Author: Nassim Nicholas Taleb

ASIN: B077QY23RV

I tried reading Taleb a few years ago but I just couldn't stomach his writing style. In comparison to other books it lacks explanations and citations, which at the time lead me to believe that Taleb is just another macro-bullshitter. I decided to plough through this time due to many recommendations. I quickly found out that my macro-BS impression was wrong. He was spot on some topics he covered and I happen to be familiar with. It still took me about an hour to get used to his writing style. The one thing I appreciated from the to beginning is total disregard for political correctness, which is so hard to come by these days! As far as the content is concerned I was really impressed. The book is basically about the value of having skin in the game, especially of the decision-makers. Well worth your time!

EXCERPTS

The knowledge we get by tinkering, via trial and error, experience, and the workings of time, is vastly superior to that obtained through reasoning, something self-serving institutions have been very busy hiding from us.

Those who don’t take risks should never be involved in making decisions.

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

And, one may ask, what can we do since a centralized system will necessarily need people who are not directly exposed to the cost of errors? Well, we have no choice but to decentralize or, more politely, to localize; to have fewer of these immune decision makers. Decentralization is based on the simple notion that it is easier to macrobull***t than microbull***t. Decentralization reduces large structural asymmetries.

In the decentralized hedge fund space, on the other hand, owner-operators have at least half of their net worth in the funds, making them relatively more exposed than any of their customers, and they personally go down with the ship.

We saw that interventionistas don’t learn because they are not the victims of their mistakes,

You will never fully convince someone that he is wrong; only reality can.

Reality doesn’t care about winning arguments: survival is what matters.

The curse of modernity is that we are increasingly populated by a class of people who are better at explaining than understanding, or better at explaining than doing.

Evolution can only happen if risk of extinction is present.

We know with much more clarity what is bad than what is good.

via negativa (acting by removing) is more powerful and less error-prone than via positiva (acting by addition) [LAW!]

Immanuel Kant’s categorical imperative, which I summarize as: Behave as if your action can be generalized to the behavior of everyone in all places, under all conditions. The actual text is more challenging: “Act only in accordance with that maxim through which you can at the same time will that it will become a universal law,” Kant wrote in what is known as the first formulation. And “act in such a way that you treat humanity, whether in your own person or in the person of any other, never merely as a means to an end, but always at the same time as an end,” in what is known as the second formulation.

Let us refresh earlier arguments: if bankers’ profits accrue to them, while their losses are somewhat quietly transferred to society (the Spanish grammar specialists, assistant schoolteachers …), there is a fundamental problem by which hidden risks will continuously increase, until the final blowup. Regulations, while appearing to be a remedy on paper, if anything, exacerbate the problem as they facilitate risk-hiding. Which brings us to what is known as the agency problem.

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

People’s “explanations” for what they do are just words, stories they tell themselves, not the business of proper science. What they do, on the other hand, is tangible and measurable and that’s what we should focus on.

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.

If something stupid works (and makes money), it cannot be stupid.

Replacing the “natural,” that is age-old, processes that have survived trillions of high-dimensional stressors with something in a “peer-reviewed” journal that may not survive replication or statistical scrutiny is neither science nor good practice.

As the great game theorist Ariel Rubinstein holds: do your theories or mathematical representations, don’t tell people in the real world how to apply them. Let those with skin in the game select what they need.

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.

When you have skin in the game, dull things like checking the safety of the aircraft because you may be forced to be a passenger in it cease to be boring.

But there is an even more vital dimension. Many addicts who normally have a dull intellect and the mental nimbleness of a cauliflower are capable of the most ingenious tricks to procure their drugs. When they undergo rehab, they are often told that should they spend half the mental energy trying to make money as they did procuring drugs, they are guaranteed to become millionaires.

A confession. When I don’t have skin in the game, I am usually dumb. My knowledge of technical matters, such as risk and probability, did not initially come from books. It did not come from lofty philosophizing and scientific hunger. It did not even come from curiosity. It came from the thrills and hormonal flush one gets while taking risks in the markets. I never thought mathematics was something interesting to me until, when I was at Wharton, a friend told me about the financial options I described earlier (and their generalization, complex derivatives). I immediately decided to make a career in them. It was a combination of financial trading and complicated probability. The field was new and uncharted. I knew in my guts there were mistakes in the theories that used the conventional bell curve and ignored the impact of the tails (extreme events). I knew in my guts that academics had not the slightest clue about the risks. So, to find errors in the estimation of these probabilistic securities, I had to study probability, which mysteriously and instantly became fun, even gripping.

When there is fire, you will run faster than in any competition.

What you learn from the intensity and the focus you had when under the influence of risk stays with you. You may lose the sharpness, but nobody can take away what you’ve learned.

There are two ways to make citizens safe from large predators, say, big powerful corporations.

1. The first one is to enact regulations—but these, aside from restricting individual freedoms, lead to another predation, this time by the state, its agents, and their cronies. More critically, people with good lawyers can game regulations (or, as we will see, make it known that they hire former regulators, and overpay for them, which signals a prospective bribe to those currently in office). And of course regulations, once in, stay in, and even when they are proven absurd, politicians are afraid of repealing them, under pressure from those benefiting from them. Given that regulations are additive, we soon end up tangled in complicated rules that choke enterprise. They also choke life.
2. The other solution is to put skin in the game in transactions, in the form of legal liability, and the possibility of an efficient lawsuit. The Anglo-Saxon world has traditionally had a predilection for the legal approach instead of the regulatory one: if you harm me, I can sue you. This has led to the very sophisticated, adaptive, and balanced common law, built bottom-up, via trial and error. Common law is about the spirit while regulation, owing to its rigidity, is all about the letter. If a big corporation pollutes your neighborhood, you can get together with your neighbors and sue the hell out of it. Some greedy lawyer will have the paperwork ready. The enemies of the corporation will be glad to help. And the potential costs of the settlement would be enough of a deterrent for the corporation to behave. This doesn’t mean one should never regulate at all. Some systemic effects may require regulation (say hidden tail risks of environmental ruins that show up too late). If you can’t effectively sue, regulate.

By regulating you are robbing people of freedom. Some of us believe that freedom is one’s first most essential good. This includes the freedom to make mistakes (those that harm only you); it is sacred to the point that it must never be traded against economic or other benefits.

I have no other definition of success than leading an honorable life. 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.

Living as a coward was simply no option, and death was vastly preferable, even if, as in the case of Galois, one invented a new and momentous branch of mathematics while still a teenager.

As a Spartan mother tells her departing son: “With it or on it,” meaning either return with your shield or don’t come back alive (the custom was to carry the dead body flat on it); only cowards throw away their shields to run faster.

Now there is another dimension of honor: engaging in actions going beyond mere skin in the game to put oneself at risk for others, have your skin in other people’s game; sacrifice something significant for the sake of the collective.

However, there are activities in which one is imbued with a sense of pride and honor without grand-scale sacrifice: artisanal ones.

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. Primo, artisans do things for existential reasons first, financial and commercial ones later. Their decision making is never fully financial, but it remains financial. Secundo, they have some type of “art” in their profession; they stay away from most aspects of industrialization; they combine art and business. Tertio, they put some soul in their work: they would not sell something defective or even of compromised quality because it hurts their pride. Finally, they have sacred taboos, things they would not do even if it markedly increased profitability.

Entrepreneurs are heroes in our society. They fail for the rest of us. But owing to funding and current venture capital mechanisms, many people mistaken for entrepreneurs fail to have true skin in the game in the sense that their aim is to either cash out by selling the company they helped create to someone else, or “go public” by issuing shares in the stock market. The true value of the company, what it makes, and its long-term survival are of small relevance to them. This is a pure financing scheme and we will exclude this class of people from our “entrepreneur” risk-taker class (this form of entrepreneurship is the equivalent of bringing great-looking and marketable children into the world with the sole aim of selling them at age four). We can easily identify them by their ability to write a convincing business plan.

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.

“Egomaniac” is good for the product.

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. They were people of deeds and had to be endowed with the spirit of risk taking.

Learning is rooted in repetition and convexity, meaning that the reading of a single text twice is more profitable than reading two different things once, provided of course that said text has some depth of content.

Rich people are suckers who fall prey to people complicating their lifestyle to sell them something.

Avoid the verbalistic: “religions” are not quite religions: some are philosophies, others are just legal systems.

You need to eat what you feed others. [Use your own product!]

As club members know, the very purpose of a club is exclusion and size limitation.

Whenever the “we” becomes too large a club, things degrade, and each one starts fighting for his own interest. The abstract is way too abstract for us. This is the main reason I advocate political systems that start with the municipality, and work their way up (ironically, as in Switzerland, those “Swiss”), rather than the reverse, which has failed with larger states. Being somewhat tribal is not a bad thing—and we have to work in a fractal way in the organized harmonious relations between tribes, rather than merge all tribes in one large soup. In that sense, an American-style federalism is the ideal system.

“Better fences make better neighbors” [I would argue it's the same with prenups. Money no longer affects the relationship!]

Scaling matters, I will keep repeating until I get hoarse. Putting Shiites, Christians, and Sunnis in one pot and asking them to sing “Kumbaya” around the campfire while holding hands in the name of unity and fraternity of mankind has failed. (Interventionistas aren’t yet aware that “should” is not a sufficiently empirically valid statement to “build nations.”) Blaming people for being “sectarian”—instead of making the best of such a natural tendency—is one of the stupidities of interventionistas. Separate tribes for administrative purposes (as the Ottomans did), or just put some markers somewhere, and they suddenly become friendly to one another.

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.

Groups behave differently at a different scale. This explains why the municipal is different from the national. It also explains how tribes operate: you are part of a specific group that is larger than the narrow you, but narrower than humanity in general.

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.

Some metrics can actually kill you. Now, say you happen to visit a cardiologist and turn out to be in the mild risk category, something that doesn’t really raise your risk of a cardiovascular event, but precedes the stage of a possibly worrisome condition. (There is a strong nonlinearity: a person classified as prediabetic or prehypertensive is, in probability space, 90 percent closer to a normal person than to one with the condition.) But the doctor is pressured to treat you to protect himself. Should you drop dead a few weeks after the visit, a low probability event, the doctor can be sued for negligence, for not having prescribed the right medicine that is temporarily believed to be useful (as in the case of statins), but that we now know has been backed up by suspicious or incomplete studies. Deep down, he may know that statins are harmful, as they will lead to long-term side effects. But the pharmaceutical companies have managed to convince everyone that these unseen consequences are harmless, when the right precautionary approach is to consider the unseen as potentially harmful. In fact for most people except those that are very ill, the risks outweigh the benefits. Except that the long-term medical risks are hidden; they will play out in the long run, whereas the legal risk is immediate. This is no different from the Bob Rubin risk-transfer trade, of delaying risks and making them look invisible.

Now can one make medicine less asymmetric? Not directly; the solution is for the patient to avoid treatment when he or she is mildly ill, but use medicine for the “tail events,” that is, for rarely encountered severe conditions. The problem is that the mildly ill represent a much larger pool of people than the severely ill—and are people who are expected to live longer and consume drugs for longer—hence pharmaceutical companies have an incentive to focus on them. (Dead people, I am told, stop taking drugs.)

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.

The minority rule will show us how all it takes is a small number of intolerant, virtuous people with skin in the game, in the form of courage, for society to function properly.

A strange idea hit me. The kosher population represents less than three tenths of a percent of the residents of the United States. Yet, it appears that almost all drinks are kosher. Why? Simply because going full kosher allows the producers, grocers, and restaurants to not have to distinguish between kosher and nonkosher for liquids, with special markers, separate aisles, separate inventories, different stocking sub-facilities. And the simple rule that changes the total is as follows: A kosher (or halal) eater will never eat nonkosher (or nonhalal) food, but a nonkosher eater isn’t banned from eating kosher. Or, rephrased in another domain: A disabled person will not use the regular bathroom, but a nondisabled person will use the bathroom for disabled people.

Let us apply the rule to domains where it can get entertaining: An honest person will never commit criminal acts, but a criminal will readily engage in legal acts.

Let us call such minority an intransigent group, and the majority a flexible one. And their relationship rests on an asymmetry in choices.

Two more things. First, the geography of the terrain, that is, the spatial structure, matters a bit; it makes a big difference whether the intransigents are in their own district or are mixed with the rest of the population. If people following the minority rule lived in ghettos with a separate small economy, then the minority rule would not apply. But when a population has an even spatial distribution, say, when the ratio of such a minority in a neighborhood is the same as that in the entire village, that in the village it is the same as in the county, that in the county it is the same as in state, and that in the state it is the same as nationwide, then the (flexible) majority will have to submit to the minority rule. Second, the cost structure matters quite a bit. It happens in our first example that making lemonade compliant with kosher laws doesn’t change the price by much—it is a matter of avoiding some standard additives. But if the manufacturing of kosher lemonade costs substantially more, then the rule will be weakened in some nonlinear proportion to the difference in costs. If it costs ten times as much to make kosher food, then the minority rule will not apply, except perhaps in some very rich neighborhoods.

In the U.S. and Europe, “organic” food companies are selling more and more products precisely because of the minority rule, and because ordinary and unlabeled food may be seen by some to contain pesticides, herbicides, and transgenic genetically modified organisms, or GMOs, with, according to them, unknown risks. (What we call GMOs in this context means transgenic food, entailing the transfer of genes from a foreign organism or species that would not have occurred in nature). Or it could be for some existential reasons, cautious behavior, or Burkean conservatism (that is, following the precautionary ideas of Edmund Burke)—some may not want to venture too far too fast from what their grandparents ate. Labeling something “organic” is a way to say that it contains no transgenic GMOs. In promoting genetically modified food via all manner of lobbying, purchasing of congressmen, and overt scientific propaganda (with smear campaigns against such persons as yours truly, much about which later), big agricultural companies foolishly believed that all they needed was to win the majority. No, you idiots. Your snap “scientific” judgment is too naive for these types of decisions. Consider that transgenic-GMO eaters will eat non-GMOs, but not the reverse. So it may suffice to have a tiny percentage—say, no more than 5 percent—of an evenly spatially distributed population of non-genetically modified eaters for the entire population to have to eat non-GMO food.

Food costs in America are largely, up to about 80 or 90 percent, determined by distribution and storage, not the cost at the agricultural level.

Let us conjecture that the formation of moral values in society doesn’t come from the evolution of the consensus. No, it is the most intolerant person who imposes virtue on others precisely because of that intolerance. The same can apply to civil rights.

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?”

Yes, an intolerant minority can control and destroy democracy. Actually, it will eventually destroy our world. So, we need to be more than intolerant with some intolerant minorities. The West is currently in the process of committing suicide.

Now consider markets. We can say that markets aren’t the sum of market participants, but price changes reflect the activities of the most motivated buyer and seller. Yes, the most motivated rules.

Science isn’t the sum of what scientists think, but exactly as with markets, it is a procedure that is highly skewed. Once you debunk something, it is now wrong. Had science operated by majority consensus, we would be still stuck in the Middle Ages, and Einstein would have ended as he started, a patent clerk with fruitless side hobbies.

“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.

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.

Understanding how the subparts of the brain (say, neurons) work will never allow us to understand how the brain works.

A group of neurons or genes, like a group of people, differs from the individual components—because the interactions are not necessarily linear.

The question is: could it be that much of what we have read about the advances in behavioral sciences is nonsense? Odds are it is.

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.

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.

Why were they banned? They were, simply, totally free. They were financially free, and secure, not because of their means but because of their lack of wants. Ironically, by being beggars, they had the equivalent of f*** you money, which we can more easily get by being at the lowest rung than by joining the income-dependent classes.

In short, every organization wants a certain number of people associated with it to be deprived of a certain share of their freedom. How do you own these people? First, by conditioning and psychological manipulation; second, by tweaking them to have some skin in the game, forcing them to have something significant to lose if they disobey authority—something hard to do with gyrovague beggars who flout their scorn for material possessions.

You have all this equity in a firm that is now under severe financial threat. You are certain that you will go bust. You start thinking: well, you know, if Bob were a slave, someone you own, you know, these kind of things would not be possible. Slave? But wait … what Bob just did isn’t something that employees who are in the business of being employees do! People who are employees for a living don’t behave so opportunistically. Contractors are exceedingly free; as risk-takers, they fear mostly the law. But employees have a reputation to protect. And they can be fired. People you find in employment love the regularity of the payroll, with that special envelop on their desk the last day of the month, and without which they would act as a baby deprived of mother’s milk. You realize that had Bob been an employee rather than something that appeared to be cheaper, that contractor thing, then you wouldn’t be having so much trouble. But employees are expensive. You have to pay them even when you’ve got nothing for them to do. You lose your flexibility. Talent for talent, they cost a lot more. Lovers of paychecks are lazy … but they would never let you down at times like these. So employees exist because they have significant skin in the game—and the risk is shared with them, enough risk for it to be a deterrent and a penalty for acts of undependability, such as failing to show up on time. You are buying dependability. And dependability is a driver behind many transactions. People of some means have a country house—which is inefficient compared to hotels or rentals—because they want to make sure it is available if they decide they want to use it on a whim.

There is a trader’s expression: “Never buy when you can rent the three Fs: what you Float, what you Fly, and what you … (that something else).”

Someone who has been employed for a while is giving you strong evidence of submission. Evidence of submission is displayed by the employee’s going through years depriving himself of his personal freedom for nine hours every day, his ritualistic and punctual arrival at an office, his denying himself his own schedule, and his not having beaten up anyone on the way back home after a bad day. He is an obedient, housebroken dog.

Even when an employee ceases to be an employee, he will remain diligent. The longer the person stays with a company, the more emotional investment they will have in staying, and, when leaving, are guaranteed in making an “honorable exit.”

If the company man is, sort of, gone, he has been replaced by the companies person. For people are no longer owned by a company but by something worse: the idea that they need to be employable. The employable person is embedded in an industry, with fear of upsetting not just their employer, but other potential employers.

Perhaps, by definition, an employable person is the one you will never find in a history book, because these people are designed to never leave their mark on the course of events. They are, by design, uninteresting to historians.

Aside from his theorem, Coase was the first to shed light on why firms exist. For him, contracts can be too costly to negotiate due to transaction costs; the solution is to incorporate your business and hire employees with clear job descriptions because you can’t afford legal and organizational bills for every transaction. A free market is a place where forces act to determine specialization, and information travels via price point; but within a firm these market forces are lifted because they cost more to run than the benefits they bring. So market forces will cause the firm to aim for the optimal ratio of employees and outside contractors.

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.

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. The question is: what would you like to be, a dog or a wolf? The original Aramaic version had a wild ass, instead of a wolf, showing off his freedom. But the wild ass ends up eaten by the lion. Freedom entails risks—real skin in the game. Freedom is never free. Whatever you do, just don’t be a dog claiming to be a wolf.

Another aspect of the dog vs. wolf dilemma: the feeling of false stability. A dog’s life may appear smooth and secure, but in the absence of an owner, a dog does not survive. Most people prefer to adopt puppies, not grown-up dogs; in many countries, unwanted dogs are euthanized. A wolf is trained to survive. Employees abandoned by their employers, cannot bounce back.

There is a category of employees who aren’t slaves, but these represent a very small proportion of the pool. You can identify them as follows: they don’t give a f*** about their reputation, at least not their corporate reputation.

Risk takers can be socially unpredictable people. 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. Note the linguistic dimension—and why, in addition to sartorial considerations, traders needed to be kept away from the rest of nonfree, non-risk-taking people. In my day, nobody cursed in public except for gang members and those who wanted to signal that they were not slaves: traders cursed like sailors, and I have kept the habit of strategic foul language, used only outside of my writings and family life. Those who use foul language on social networks (such as Twitter) are sending an expensive signal that they are free—and, ironically, competent. You don’t signal competence if you don’t take risks for it—there are few such low-risk strategies. So cursing today is a status symbol, just as oligarchs in Moscow wear blue jeans at special events to signal their power.

What matters isn’t what a person has or doesn’t have; it is what he or she is afraid of losing.

The exact obverse of the public-hotshot as slave is the autocrat. As I am writing these lines, we are witnessing a nascent confrontation between several parties, which includes the current “heads” of state of members of the North Atlantic Treaty Organization (modern states don’t quite have heads, just people who talk big) and the Russian Vladimir Putin. Clearly, except for Putin, all the others need to be elected, can come under fire by their party, and have to calibrate every single statement with how it could be misinterpreted the least by the press. On the other hand, Putin has the equivalent of f***you money, projecting a visible “I don’t care,” which in turn brings him more followers and more support. In such a confrontation Putin looks and acts as a free citizen confronting slaves who need committees, approval, and who of course feel like they have to fit their decisions to an immediate rating. Putin’s attitude mesmerizes his followers...

It is much easier to do business with the owner of the business than some employee who is likely to lose his job next year; likewise it is easier to trust the word of an autocrat than a fragile elected official. Watching Putin made me realize that domesticated (and sterilized) animals don’t stand a chance against a wild predator. Not a single one. Fughedabout military capabilities: it is the trigger that counts.

People whose survival depends on qualitative “job assessments” by someone of higher rank in an organization cannot be trusted for critical decisions.

Society likes saints and moral heroes to be celibate so they do not have family pressures that may force them into the dilemma of needing to compromise their sense of ethics to feed their children. The entire human race, something rather abstract, becomes their family.

The vulnerability of heads of households has been remarkably exploited in history. The samurai had to leave their families in Edo as hostages, thus guaranteeing to the authorities that they would not take positions against the rulers. The Romans and Huns partook of the practice of exchanging permanent “visitors,” the children of rulers on both sides, who grew up at the courts of the foreign nation in a form of gilded captivity.

It is no secret that large corporations prefer people with families; those with downside risk are easier to own, particularly when they are choking under a large mortgage.

To make ethical choices you cannot have dilemmas between the particular (friends, family) and the general.

Financial independence is another way to solve ethical dilemmas, but such independence is hard to ascertain.

Far-fetched comparisons are more likely to discredit the commentator than the commentated.

People who collect honorary doctorates are typically hierarchy-conscious, and I abide by Cato’s injunction: he preferred to be asked why he didn’t have a statue rather than why he had one.

Animals know where weakness lies. By the minority rule, all it takes is a very small number of detractors using misplaced buzzwords of the type that makes people cringe (such as “racist”) to scare an entire institution. Institutions are employees—vulnerable, reputation-conscious employees.

To be free of conflict you need to have no friends.

Deuteronomy makes a separation: “Fathers shall not be put to death because of their children, nor shall children be put to death because of their fathers. Each one shall be put to death for his own sin.” Even today the question isn’t fully settled, nor is the answer clear-cut. You are not responsible for the debts of your parents, but German taxpayers are still responsible for war reparations for crimes committed by their grandparents and great-grandparents.

However, the answer is clear in the case of terrorism. The rule should be: You kill my family with supposed impunity; I will make yours pay some indirect price for it. Indirect responsibility isn’t part of the standard crime-and-punishment methodology of a civilized society, but confronting terrorists (who threaten innocents) isn’t standard either. For we have rarely in history faced a situation in which the perpetrator of a crime has a completely asymmetric payoff and upside from death itself. [...] The unusual nuisance with jihadi terrorism is that we are totally defenseless in front of a deluded person willing to kill scores of innocents without any true downside, that is, no skin in the game. [...] The only way we have left to control suicide-terrorists would be precisely to convince them that blowing themselves up is not the worst-case scenario for them, nor the end scenario at all. Making their families and loved ones bear a financial burden—just as Germans still pay for war crimes—would immediately add consequences to their actions. The penalty needs to be properly calibrated to be a true disincentive, without imparting any sense of heroism or martyrdom to the families in question.

If you do not undertake a risk of real harm, reparable or even potentially irreparable, from an adventure, it is not an adventure.

I have a tendency to watch television with the sound off. When I saw Donald Trump in the Republican primary standing next to other candidates, I became certain he was going to win that stage of the process, no matter what he said or did. Actually, it was because he had visible deficiencies. Why? Because he was real, and the public—composed of people who usually take risks, not the lifeless non-risk-taking analysts we will present in the next chapter—would vote anytime for someone who actually bled after putting an icepick in his hand rather than someone who did not. Arguments that Trump was a failed entrepreneur, even if true, actually prop up this argument: you’d even rather have a failed real person than a successful one, as blemishes, scars, and character flaws increase the distance between a human and a ghost.

Scars signal skin in the game.

The insidious disease of modern times: back-office people (that is, support staff) acting as front-office ones (business generators).

What we saw worldwide from 2014 to 2018, from India to the U.K. to the U.S., was a rebellion against the inner circle of no-skin-in-the-game policymaking “clerks” and journalists-insiders, that class of paternalistic semi-intellectual experts with some Ivy League, Oxford-Cambridge or similar label-driven education who are telling the rest of us 1) what to do, 2) what to eat, 3) how to speak, 4) how to think, and … 5) whom to vote for. [...] Their main skill is a capacity to pass exams written by people like them, or to write papers read by people like them. Some of us—not Fat Tony—have been blind to their serial incompetence. With psychology studies replicating less than 40 percent of the time, dietary advice reversing after thirty years of dietary fat phobia, macroeconomics and financial economics (while trapped in an intricate Gargantuan patch of words) scientifically worse than astrology (this is what the reader of the Incerto has known since Fooled by Randomness), the reappointment of Bernanke (in 2010) who was less than clueless about financial risk as the Federal Reserve boss, and pharmaceutical trials replicating at best only a third of the time, people are perfectly entitled to rely on their own ancestral instincts and to listen to their grandmothers.

The Intellectual Yet Idiot (IYI) is a product of modernity.

The IYI pathologizes others for doing things he doesn’t understand without ever realizing it is his understanding that may be limited. He thinks people should act according to their best interests and he knows their interests, particularly if they are “rednecks” or from the English non-crisp-vowel class who voted for Brexit. When plebeians do something that makes sense to themselves, but not to him, the IYI uses the term “uneducated.” What we generally call participation in the political process, he calls by two distinct designations: “democracy” when it fits the IYI, and “populism” when plebeians dare to vote in a way that contradicts IYI preferences. While rich people believe in one tax dollar one vote, more humanistic ones in one man one vote, Monsanto in one lobbyist one vote, the IYI believes in one Ivy League degree one vote, with some equivalence for foreign elite schools and PhDs, as these are needed in the club. [...] 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. [...] The modern IYI has attended more than one TED talk in person or watched more than two TED talks on YouTube. Not only did he vote for Hillary Monsanto-Malmaison because she seemed electable or some such circular reasoning, but he holds that anyone who didn’t do so is mentally ill. [...] The IYI likes to use buzzwords from philosophy of science when discussing unrelated phenomena; he goes two or three levels too theoretical for a given problem.

There is inequality and inequality. The first is the inequality people tolerate, such as one’s understanding compared to that of people deemed heroes, say, Einstein, Michelangelo, or the recluse mathematician Grisha Perelman, in comparison to whom one has no difficulty acknowledging a large surplus. This applies to entrepreneurs, artists, soldiers, heroes, the singer Bob Dylan, Socrates, the current local celebrity chef, some Roman Emperor of good repute, say, Marcus Aurelius; in short, those for whom one can naturally be a “fan.” You may like to imitate them, you may aspire to be like them, but you don’t resent them. The second is the inequality people find intolerable because the subject appears to be just a person like you, except that he has been playing the system, and getting himself into rent-seeking, acquiring privileges that are not warranted—and although he has something you would not mind having (which may include his Russian girlfriend), you cannot possibly become a fan. The latter category includes bankers, bureaucrats who get rich, former senators shilling for the evil firm Monsanto, clean-shaven chief executives who wear ties, and talking heads on television making outsized bonuses. You don’t just envy them; you take umbrage at their fame, and the sight of their expensive or even semi-expensive car triggers some feeling of bitterness. They make you feel smaller. There may be something dissonant in the spectacle of a rich slave.

Systematic interview of blue-collar Americans and found a resentment of high-paid professionals but, unexpectedly, not of the rich. It is safe to say that public despises people who make a lot of money on a salary, or, rather, salarymen who make a lot of money. This is indeed generalized to other countries: a few years ago the Swiss, of all people, ran a referendum for a law capping salaries of managers to a set multiple of the lowest wage. The law didn’t pass, but the fact that they thought in these terms is rather significant. For the same Swiss hold rich entrepreneurs, and people who have derived their celebrity by other means, in some respect.

What people resent—or should resent—is the person at the top who has no skin in the game, that is, because he doesn’t bear his allotted risk, he is immune to the possibility of falling from his pedestal, exiting his income or wealth bracket, and waiting in line outside the soup kitchen.

There is something respectable in losing a billion dollars, provided it is your own money. In addition, someone without skin in the game—say, a corporate executive with upside and no financial downside (the type to speak clearly in meetings)—is paid according to some metrics that do not necessarily reflect the health of his company; these he can manipulate, hide risks, get the bonus, then retire (or go do the same thing at another company) and blame his successor for subsequent results.

Consider that about 10 percent of Americans will spend at least a year in the top 1 percent, and more than half of all Americans will spent a year in the top 10 percent. This is visibly not the same for the more static—but nominally more equal—Europe. For instance, only 10 percent of the wealthiest five hundred American people or dynasties were so thirty years ago; more than 60 percent on the French list are heirs and a third of the richest Europeans were the richest centuries ago.

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.

Piketty’s theory about the increase in the return of capital in relation to labor is patently wrong, as anyone who has witnessed the rise of what is called the “knowledge economy” (or anyone who has had investments in general) knows. Clearly, when you say that inequality changes from year one to year two, you need to show that those who are at the top are the same people—something Piketty doesn’t do.

Now consider that the likes of Krugman and Piketty have no downside in their existence—lowering inequality brings them up in the ladder of life. Unless the university system or the French state goes bust, they will continue receiving their paychecks. The fellow you just saw in the steak restaurant dripping with gold chains is exposed to the risk of the soup kitchen, not them. Just as those who live by the sword die by the sword, those who earn their living taking risks will lose their livelihood taking risks.

Envy does not originate with the impoverished, concerned with the betterment of their condition, but with the clerical class. Simply, it looks like it was the university professors (who have “arrived”) and people who have permanent stability of income, in the form of tenure, governmental or academic, who bought heavily into Piketty’s argument. From conversations, I became convinced that people who counterfactual upwards (i.e., compare themselves to those richer) want to actively dispossess the rich. As with all communist movements, it is often the bourgeois or clerical classes who are the early adopters of revolutionary theories. So class envy doesn’t originate from a truck driver in South Alabama, but from a New York or Washington, D.C., Ivy League–educated IYI (say Paul Krugman or Joseph Stiglitz) with a sense of entitlement, upset some “less smart” persons are much richer. Aristotle, in his Rhetoric, postulated that envy is something you are more likely to encounter in your own kin: lower classes are more likely to experience envy toward their cousins or the middle class than toward the very rich. And the expression Nobody is a prophet in his own land, making envy a geographical thing (mistakenly thought to originate with Jesus), originates from that passage in the Rhetoric.

Jealousy is to be found within the same art, talent, and condition. So I doubt Piketty bothered to ask blue-collar Frenchmen what they want. I am certain that they would ask for better beer, a new dishwasher, or faster trains for their commute, not to bring down some rich businessman invisible to them. But, again, people can frame questions and portray enrichment as theft, as was done before the French Revolution, in which case the blue-collar class would ask, once again, for heads to roll.

[People compete for status. Status is a zero-sum game; if you want to move up, somebody has to move down. There are two ways to move up; either become better (the hard way as it requires hard work) or displace someone higher above (without any evidence of wrongdoing - usually a backstabbing manoeuvre). In my opinion, most people chose the second way. Why? Because it requires far less work on their part.]

It seems to me that people flood their stories with numbers and graphs in the absence of solid or logical arguments. [...] So I’ve discovered, with experience, that when you buy a thick book with tons of graphs and tables used to prove a point, you should be suspicious. It means something didn’t distill right! But for the general public and those untrained in statistics, such tables appear convincing—another way to substitute the true with the complicated.

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

I had a rough time explaining that having rich people in a public office is very different from having public people become rich—again, it is the dynamics, the sequence, that matters. Rich people in public office have shown some evidence of lack of total incompetence—success may come from randomness, of course, but we at least have a hint of some skill in the real world, some evidence that the person has dealt with reality.

Being fragile, it necessarily has a nonlinear reaction to stressors: up until its breaking point, shocks of larger intensity affect it disproportionally more than smaller ones.

Things that have survived are hinting to us ex post that they have some robustness—conditional on their being exposed to harm. For without skin in the game, via exposure to reality, the mechanism of fragility is disrupted: things may survive for no reason for a while, at some scale, then ultimately collapse, causing a lot of collateral harm.

Peers devolve honors, memberships in academies, Nobels, invitations to Davos and similar venues, tea (and cucumber sandwiches) with the Queen, requests by rich name-droppers to attend cocktail parties where you see only people who are famous. Believe me, there are rich people whose lives revolve around these things. They usually claim to be trying to save the world, the bears, the children, the mountains, the deserts—all the ingredients of the broadcasting of virtue.

Knowing “economics” doesn’t mean knowing anything about economics in the sense of the real activity, but rather the theories, most of which are bull***t, produced by economists.

One should give more weight to research that, while being rigorous, contradicts other peers, particularly if it entails costs and reputational harm for its author. Further, Someone with a high public presence who is controversial and takes risks for his opinion is less likely to be a bull***t vendor.

Academics divide research into theoretical and empirical areas. Empiricism consists in looking at data on a computer in search for what they call “statistically significant,” or doing experiments in the laboratory under some purposefully narrow conditions. Doing things in the real world, in some professions (such as medicine), bears the name clinical, which is not deemed to be scientific. Many disciplines lack this third dimension, the clinical one. For in fact, by the Lindy effect, robustness to time, that is, doing things under risk-taking conditions, is checked by survival. Things work 1) if those who have been doing the doing took some type of risk, and 2) their work manages to cross generations.

Let us now close by sampling a few ideas that exist in both ancient lore and are sort of reconfirmed by modern psychology:

• Cognitive dissonance (a psychological theory by Leon Festinger about sour grapes, by which people, in order to avoid inconsistent beliefs, rationalize that, say, the grapes they can’t reach got to be sour).
• Negative advice (via negativa): We know the wrong better than what’s right; recall the superiority of the Silver over the Golden Rule. The good is not as good as the absence of bad, Ennius, repeated by Cicero.
• Skin in the game (literally): We start with the Yiddish proverb: You can’t chew with somebody else’s teeth.
• Time discounting: “A bird in the hand is better than ten on the tree.” (Levantine proverb)
• Madness of crowds: Nietzsche: Madness is rare in individuals, but in groups, parties, nations, it is the rule.
• Less is more: Truth is lost with too much altercation.
• Overconfidence: “I lost money because of my excessive confidence,”
• The Paradox of progress, and the paradox of choice: There is a familiar story of a New York banker vacationing in Greece, who, from talking to a fisherman and scrutinizing the fisherman’s business, comes up with a scheme to help the fisherman make it a big business. The fisherman asked him what the benefits were; the banker answered that he could make a pile of money in New York and come back to vacation in Greece; something that seemed ludicrous to the fisherman, who was already there doing the kind of things bankers do when they go on vacation in Greece.

Say you had the choice between two surgeons of similar rank in the same department in some hospital. The first is highly refined in appearance. The second one looks like a butcher; he is overweight, with large hands, uncouth speech, and an unkempt appearance. Now if I had to pick, I would overcome my sucker-proneness and take the butcher any minute. Even more: I would seek the butcher as a third option if my choice was between two doctors who looked like doctors. Why? Simply the one who doesn’t look the part, conditional on having made a (sort of) successful career in his profession, had to have much to overcome in terms of perception. And if we are lucky enough to have people who do not look the part, it is thanks to the presence of some skin in the game, the contact with reality that filters out incompetence, as reality is blind to looks. When results come from dealing directly with reality rather than through the agency of commentators, image matters less, even if it correlates to skills. But image matters quite a bit when there is hierarchy and standardized “job evaluation.” Consider the chief executive officers of corporations: they don’t just look the part, they even look the same. And, worse, when you listen to them talk, they sound the same, down to the same vocabulary and metaphors. But that’s their job: as I will keep reminding the reader, counter to the common belief, executives are different from entrepreneurs and are supposed to look like actors. Now there may be some correlation between looks and skills (someone who looks athletic is likely to be athletic), but, conditional on having had some success in spite of not looking the part, it is potent, even crucial, information.

By the same reasoning, and flipping the arguments, skilled thieves at large should not look like thieves. Those who do are more likely to be in jail.

Don’t think that beautiful apples taste better, goes the Latin saying.

Likewise, the illusion prevails that businesses work via business plans and science via funding. This is strictly not true: a business plan is a useful narrative for those who want to convince a sucker. It works because, as I said in Prologue 2, firms in the entrepreneurship business make most of their money packaging companies and selling them; it is not easy to sell without some strong narrative. But for a real business (as opposed to a fund-raising scheme), something that should survive on its own, business plans and funding work backward. At the time of writing, most big recent successes (Microsoft, Apple, Facebook, Google) were started by people with skin and soul in the game and grew organically—if they had recourse to funding, it was to expand or allow the managers to cash out; funding was not the prime source of creation. You don’t create a firm by creating a firm; nor do you do science by doing science.

Never hire an academic unless his function is to partake of the rituals of writing papers or taking exams.

Just as the slick fellow in a Ferrari looks richer than the rumpled centimillionaire, scientism looks more scientific than real science. True intellect should not appear to be intellectual.

Never pay for complexity of presentation when all you need is results.

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.

Now, indeed, we know by instinct that brain surgery is not more “scientific” than aspirin, any more than flying the forty or so miles between JFK and Newark airports represent “efficiency,” although there is more technology involved. But we don’t easily translate this to other domains and remain victims of scientism, which is to science what a Ponzi scheme is to investment, or what advertisement or propaganda are to genuine scientific communication. You magnify the cosmetic attributes.

Religious “beliefs” are simply mental heuristics that solve a collection of problems—without the agent really knowing how.

People who are bred, selected, and compensated to find complicated solutions do not have an incentive to implement simplified ones.

But we have evidence that collectively society doesn’t advance with organized education, rather the reverse: the level of (formal) education in a country is the result of wealth.

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. You can tell if a discipline is BS if the degree depends severely on the prestige of the school granting it. I remember when I applied to MBA programs being told that anything outside the top ten or twenty would be a waste of time. On the other hand a degree in mathematics is much less dependent on the school (conditional on being above a certain level, so the heuristic would apply to the difference between top ten and top two thousand schools). The same applies to research papers. In math and physics, a result posted on the repository site arXiv (with a minimum hurdle) is fine. In low-quality fields like academic finance (where papers are usually some form of complicated storytelling), the “prestige” of the journal is the sole criterion.

REAL GYMS DON’T LOOK LIKE GYMS

People are impressed with expensive equipment—fancy, complicated, multicolored—meant to look as if it belonged on a spaceship. Things appear maximally sophisticated and scientific—but remember that what looks scientific is usually scientism, not science. As with label universities, you pay quite a bit of money to join, largely for the benefit of the real estate developer. Yet people into strength training (those who are actually strong across many facets of real life) know that users of these machines gain no strength beyond an initial phase. By having recourse to complicated equipment that typically targets very few muscles, regular users will eventually be pear-shaping and growing weaker over time, with skills that do not transfer outside of the very machine that they trained on. The equipment may have some use in a hospital or a rehabilitation program, but that’s about it. On the other hand, the simpler barbell (a metal bar with two weights on both ends) is the only standard piece of equipment that gets you to recruit your entire body for exercises—and it is the simplest and cheapest to get. All you need to learn are the safety skills to move off the floor at your maximum while avoiding injury. Lindy again: weight lifters have known the phenomenology for at least two and a half millennia. And if gyms should not look like gyms, exercise should not look like exercise. Most gains in physical strength come from working the tails of the distribution, close to your limit.

I left the place starving. Now, if I had a choice, I would have had some time-tested recipe (say a pizza with very fresh ingredients, or a juicy hamburger) in a lively place—for a twentieth of the price. But because the dinner partner could afford the expensive restaurant, we ended up the victims of some complicated experiments by a chef judged by some Michelin bureaucrat.

Thieves do not enter impecunious homes, and one is more likely to be drinking poison in a golden cup than an ordinary one. Poison is drunk in golden cups (Venenum in auro bibitur). It is easy to scam people by getting them into complications—the poor are spared that type of scamming. That makes academics sell the most possibly complicated solution when a simple one can do. Further, the rich start using “experts” and “consultants.” An entire industry meant to swindle you will swindle you: financial consultants, diet advisors, exercise experts, lifestyle engineers, sleeping councilors, breathing specialists, etc. Hamburgers, to many of us, are vastly tastier than filet mignon because of the higher fat content, but people have been convinced that the latter is better because it is more expensive to produce.

Same with real estate: most people, I am convinced, are happier in close quarters, in a real barrio-style neighborhood, where they can feel human warmth and company. But when they have big bucks they end up pressured to move into outsized, impersonal, and silent mansions, far away from neighbors. On late afternoons, the silence of these large galleries has a funereal feel to it, but without the soothing music.

If wealth is giving you fewer options instead of more (and more varied) options, you’re doing it wrong.

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.

In 1118, Ahmad Sanjar became the sultan of the Seljuk Turkish Empire of Asia minor (that is, modern-day Turkey), Iran, and parts of Afghanistan. Soon after his accession, he woke up one day with a dagger next to his bed, firmly planted in the ground. [...] They convinced him that his life was in their hands and that, crucially, he didn’t have to worry if he did the right thing. Indeed Sanjar and the Assassins had a happy life together ever after. You will note that no explicit verbal threat was issued. Verbal threats reveal nothing beyond weakness and unreliability. Remember, once again, no verbal threats.

Thanks to the camera, you no longer need to put horses’ heads in boutique hotels or villas in the Hamptons to own people. You may no longer even need to assassinate anyone. [...] I discovered the magic of the camera in reestablishing civil/ethical behavior as follows. [...] I pulled my cell out and took his picture while calmly calling him a “mean idiot, abusive to lost persons.” He freaked out and ran away from me, hiding his face in his hands to prevent further photographs.

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.

You can’t fool people more than twice.

You never cure structural defects; the system corrects itself by collapsing. [So true - business!]

You can criticize either what a person said or what a person meant. The former is more sensational, hence lends itself more readily to dissemination. The mark of a charlatan—say the writer and pseudo-rationalist Sam Harris—is to defend his position or attack a critic by focusing on some of specific statement (“look at what he said”) rather than blasting his exact position (“look at what he means” or, more broadly, “look at what he stands for”)—for the latter requires an extensive grasp of the proposed idea.

Lycurgus, the Spartan lawmaker, responded to a suggestion to allow democracy there, saying “begin with your own family.”

It is immoral to be in opposition to the market system and not live (somewhere in Vermont or Northwestern Afghanistan) in a hut or cave isolated from it. But there is worse: It is much more immoral to claim virtue without fully living with its direct consequences.

If your private life conflicts with your intellectual opinion, it cancels your intellectual ideas, not your private life.

[To be or to seem?] Matthew 6:1–4: Be careful not to practice your righteousness in front of others to be seen by them. If you do, you will have no reward from your Father in heaven. So when you give to the needy, do not announce it with trumpets, as the hypocrites do in the synagogues and on the streets, to be honored by others.

So these global causes—poverty (particularly children’s), the environment, justice for some minority trampled upon by colonial powers, or some as-yet-unknown gender that will be persecuted—are now the last refuge of the scoundrel advertising virtue. Virtue is not something you advertise. It is not an investment strategy. It is not a cost-cutting scheme. It is not a bookselling (or, worse, concert-ticket-selling) strategy.

Courage is the only virtue you cannot fake. If I were to describe the perfect virtuous act, it would be to take an uncomfortable position, one penalized by the common discourse.

Sticking up for truth when it is unpopular is far more of a virtue, because it costs you something—your reputation. If you are a journalist and act in a way that risks ostracism, you are virtuous. Some people only express their opinions as part of mob shaming, when it is safe to do so, and, in the bargain, think that they are displaying virtue. This is not virtue but vice, a mixture of bullying and cowardice.

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.

Courage (risk taking) is the highest virtue. We need entrepreneurs.

No peace proceeds from bureaucratic ink. If you want peace, make people trade, as they have done for millennia. They will be eventually forced to work something out.

There are very, very few predators compared to what one can call collaborative animals. The camp in the wild reserve was next to a watering hole, and in the afternoon it got crowded with hundreds of animals of different species who apparently got along rather well with one another. But of the thousands of animals that I spotted cumulatively, the image of the lion in a state of majestic calm dominates my memory. It may make sense from a risk-management point of view to overestimate the role of the lion—but not in our interpretation of world affairs. If the “law of the jungle” means anything, it means collaboration for the most part, with a few perceptional distortions caused by our otherwise well-functioning risk-management intuitions. Even predators end up in some type of arrangement with their prey.

History is largely peace punctuated by wars, rather than wars punctuated by peace. The problem is that we humans are prone to the availability heuristic, by which the salient is mistaken for the statistical, and the conspicuous and emotional effect of an event makes us think it is occurring more regularly than in reality. This helps us to be prudent and careful in daily life, forcing us to add an extra layer of protection, but it does not help with scholarship. For when you read histories of international affairs, you might fall under the illusion that history is mostly wars, that states like to fight as a default condition, whenever they have the chance, and that the only coordination between entities takes place when two countries have a “strategic” alliance against a common danger. Or some unification under a top-down bureaucratic structure. Recent peace among European states is attributed to the rule of verbose bureaucrats devoid of “toxic masculinity” (the most recent pathologification in universities), rather than American and Soviet occupation. We are fed a steady diet of histories of wars, fewer histories of peace. As a trader, I was trained to look for the first question people forget to ask: who wrote these books? Well, historians, international affairs scholars, and policy experts did. Can these people be fooled? Let’s be polite and say that they are in the majority no rocket scientists, and operate under a structural bias. It looks like, in spite of quite a bit of lip service and introspection, an empirically rigorous approach in history and international relations is rare. First, there are problems of “overfitting,” overnarrating, extracting too much via positiva and not enough via negativa from past data. Even in the empirical sciences, positive results (“this works”) tends to get more press than negative ones (“this doesn’t work”) so it should be no surprise that historians and international relations scholars fall squarely into the same trap. Second, these scholars, as non–rocket scientists, fail to get a central mathematical property, confusing intensity with frequency.

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.

I have myself lived through the worst part of the civil war in Lebanon. Except for areas near the Green Line, it didn’t feel like war. But those reading about it in history books will not understand my experience.

The strength of a creed did not rest on “evidence” of the powers of its gods, but evidence of the skin in the game on the part of its worshippers.

After Pope John Paul II was shot in 1981, he was rushed to the emergency room of the Agostino Gemelli University Polyclinic, where he met a collection of some of the most skilled doctors—modern doctors—Italy could produce. At no point during the emergency period did the drivers of the ambulance consider taking John Paul the Second to a chapel for a prayer, or some equivalent form of intercession with the Lord, to give the sacred first right of refusal for the treatment. And not one of his successors seemed to have considered giving precedence to dealing with the Lord with the hope of some miraculous intervention in place of the trappings of modern medicine. But it remains that nobody in the Vatican seems to ever take chances by going first to the Lord, subsequently to the doctor, and, what is even more surprising, nobody seems to see a conflict with such inversion of the logical sequence. In fact the opposite course of action would have been considered madness. It would be in opposition to the tenets of the Catholic church, as it would be considered voluntary death, which is banned. Clearly, there are a lot of differences between the Most Holy Father and an atheist of equivalent rank, but these concern matters that are not life-threatening.

Most Christians, when it comes to central medical, ethical, and decision-making situations (like myself, an Orthodox Christian) do not act any differently than atheists. Those who do (such as Christian scientists) are few. Most Christians have accepted the modern trappings of democracy, oligarchy, or military dictatorship, all these heathen political regimes, rather than seeking theocracies. Their decisions on central matters are indistinguishable from those of an atheist.

Rationality resides in what you do, not in what you think or in what you “believe” (skin in the game).

The purpose of your eyes is to orient you in the best possible way, and get you out of trouble when needed, or help you find prey at a distance. Your eyes are not sensors designed to capture the electromagnetic spectrum. Their job description is not to produce the most accurate scientific representation of reality; rather the most useful one for survival.

Ergodicity: Survival comes first, truth, understanding, and science later. In other words, you do not need science to survive (we’ve survived for several hundred million years or more, depending on how you define the “we”), but you must survive to do science. As your grandmother would have said, better safe than sorry. Or as per the expression attributed to Hobbes: Primum vivere, deinde philosophari (First, live; then philosophize).

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.

making some types of errors is the most rational thing to do, when the errors are of little cost, as they lead to discoveries. For instance, most medical “discoveries” are accidental to something else. An error-free world would have no penicillin, no chemotherapy … almost no drugs, and most probably no humans. This is why I have been against the state dictating to us what we “should” be doing: only evolution knows if the “wrong” thing is really wrong, provided there is skin in the game to allow for selection.

Skin in the game means that you do not pay attention to what people say, only to what they do, and to how much of their necks they are putting on the line. Let survival work its wonders.

Never discount anything that allows you to survive.

Science is currently too incomplete to provide all answers—and says it itself. We have been so much under assault by vendors using “science” to sell products that many people, in their mind, confuse science and scientism. Science is mainly rigor in the process.

Collective rationality might require some individual biases.

How much you truly “believe” in something can be manifested only through what you are willing to risk for it. [Great BS detector; when somebody makes a prediction simply tell him: "You wanna bet?"]

“Rationality” was forged during the post-enlightenment period, at a time when we thought that understanding the world was around the corner. It assumes absence of randomness, or a simplified random structure of our world. Also, of course, no interactions with the world. 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. [Therefore, risk aversion is not a bias; we cannot afford being killed by one loss. A gain has to be disproportional when we're risking our survival!]

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

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.”

It looks like you need a lot of intelligence to figure probabilistic things out when you don’t have skin in the game. But for an overeducated nonpractitioner, these things are hard to figure out. Unless one is a genius, that is, has the clarity of mind to see through the mud, or has a sufficiently profound command of probability theory to cut through the nonsense. Now, certifiably, Murray Gell-Mann is a genius (and, likely, Peters). Gell-Mann discovered the subatomic particles he himself called quarks (which got him the Nobel). Peters said that when he presented the idea to Gell-Mann, “he got it instantly.” Claude Shannon, Ed Thorp, J. L. Kelly, and Harald Cramér are, no doubt, geniuses—I can personally vouch for Thorp, who has an unmistakable clarity of mind combined with a depth of thinking that juts out in conversation. These people could get it without skin in the game. But economists, psychologists, and decision theorists have no geniuses among them (unless one counts the polymath Herb Simon, who did some psychology on the side), and odds are they never will. Adding people without fundamental insights does not sum up to insight.

[ERGODICITY explained] 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.

Smoking a single cigarette is extremely benign, so a cost-benefit analysis would deem it irrational to give up so much pleasure for so little risk! But it is the act of smoking that kills, at a certain number of packs per year, or tens of thousand of cigarettes—in other words, repeated serial exposure.

But things are even worse: in real life, every single bit of risk you take adds up to reduce your life expectancy. If you climb mountains and ride a motorcycle and hang around the mob and fly your own small plane and drink absinthe, and smoke cigarettes, and play parkour on Thursday night, your life expectancy is considerably reduced, although no single action will have a meaningful effect.

Further, there is a twist. If medicine is progressively improving your life expectancy, you need to be even more paranoid. Think dynamically. 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. Confusion arises because it may seem that if the “one-off” risk is reasonable, then an additional one is also reasonable. This can be quantified by recognizing that the probability of ruin approaches 1 as the number of exposures to individually small risks, say one in ten thousand, increases.

The flaw in psychology papers is to believe that the subject doesn’t take any other tail risks anywhere outside the experiment and, crucially, will never again take any risk at all. The idea in social science of “loss aversion” has not been thought through properly—it is not measurable the way it has been measured (if it is at all measurable). Say you ask a subject how much he would pay to insure a 1 percent probability of losing $100. You are trying to figure out how much he is “overpaying” for “risk aversion” or something even more foolish, “loss aversion.” But you cannot possibly ignore all the other financial risks he is taking: if he has a car parked outside that can be scratched, if he has a financial portfolio that can lose money, if he has a bakery that may risk a fine, if he has a child in college who may cost unexpectedly more, if he can be laid off, if he may be unexpectedly ill in the future. All these risks add up, and the attitude of the subject reflects them all. Ruin is indivisible and invariant to the source of randomness that may cause it.

The Thorp, Kelly, and Shannon school of information theory requires that, for an investment strategy to be ergodic and eventually capture the return of the market, agents increase their risks as they are winning, but contract after losses, a technique called “playing with the house money.” In practice, it is done by threshold, for ease of execution, not complicated rules: you start betting aggressively whenever you have a profit, never when you have a deficit, as if a switch was turned on or off. This method is practiced by probably every single trader who has survived. Now it happens that this dynamic strategy is deemed out of line by behavioral finance econophasters such as the scarily interventionist Richard Thaler, who, very ignorant of probability, calls this “mental accounting” a mistake (and, of course, invites government to “nudge” us away from it, and prevent strategies from being ergodic). I believe that risk aversion does not exist: what we observe is, simply, a residual of ergodicity. People are, simply, trying to avoid financial suicide and take a certain attitude to tail risks.

Let us return to the notion of “tribe.” One of the defects modern education and thinking introduces is the illusion that each one of us is a single unit. In fact, I’ve sampled ninety people in seminars and asked them: “what’s the worst thing that can happen to you?” Eighty-eight people answered “my death.” This can only be the worst-case situation for a psychopath. For after that, I asked those who deemed that their worst-case outcome was their own death: “Is your death plus that of your children, nephews, cousins, cat, dogs, parakeet and hamster worse than just your death?"

Unless you are perfectly narcissistic and psychopathic—even then—your worst-case scenario is never limited to the loss of only your life.

Thus, we see the point that individual ruin is not as big a deal as collective ruin. And of course ecocide, the irreversible destruction of our environment, is the big one to worry about.

Taking personal risks to save the collective are “courage” and “prudence” since you are lowering risks for the collective. ->I have a finite shelf life, humanity should have an infinite duration.

The fragility of the system’s components (provided they are renewable and replaceable) is required to ensure the solidity of the system as a whole. If humans were immortals, they would go extinct from an accident, or from a gradual buildup of misfitness. But shorter shelf life for humans allows genetic changes across generations to be in sync with the variability of the environment.

I can exercise courage to save a collection of kids from drowning, at the risk of my own life, and it would also correspond to a form of prudence. Were I to die, I would be sacrificing a lower layer for the sake of a higher one.

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.

“The difference between successful people and really successful people is that really successful people say no to almost everything,”

For all it takes is for my paranoia to be right once, and it saves my life.

Small injuries will be beneficial, never larger ones, those that have irreversible effects.

Risk and ruin are different tings.

All risks are not equal. We often hear that “Ebola is causing fewer deaths than people drowning in their bathtubs,” or something of the sort, based on “evidence.” This is another class of problems that your grandmother can get, but the semi-educated cannot. Never compare a multiplicative, systemic, and fat-tailed risk to a non-multiplicative, idiosyncratic, and thin-tailed one. Recall that I worry about the correlation between the death of one person and that of another. So we need to be concerned with systemic effects: things that can affect more than one person should they happen.

There are two categories in which random events fall: Mediocristan and Extremistan. Mediocristan is thin-tailed and affects the individual without correlation to the collective. Extremistan, by definition, affects many people. Hence Extremistan has a systemic effect that Mediocristan doesn’t. Multiplicative risks—such as epidemics—are always from Extremistan. They may not be lethal (say, the flu), but they remain from Extremistan.

The Chernoff bound can be explained as follows. The probability that the number of people who drown in their bathtubs in the United States doubles next year—assuming no changes in population or bathtubs—is one per several trillions lifetimes of the universe. This cannot be said about the doubling of the number of people killed by terrorism over the same period.

One may be risk loving yet completely averse to ruin.

In a strategy that entails ruin, benefits never offset risks of ruin.

Rationality is avoidance of systemic ruin.

So let me finish this book with a (long) maxim, via negativa style:

• 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.