What Nassim Taleb is on about, and why you should read him

If you have something to say do so simply.  Nassim Taleb drifts between probability theory and Mafia morality codes.  He peppers his work with insights from the Levant, ancient Greece, Rome and central Asia, through to modern Iraq and the Beltway.  His rambling style, verbosity and arcane references lose many readers, and his personal attacks turn others off.  Yet he has much to say.

In Black Swan, Anti-fragility and Skin in the Game Taleb addresses three inter-related questions.  Why do bad things like financial crises and the Iraq and Syrian debacles occur?  Why do good things, from great literature to traditional cooking survive?  Given these, how should we behave?

Black Swan argues that extreme outlier events have impacts vastly disproportional to their statistical probability.  In a normal distribution, some extreme tail risks can be so catastrophic we can’t afford to take them.

Genetic engineers, economic forecasters and financiers ignore the risk of extreme outliers.  Investment bankers and policy makers caused the 2008 GFC because they had no skin in the game.  After such events, bureaucrats then develop regulations that grow in complexity and make future black swans more likely.

Resonant with Hayek’s Pretence of Knowledge and Joshua Ramo’s The Age of the Unthinkable, individual creativity and innovation should be fostered in a devolved not centrally directed way. Rather than over-regulate financial instruments it may be better to reduce risks obliquely, for example by lifting individual savings rates and fostering more devolved, small scale and relational banks and investment agents.

Anti-fragile argues that some things are fragile and break too easily, some are robust but don’t improve over time, and others are both robust and evolve over time – the anti-fragile.  Anything that is anti-fragile has more upside than downside from random events.

An ancient cathedral is robust enough to outlive Le Corbusier and New Zealand leaky home architects.  However, it does not improve over time. Some Christian beliefs and canonical literature such as Shakespeare can be robust and improve over time as they inspire further human endeavour.

Adversity creates learning and adaptiveness and makes things anti-fragile.  Jewish culture has been anti-fragile for over 2000 years. Getting sick improves the immune system and makes people healthier.  Israeli attacks on Hizb’allah actually strengthened it by forcing it to adapt.  Overuse of antibiotics leads to bacteria becoming more resistant.

Keynesianism is an anti-fragile economic paradigm.  Obamacare is so cleverly designed it will survive the Trump administration’s attacks and become stronger – it is anti-fragile.  Kiwisaver might prove to be anti-fragile in the New Zealand context.

In Skin in the Game Taleb argues that leadership and business success depends on people taking risks and bearing the up and down sides.  Most great firms are started by those with skin in the game and grow organically.  CEOs create less value than entrepreneurs who have put their houses on the line.

You should also be prepared to put your body on the line.  Taleb cites warrior kings who died leading their armies. George Orwell wrote that the English aristocrats he disparaged for their dimness were morally sound because they were prepared to die in war.

Duels between two people with skin in the game can stop conflict between them spreading wider.   Menelaus and Paris’s duel in the Iliad could have ended the Trojan war if Aphrodite (someone with no skin in the game) hadn’t interfered.

Politicians who dodge the draft are often the worst warmongers. The Iraq invasion resulted from politicians and their advisors not having skin in the game.

Learning comes from practical engagement with the world rather than risk-free theory.  Unschooled street traders learn the English and arithmetic needed to trade. Steve Jobs was a craftsman more than a theoretician.  Artisans have soul as well as skin in the game, and this drives their success.

Taleb associates skin in the game with moral symmetry between people.  This includes such principles as the Golden Rule: “do unto others as you would have them do unto you”.  He adds a “silver rule” – “do not do to others what you would not like them to do to you”.   He who seeks a benefit should bear the cost if things go wrong.  You should not give advice that you yourself are not following.

Taleb argues that an authentic conversation must be on equal terms. Caveat emptor is unethical.  All involved in a transaction should have the same information.    This overcomes information asymmetry and bounded rationality, and reduces rent seeking.  He cites the Islamic ban on gharar, a form of trade with high uncertainty which can damage other parties.

Taleb highlights some basic rules to live by.  Live by the Golden Rule rather than pay lip service to it.  Ignore what people say and watch what they do.  In business, only trust people who put their money where their mouths are.  Learn in the real world, not through abstractions.  Keep things as simple as possible.

When readers put their skin in the game, Taleb’s insights stay with them.  However, he could say things more simply, following one of his own rules…


About Peter Winsley

I’ve worked in policy and economics-related fields in New Zealand for many years. With qualifications and publications in economics, management and literature, I take a multidisciplinary perspective to how people’s lives can be enhanced. I love nature, literature, music, tramping, boating and my family.
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