crazy but weren’t skilled enough to destroy the world. Now we can.

Bureaucracy is a construction by which a person is conveniently separated from the consequences of his or her actions.

The abrasions of your skin guide your learning and discovery, a mechanism of organic signaling, what the Greeks called pathemata mathemata (“guide your learning through pain,” something mothers of young children know rather well)

So these interventionistas not only lack practical sense, and never learn from history, but they even fail at pure reasoning, which they drown in elaborate semiabstract buzzword-laden discourse. Their three flaws: 1) they think in statics not dynamics, 2) they think in low, not high, dimensions, 3) they think in terms of actions, never interactions. We will see in more depth throughout the book this defect of mental reasoning by educated (or, rather, semi-educated) fools. I can flesh out the three defects for now.

Decentralization is based on the simple notion that it is easier to macrobullt than microbullt. Decentralization reduces large structural asymmetries.

We saw that interventionistas don’t learn because they are not the victims of their mistakes, and, as we hinted at with pathemata mathemata: The same mechanism of transferring risk also impedes learning. More practically, You will never fully convince someone that he is wrong; only reality can. Actually, to be precise, reality doesn’t care about winning arguments: survival is what matters. For The curse of modernity is that we are increasingly populated by a class of people who are better at explaining than understanding,

In general, the more people worship the sacrosanct state (or, equivalently, large corporations), the more they hate skin in the game. The more they believe in their ability to forecast, the more they hate skin in the game. The more they wear suits and ties, the more they hate skin in the game.

Avoid taking advice from someone who gives advice for a living, unless there is a penalty for their advice.

The agency problem (or principal-agent problem) also manifests itself in the misalignment of interests in transactions: a vendor in a one-shot transaction does not have his interests aligned to yours—and so can hide stuff from you.

Forecasting (in words) bears no relation to speculation (in deeds)

I personally know rich horrible forecasters and poor “good” forecasters. Because what matters in life isn’t how frequently one is “right” about outcomes, but how much one makes when one is right. Being wrong, when it is not costly, doesn’t count—in a way that’s similar to trial-and-error mechanisms of research.

the twenty-two-century-old diatribe by Sextus Empiricus Against the Professors. The rule is: Those who talk should do and only those who do should talk

Specialization, as I will keep insisting, comes with side effects, one of which is separating labor from the fruits of labor.

Things designed by people without skin in the game tend to grow in complication (before their final collapse).

There is absolutely no benefit for someone in such a position to propose something simple: when you are rewarded for perception, not results, you need to show sophistication. Anyone who has submitted a “scholarly” paper to a journal knows that you usually raise the odds of acceptance by making it more complicated than necessary. Further, there are side effects for problems that grow nonlinearly with such branching-out complications. Worse: Non-skin-in-the-game people don’t get simplicity.

If you do not take risks for your opinion, you are nothing.

And I will keep mentioning that I have no other definition of success than leading an honorable life. We intimated that it is dishonorable to let others die in your stead. Honor implies that there are some actions you would categorically never do, regardless of the material rewards. She accepts no Faustian bargain, would not sell her body for $500; it also means she wouldn’t do it for a million, nor a billion, nor a trillion. And it is not just a via negativa stance, honor means that there are things you would do unconditionally, regardless of the consequences

Artisans Anything you do to optimize your work, cut some corners, or squeeze more “efficiency” out of it (and out of your life) will eventually make you dislike it. Artisans have their soul in the game.

Now, something very practical. One of the best pieces of advice I have ever received was the recommendation by a very successful (and happy) older entrepreneur, Yossi Vardi, to have no assistant. The mere presence of an assistant suspends your natural filtering—and its absence forces you to do only things you enjoy, and progressively steer your life that way. (By assistant here I exclude someone hired for a specific task, such as grading papers, helping with accounting, or watering plants; just some guardian angel overseeing all your activities). This is a via negativa approach: you want maximal free time, not maximal activity, and you can assess your own “success” according to such metric. Otherwise, you end up assisting your assistants, or being forced to “explain” how to do things, which requires more mental effort than doing the thing itself. In fact, beyond my writing and research life, this has proved to be great financial advice as I am freer, more nimble, and have a very high benchmark for doing something, while my peers have their days filled with unnecessary “meetings” and unnecessary correspondence. Having an assistant (except for the strictly necessary) removes your soul from the game.

Arrogant Will Do Products or companies that bear the owner’s name convey very valuable messages. They are shouting that they have something to lose. Eponymy indicates both a commitment to the company and a confidence in the product. A friend of mine, Paul Wilmott, is often called an egomaniac for having his name on a mathematical finance technical journal (Wil–mott), which at the time of writing is undoubtedly the best. “Egomaniac” is good for the product. But if you can’t get “egomaniac,” “arrogant” will do.

By some mysterious mental mechanism, people fail to realize that the principal thing you can learn from a professor is how to be a professor—and the chief thing you can learn from, say, a life coach or inspirational speaker is how to become a life coach or inspirational speaker. So remember that the heroes of history were not classicists and library rats, those people who live vicariously in their texts

As we intimated in the first paragraphs of the introduction, some nonsoporific topics (pagan theology, religious practices, complexity theory, ancient and medieval history, and, of course, probability and risk taking) match this author’s naturalistic filter. Simply: if you can’t put your soul into something, give it up and leave that stuff to someone else.

Beware of the person who gives advice, telling you that a certain action on your part is “good for you” while it is also good for him, while the harm to you doesn’t directly affect him.

The ethical is always more robust than the legal. Over time, it is the legal that should converge to the ethical, never the reverse.

No person in a transaction should have certainty about the outcome while the other one has uncertainty.

Sympathy for all would be tyranny for thee, my good neighbor

So we exercise our ethical rules, but there is a limit—from scaling—beyond which the rules cease to apply. It is unfortunate, but the general kills the particular

The question we will reexamine later, after deeper discussion of complexity theory, is whether it is possible to be both ethical and universalist. In theory, yes, but, sadly, not in practice. For whenever the “we” becomes too large a club, things degrade, and each one starts fighting for his own interest

But we don’t have to go very far to get the importance of scaling. You know instinctively that people get along better as neighbors than roommates.

Let us get into the gut of Ostrom’s idea. The “tragedy of the commons,” as exposed by economists, is as follows—the commons being a collective property, say, a forest or fishing waters or your local public park. Collectively, farmers as a community prefer to avoid overgrazing, and fishermen overfishing—the entire resource becomes thus degraded. But every single individual farmer would personally gain from his own overgrazing or overfishing under, of course, the condition that others don’t.

A saying by the brothers Geoff and Vince Graham summarizes the ludicrousness of scale-free political universalism. I am, at the Fed level, libertarian; at the state level, Republican; at the local level, Democrat; and at the family and friends level, a socialist.

Greek is a language of precision; it has a word describing the opposite of risk transfer: risk sharing. Synkyndineo means “taking risks together,” which was a requirement in maritime transactions

It is provided by the Rhodian Law that where merchandise is thrown overboard for the purpose of lightening a ship, what has been lost for the benefit of all must be made up by the contribution of all.

Synkyndineo has been translated into Latin by maestro classicist Armand D’Angour as compericlitor, hence, if it ever makes it into English, it should be compericlity, and its opposite, the Bob Rubin risk transfer, will be incompericlity. But I guess risk sharing will do in the meanwhile.

There are two types of “talking one’s book.” One consists of buying a stock because you like it, then commenting on it (and disclosing such ownership)—the most reliable advocate for a product is its user.fn6 Another is buying a stock so you can advertise the qualities of the company, then selling it, benefiting from the trumpeting—this is called market manipulation, and it is certainly a conflict of interest

We removed the skin in the game of journalists in order to prevent market manipulation, thinking that it would be a net gain to society. The arguments in this book are that the former (market manipulation) and conflicts of interest are more benign than impunity for bad advice. The main reason, we will see, is that in the absence of skin in the game, journalists will imitate, to be safe, the opinion of other journalists, thus creating monoculture and collective mirages.

In general, skin in the game comes with conflict of interest. What I hope this book will do is show that the former is more important than the latter. There is no problem if people have a conflict of interest if it is congruous with downside risk for themselves.

This chapter introduced us to the agency problem and risk sharing, seen from both a commercial and an ethical viewpoint, assuming the two can be disentangled. We also introduced the problem of scale. Next, we will try to get deeper into the hidden asymmetries that make aggregates strange animals

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. Studying individual ants will almost never give us a clear indication of how the ant colony operates. For that, one needs to understand an ant colony as an ant colony, no less, no more, not a collection of ants. This is called an “emergent” property of the whole, by which parts and whole differ because what matters are the interactions between such parts. And interactions can obey very simple rules.

The rule we discuss in this chapter is the minority rule, the mother of all asymmetries. It suffices for an intransigent minority—a certain type of intransigent minority—with significant skin in the game (or, better, soul in the game) to reach a minutely small level, say 3 or 4 percent of the total population, for the entire population to have to submit to their preferences

Another example: do not think that the spread of automatic shifting cars is necessarily due to a majority preference; it could just be because those who can drive manual shifts can always drive automatic, but the reverse is not true. The method of analysis employed here is called a “renormalization group,” a powerful apparatus in mathematical physics that allows us to see how things scale up (or down). Let us examine it next—without mathematics.

Once a moral rule is established, it will suffice to have a small, intransigent minority of geographically distributed followers to dictate a norm in society. The sad news is that one person looking at mankind as an aggregate may mistakenly believe that humans are spontaneously becoming more moral, better, and more gentle, with better breath, when this applies to only a small proportion of mankind. But things work both ways, the good and the bad. While some believe that the average Pole was complicit in the liquidation of Jews, the historian Peter Fritzsche, when asked, “Why didn’t the Poles in Warsaw help their Jewish neighbors more?,” responded that they generally did. But it took seven or eight Poles to help one Jew. It took only one Pole, acting as an informer, to turn in a dozen Jews. Even if such select Polish anti-Semitism is contestable, we can easily imagine bad outcomes stemming from a minority of bad agents

Outcomes are paradoxically more stable under the minority rule—the variance of the results is lower and the rule is more likely to emerge independently across separate populations. What emerges from the minority rule is more likely to be black-and-white, binary rules.

Can democracy—by definition the majority—tolerate enemies? The question is as follows: “Would you agree to deny the freedom of speech to every political party that has in its charter the banning the freedom of speech?” Let’s go one step further: “Should a society that has elected to be tolerant be intolerant about intolerance?”

The market is like a large movie theater with a small door. And the best way to detect a sucker is to see if his focus is on the size of the theater rather than that of the door. Stampedes happen in cinemas—say, when someone shouts “fire”—because those who want to be out do not want to stay in, exactly the same unconditionality we saw with kosher observance or panic selling.

Alexander said that it was preferable to have an army of sheep led by a lion than an army of lions led by a sheep

“Never doubt that a small group of thoughtful citizens can change the world. Indeed, it is the only thing that ever has,” wrote Margaret Mead. Revolutions are unarguably driven by an obsessive minority. And the entire growth of society, whether economic or moral, comes from a small number of people.

SUMMARY AND NEXT So we summarize this chapter and link it to hidden asymmetries, the subtitle of the book. Society doesn’t evolve by consensus, voting, majority, committees, verbose meetings, academic conferences, tea and cucumber sandwiches, or polling; only a few people suffice to disproportionately move the needle. All one needs is an asymmetric rule somewhere—and someone with soul in the game. And asymmetry is present in about everything.fn6 We promised in the Prologue to explain that slavery is more widespread than anticipated—actually, quite a bit more. Let us see next, after the Appendix

Understanding the genetic makeup of a unit will never allow us to understand the behavior of the unit itself.

ZERO-INTELLIGENCE MARKETS The underlying structure of reality matters much more than the participants, something policymakers fail to understand. Under the right market structure, a collection of idiots produces a well-functioning market. The researchers Dhananjay Gode and Shyam Sunder came to a surprising result in 1993. You populate markets with zero intelligence agents, that is buying and selling randomly, under some structure such that a proper auction process matches bids and offers in a regular way. And guess what? We get the same allocative efficiency as if market participants were intelligent. Friedrich Hayek has been, once again, vindicated. Yet one of the most cited ideas in history, that of the invisible hand, appears to be the least integrated into modern psyche. Furthermore: It may be that be that some idiosyncratic behavior on the part of the individual (deemed at first glance “irrational”) may be necessary for efficient functioning at the collective level. More critically for the “rationalist” crowd, Individuals don’t need to know where they are going; markets do. Leave people alone under a good structure and they will take care of things.

Our definition: A company man is someone who feels that he has something huge to lose if he doesn’t behave as a company man—that is, he has skin in the game.

A CURIOUS FORM OF SLAVE OWNERSHIP Slave ownership by companies has traditionally taken very curious forms. The best slave is someone you overpay and who knows it, terrified of losing his status. Multinational companies created the expat category, a sort of diplomat with a higher standard of living who represents the firm far away and runs its business there. All large corporations had (and some still have) employees with expat status and, in spite of its costs, it is an extremely effective strategy. Why? Because the further from headquarters an employee is located, the more autonomous his unit, the more you want him to be a slave so he does nothing strange on his own. A bank in New York sends a married employee with his family to a foreign location, say, a tropical county with cheap labor, with perks and privileges such as country club membership, a driver, a nice company villa with a gardener, a yearly trip back home with the family in first class, and keeps him there for a few years, enough to be addicted. He earns much more than the “locals,” in a hierarchy reminiscent of colonial days. He builds a social life with other expats. He progressively wants to stay in the location longer, but he is far from headquarters and has no idea of his minute-to-minute standing in the firm except through signals. Eventually, like a diplomat, he begs for another location when time comes for a reshuffle. Returning to the home office means loss of perks, having to revert to his base salary—a return to lower-middle-class life in the suburbs of New York City, taking the commuter train, perhaps, or, God forbid, a bus, and eating a sandwich for lunch! The person is terrified when the big boss snubs him. Ninety-five percent of the employee’s mind will be on company politics … which is exactly what the company wants. The big boss in the board room will have a supporter in the event of some intrigue.

On Bureaucracy

DO NOT ROCK BUREAUCRISTAN More generally: People whose survival depends on qualitative “job assessments” by someone of higher rank in an organization cannot be trusted for critical decisions

On freedom

FREEDOM IS NEVER FREE In the famous tale by Ahiqar, later picked up by Aesop (then again by La Fontaine), the dog boasts to the wolf all the contraptions of comfort and luxury he has, almost prompting the wolf to enlist. Until the wolf asks the dog about his collar and is terrified when he understands its use. “Of all your meals, I want nothing.” He ran away and is still running.

Freedom is always associated with risk taking, whether it leads to it or comes from it. You take risks, you feel part of history. And risk takers take risks because it is in their nature to be wild animals.

On Risk Taking

Because, to repeat, life is sacrifice and risk taking, and nothing that doesn’t entail some moderate amount of the former, under the constraint of satisfying the latter, is close to what we can call life. If you do not undertake a risk of real harm, reparable or even potentially irreparable, from an adventure, it is not an adventure.

Scars signal skin in the game. And People can detect the difference between front- and back-office operators.

PASCAL’S WAGER This argument (that real life is risk taking) reveals the theological weakness of Pascal’s wager, which stipulates that believing in the creator has a positive payoff in case he truly exists, and no downside in case he doesn’t. Hence the wager would be to believe in God as a free option. But there are no free options. If you follow the idea to its logical end, you can see that it proposes religion without skin in the game, making it a purely academic and sterile activity. But what applies to Jesus should also apply to other believers. We will see that, traditionally, there is no religion without some skin in the game.

Again, on that account, the detractors of Donald Trump, when he was still a candidate, not only misunderstood the value of scars as risk signaling, but they also failed to realize that, by advertising his episode of bankruptcy and his personal losses of close to a billion dollars, he removed the resentment (the second type of inequality) people may have had toward him. There is something respectable in losing a billion dollars, provided it is your own money.

Not everything that happens happens for a reason, but everything that survives survives for a reason.

Equality

True equality is equality in probability. and Skin in the game prevents systems from rotting.

Dynamic equality is what restores ergodicity, making time and ensemble probabilities substitutable.

You do not create dynamic equality just by raising the level of those at the bottom, but rather by making the rich rotate—or by forcing people to incur the possibility of creating an opening. The way to make society more equal is by forcing (through skin in the game) the rich to be subjected to the risk of exiting from the 1 percent.fn4

Inequality is the disproportion of the role of the tail—rich people were in the tails of the distribution.fn8

Any form of control of the wealth process—typically instigated by bureaucrats—tends to lock people with privileges in their state of entitlement. So the solution is to allow the system to destroy the strong, something that works best in the United States.

Except for the occasional season in the cities, their social life was quite vertical. Their children played with the children of the servants. It was in mercantile urban environments that socializing within social classes took place. And, over time, with industrialization, the rich started moving to cities or suburbs surrounded by other people of similar—but not completely similar—condition. Hence they needed to keep up with each other, racing on a treadmill. For a rich person isolated from vertical socializing with the poor, the poor become something entirely theoretical, a textbook reference

If intellectuals are overly worried about inequality, it is because they tend to view themselves in hierarchical terms, and thus think that others do too

On action

Before we end, take some Fat Tony wisdom: always do more than you talk. And precede talk with action. For it will always remain that action without talk supersedes talk without action.

scientifically worse than astrology (this is what the reader of the Incerto has known since Fooled by Randomness)

Survival comes first, truth, understanding, and science later.

Primum vivere, deinde philosophari (First, live; then philosophize)

Kids with rich parents talk about “class privilege” at privileged colleges such as Amherst—but in one instance, one of them could not answer Dinesh D’Souza’s simple and logical suggestion: Why don’t you go to the registrar’s office and give your privileged spot to the minority student next in line? Clearly the defense given by people under such a situation is that they want others to do so as well—they require a systemic solution to every local perceived problem of injustice. I find that immoral. I know of no ethical system that allows you to let someone drown without helping him because other people are not helping, no system that says, “I will save people from drowning only if others too save other people from drowning.” Which brings us to the principle: If your private life conflicts with your intellectual opinion, it cancels your intellectual ideas, not your private life.

The IYI

The IYI subscribes to The New Yorker, a journal designed so philistines can learn to fake a conversation about evolution, neurosomething, cognitive biases, and quantum mechanics. He never curses on social media. He speaks of “equality of races” and “economic equality,” but never goes out drinking with a minority cab driver (again, no real skin in the game, as, I will repeat until I am hoarse, the concept is fundamentally foreign to the IYI).

TO CONCLUDE The Intellectual Yet Idiot knows at any given point in time what his words or actions are doing to his reputation. But a much easier marker: he doesn’t even deadlift

people flood their stories with numbers and graphs in the absence of solid or logical arguments

Traders, when they make profits, have short communications; when they lose they drown you in details, theories, and charts.

That which is fragile has an asymmetric response to volatility and other stressors, that is, will experience more harm than benefit from it.

Simplicity

THE GORDIAN KNOT Never pay for complexity of presentation when all you need is results. Alexander the Magnus was once called to solve the following challenge in the Phrygian city of Gordium (as usual with Greek stories, in modern-day Turkey). When he entered Gordium, he found an old wagon, its yoke tied with a multitude of knots, all so tightly entangled that it was impossible to figure out how they were fastened. An oracle had declared that he who would untie the knot would rule all of what was then called “Asia,” that is, Asia Minor, the Levant, and the Middle East. After wrestling with the knot, the Magnus drew back from the lump of gnarled ropes, then made a proclamation that it didn’t matter for the prophecy how the tangle was to be unraveled. He then drew his sword and, with a single stroke, cut the knot in half. No “successful” academic could ever afford to follow such a policy. And no Intellectual Yet Idiot. It took medicine a long time to realize that when a patient shows up with a headache, it is much better to give him aspirin or recommend a good night’s sleep than do brain surgery, although the latter appears to be more “scientific.” But most “consultants” and others paid by the hour are not there yet.

In other words, many problems in society come from the interventions of people who sell complicated solutions because that’s what their position and training invite them to do. There is absolutely no gain for someone in such a position to propose something simple: you are rewarded for perception, not results. Meanwhile, they pay no price for the side effects that grow nonlinearly with such complications. This also holds true when it comes to solutions that are profitable to technologists

It asserts that one does not need complex models as a justification to avoid a certain action. If we don’t understand something and it has a systemic effect, just avoid it

In fact, the more uncertainty about the models, the more conservative one should be.

Antifragile

But shorter shelf life for humans allows genetic changes across generations to be in sync with the variability of the environment.

Antifragility: There are tens of ancient sayings. Let us just mention Cicero. When our souls are mollified, a bee can sting. See also Machiavelli and Rousseau for its application to political systems. Time discounting: “A bird in the hand is better than ten on the tree.”fn9 (Levantine proverb)

Madness of crowds: Nietzsche: Madness is rare in individuals, but in groups, parties, nations, it is the rule. (This counts as ancient wisdom since Nietzsche was a classicist; I’ve seen many such references in Plato.) Less is more: Truth is lost with too much altercation,fn10 in Publilius Syrus. But of course the expression “less is more” is in an 1855 poem by Robert Browning. Overconfidence: “I lost money because of my excessive confidence,”fn11 Erasmus inspired by Theognis of Megara (Confident, I lost everything; defiant, I saved everything) and Epicharmus of Kos (Remain sober and remember to watch out).

Even within the “normal” warrior-run or doer-run societies, the class of intellectuals is all about rituals: without pomp and ceremony, the intellectual is just a talker, that is, pretty much nothing. Consider the bishop in my parts, the Greek-Orthodox church: it’s a show of dignity. A bishop on rollerblades would no longer be a bishop. There is nothing wrong with the decorative if it remains what it is, decorative, as remains true today. However, science and business must not be decorative.

A BS DETECTION HEURISTIC The heuristic here would be to use education in reverse: hire, conditional on an equal set of skills, the person with the least label-oriented education. It means that the person had to succeed in spite of the credentialization of his competitors and overcome more serious hurdles. In addition, people who didn’t go to Harvard are easier to deal with in real life.

This chapter managed to mix weight lifting and fundamental research under the single argument that, while the presence of skin in the game does away with the cosmetic, its absence causes multiplicative nonsense. Next, let us consider the divergence of interest between you and yourself when you become rich.

It is easy to scam people by getting them into complications—the poor are spared that type of scamming. This is the same complication we saw in Chapter 9 that makes academics sell the most possibly complicated solution when a simple one can do

CONVERSATION If anything, being rich you need to hide your money if you want to have what I call friends. This may be known; what is less obvious is that you may also need to hide your erudition and learning. People can only be social friends if they don’t try to upstage or outsmart one another. Indeed, the classical art of conversation is to avoid any imbalance, as in Baldassare Castiglione’s Book of the Courtier: people need to be equal, at least for the purpose of the conversation, otherwise it fails. It has to be hierarchy-free and equal in contribution. You’d rather have dinner with your friends than with your professor, unless of course your professor understands “the art” of conversation. Indeed, one can generalize and define a community as a space within which many rules of competition and hierarchy are lifted, where the collective prevails over one’s interest. Of course there will be tension with the outside, but that’s another discussion. This idea of competition being lifted within a group or a tribe was, once again, present in the notion of a group as studied by Elinor Ostrom.

The principle of charity stipulates that you try to understand a message as if you were yourself its author. It, and revulsion at its violations, are Lindy compatible. For instance, Isaiah 29:21 states: That make a man an offender for a word, and lay a snare for him that reproveth in the gate, and turn aside the just for a thing of nought. The wicked ensnare you. Calumny was already a very severe crime in Babylon, where the person who made a false accusation was punished as if he committed the exact crime. However, in philosophy, the principle of charity—as principle—is only sixty years old. As with other things, if the principle of charity had to become a principle, it must be because some old ethical practices were abandoned.

Sontag is about Sontag—Virtue is what you do when nobody is looking—Have the guts to be unpopular—Meetings breed meetings—Call someone lonely on Saturdays after tennis

It is much more immoral to claim virtue without fully living with its direct consequences.

Now I have wondered why, by the Lindy effect, there is so little mention of what is called virtue signaling in the ancient texts. How could it be new?

TO BE OR TO SEEM? The investor Charlie Munger once said: “Look it. Would you rather be the world’s greatest lover, but have everyone think you’re the world’s worst lover? Or would you rather be the world’s worst lover but have everyone think you’re the world’s greatest lover?” As usual, if it makes sense, it has to be in the classics, where it is found under the name esse quam videri, which I translate as to be or to be seen as such. It can be found in Cicero, Sallust, even Machiavelli, who, characteristically, inverted it to videri quam esse, “show rather than be.”

UNPOPULAR VIRTUE Further, the highest form of virtue is unpopular. This does not mean that virtue is inherently unpopular, or correlates with unpopularity, only that unpopular acts signal some risk taking and genuine behavior. Courage is the only virtue you cannot fake

Finally, when young people who “want to help mankind” come to me asking, “What should I do? I want to reduce poverty, save the world,” and similar noble aspirations at the macro-level, my suggestion is: 1) Never engage in virtue signaling; 2) Never engage in rent-seeking; 3) You must start a business. Put yourself on the line, start a business. Yes, take risk, and if you get rich (which is optional), spend your money generously on others. We need people to take (bounded) risks. The entire idea is to move the descendants of Homo sapiens away from the macro, away from abstract universal aims, away from the kind of social engineering that brings tail risks to society. Doing business will always help (because it brings about economic activity without large-scale risky changes in the economy); institutions (like the aid industry) may help, but they are equally likely to harm (I am being optimistic; I am certain that except for a few most do end up harming). Courage (risk taking) is the highest virtue. We need entrepreneurs.

Journalism is about “events,” not absence of events, and many historians and policy scholars are glorified journalists with high fact-checking standards who allow themselves to be a little boring in order to be taken seriously. But being boring doesn’t make them scientists, nor does “fact checking” make them empirical, as these scholars miss the notion of absence of data points and silent facts

Reading a history book, without putting its events in perspective, offers a similar bias to reading an account of life in New York seen from an emergency room at Bellevue Hospital.

For the Romans, religion was social events, rituals, and festivals

Nevertheless, we libertarians share a minimal set of beliefs, the central one being to substitute the rule of law for the rule of authority. Without necessarily realizing it, libertarians believe in complex systems. And, since libertarianism is a movement, it can still exist as splintered factions within other political parties. NEXT To conclude, beware labels when it comes to matters associated with beliefs. And avoid treating religions as if they are all the same animal. But there is a commonality. The next chapter will show us how religion does not like fair-weather friends; it wants commitment; it is based on skin in the game.

Before explaining the concept, consider the following three maxims: Judging people by their beliefs is not scientific. There is no such thing as the “rationality” of a belief, there is rationality of action. The rationality of an action can be judged only in terms of evolutionary considerations. The axiom of revelation of preferences (originating with Paul Samuelson, or possibly the Semitic gods), as you recall, states the following: you will not have an idea about what people really think, what predicts people’s actions, merely by asking them—they themselves don’t necessarily know. What matters, in the end, is what they pay for goods, not what they say they “think” about them, or the various possible reasons they give you or themselves for that. If you think about it, you will see that this is a reformulation of skin in the game.

Actually, by a mechanism (more technically called the bias-variance tradeoff), you often get better results making “errors,” as when you aim slightly away from the target when shooting

The only definition of rationality that I’ve found that is practically, empirically, and mathematically rigorous is the following: what is rational is that which allows for survival

Unlike modern theories by psychosophasters, it maps to the classical way of thinking. Anything that hinders one’s survival at an individual, collective, tribal, or general level is, to me, irrational. Hence the precautionary principle and sound risk understanding.

FIGURE 5. The difference between one hundred people going to a casino and one person going to a casino one hundred times, i.e. between path-dependent and conventionally understood probability. The mistake has persisted in economics and psychology since age immemorial.

between one hundred people going to a casino and one person going to a casino one hundred times, i.e. between path-dependent and conventionally understood probability. The mistake has persisted in economics and psychology since age immemorial.

Time to explain ergodicity, ruin, and (again) rationality. Recall that to do science (and other nice things) requires survival but not the other way around. Consider the following thought experiment. First case, one hundred people go to a casino to gamble a certain set amount each over a set period of time, and have complimentary gin and tonic—as shown in the cartoon in Figure 5. Some may lose, some may win, and we can infer at the end of the day what the “edge” is, that is, calculate the returns simply by counting the money left in the wallets of the people who return. We can thus figure out if the casino is properly pricing the odds. Now assume that gambler number 28 goes bust. Will gambler number 29 be affected? No. You can safely calculate, from your sample, that about 1 percent of the gamblers will go bust. And if you keep playing and playing, you will be expected to have about the same ratio, 1 percent of gamblers going bust, on average, over that same time window. Now let’s compare this to the second case in the thought experiment. One person, your cousin Theodorus Ibn Warqa, goes to the casino a hundred days in a row, starting with a set amount. On day 28 cousin Theodorus Ibn Warqa is bust. Will there be day 29? No. He has hit an uncle point; there is no game no more.

Let us call the first set ensemble probability, and the second one time probability (since the first is concerned with a collection of people and the second with a single person through time). Now, when you read material by finance professors, finance gurus, or your local bank making investment recommendations based on the long-term returns of the market, beware. Even if their forecasts were true (they aren’t), no individual can get the same returns as the market unless he has infinite pockets and no uncle points

Anyone who has survived in the risk-taking business more than a few years has some version of our by now familiar principle that “in order to succeed, you must first survive.” My own has been: “never cross a river if it is on average four feet deep.”

To take stock: a situation is deemed non-ergodic when observed past probabilities do not apply to future processes. There is a “stop” somewhere, an absorbing barrier that prevents people with skin in the game from emerging from it—and to which the system will invariably tend. Let us call these situations “ruin,” as there is no reversibility away from the condition. The central problem is that if there is a possibility of ruin, cost-benefit analyses are no longer possible. Consider a more extreme example than the casino experiment. Assume a collection of people play Russian roulette a single time for a million dollars—this is the central story in Fooled by Randomness. About five out of six will make money. If someone used a standard cost-benefit analysis, he would have claimed that one has an 83.33 percent chance of gains, for an “expected” average return per shot of $833,333. But if you keep playing Russian roulette, you will end up in the cemetery. Your expected return is … not computable.

If you incur a tiny probability of ruin as a “one-off” risk, survive it, then do it again (another “one-off” deal), you will eventually go bust with a probability of one hundred percent.

Courage is when you sacrifice your own well-being for the sake of the survival of a layer higher than yours. Selfish courage is not courage. A foolish gambler is not committing an act of courage, especially if he is risking other people’s funds or has a family to feed.