Skin In The Game
by: Nassim Nicholas Taleb
Central Theme:
Those that do not take risks should not be involved in making decisions. If one can reap the benefits of a positive outcome, it is most efficient that they also hold responsibility and pay a price for a negative outcome.
Recommendation:
In Nassim Taleb’s latest piece as part of The Incerto, he emphasizes that for total efficiency all players must have ‘skin in the game’. Gaining feedback from reality is essential for growth. Instead of asking a portfolio manager which investments they recommend, ask which investments currently reside in their portfolio.
Summary:
The financial system carries some of the greatest asymmetries of risks and rewards of any industry. Fund managers earn a percentage on wins, but often transfer the risks to others under the umbrella of a large corporation. Further, banks have long had the freedom to take on risk without responsibility because government bailout serves as insurance protection. Forcing ‘skin in the game’ corrects asymmetry better than overwhelming laws and regulations.
