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Love It Or Hate It, But You Can’t Ignore It

The book is hyper-organised at one level but it is hard to discern any organisation in terms of flow of thought or argument

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If you are familiar with Nassim Nicholas Taleb’s books such as Fooled by Randomness (2007), Black Swan (2008), Antifragile (2013), etc., you already know what I mean by the title of the review. Without a doubt, Taleb is a successful trader, an intellectual (even if he hates being called so) and a practitioner with a deep understanding of risk and  decision making under uncertainty. His books are always interesting and insightful but are also opinionated, controversial, sensationalist, angry and introduce unnecessary new jargon.

In Skin in the Game, Taleb focuses on asymmetries of risk and reward in our daily lives. For example, think of all the people who benefit by giving you advice or selling you a product but experience no downside if the advice or product does you harm. Wherever there is such asymmetry, people will benefit by transferring their risks (to you) while benefiting from the rewards of your risk taking.

 In economics, there is no theoretical solution for the principal-agent problem (or aligning incentives perfectly between all parties in a transaction) – the best way to solve an agency problem is to have repeated games/transactions between the parties so that they have an incentive to share risks and rewards more fairly. (As in the adage: fool me once, shame on you. Fool me twice, shame on me.)

Taleb shares several intriguing examples of hidden asymmetries in situations and the bad consequences thereof. He is obsessed with what he calls “the Bob Rubin” trade, referring to Robert Rubin who, as Chairman of Citigroup, collected more than $120 million in pay while “exposing Citi to Black Swan risks”. As Citi almost went under in 2009 and took a government bailout, taxpayer money was used to prop up Citi. No money was clawed back from Rubin. Almost no reckless executive who contributed to the economic/banking crisis of 2008 went to jail; and the consequences were borne by the average “Spanish grammar instructor”.

Taleb’s other fascination is with Mesopotamian/Greco-Roman history and specifically the Code of Hammurabi, something he brings up repeatedly in his books. His solution to the asymmetry/agency problem is to create skin in the game by invoking “Hammurabi’s best-known injunction”: “If a builder builds a house and the house collapses and causes the death of the owner of the house - the builder shall be put to death”. By creating a serious disincentive for people to do the wrong thing (in the Bob Rubin case, it could be a claw back of his pay and possibly jail time), we can make people not hide risks and transfer them to unsuspecting customers/individuals. This can be captured by the “silver rule” from Mahabharata, Isocrates and Hillel, the Elder: Do not do unto others what you would not have them do unto you.

The solution, according to Taleb, is not more regulation, but a very effective system of Torts that can provide remedy for such risk transfer and penalise the person transferring the risk. According to him, anything more than light regulation, makes it easy for bad actors to hide risks.

So far so good. After this, the book goes downhill into a tirade against his long list of pet enemies – including Bob Rubin, Richard Thaler (Nobel Prize winning behavioural economist), behavioral sciences (he has a non-standard definition of rationality and he thinks behavioural science is junk), journalists (he thinks they suffer from “monoculture” where they rely on each other’s feedback and not on the feedback of their audience), intellectuals (who he calls as IYIs – intellectual yet idiots), Monsanto (he cites the “precautionary principle” against GMOs - not tinker with a complex system that we don’t understand and could cause big harm if things go wrong) and so on.

He attributes this to his “oversensitive BS detector” while writing the book – but all his books (except possibly the first one) are angry and opinionated.  What is especially hypocritical is that he is guilty of the same flaws that he finds so offensive in other people – for starters, he is an intellectual, albeit with different opinions from the intellectuals he hates. He criticises historians and their overrepresentation of war, while cherry picking examples from history to advance his own arguments.

The book is hyper-organised at one level (272 pages divided into eight ‘books’, three prologues, 19 chapters, two appendices, and an epilogue) but it is hard to discern any organisation in terms of flow of thought or argument.

Having critiqued Taleb, I will still read his books for his unconventional insight, his candor and willingness to pick a fight with anyone, and his sharp understanding of risk. There is enough signal in the noise to make his books very worthwhile reading. The discussions on Minority rule (how a tiny inflexible minority can have their way), Lindy effect (repetition from Black Swan but still interesting), what made Donald Trump win the presidency, etc., are very interesting and insightful.  With Taleb there’s never a dull moment, even if at times, you vehemently disagree and want to scream at him.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

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bookmark book review Magazine 23 June 2018

Srikanth Velamakanni

The writer is co-founder and CEO of Fractal Analytics

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