Skin in the game

In his book Skin in the Game, Nassim Taleb points out that most workers pay a price for their mistakes. For example, a bad barber quickly loses customers.

In contrast, there are some professions that profit while sticking someone else with the risk.

Examples:

Government bureaucrats are paid whether or not they perform
Teachers and professors are employed whether or not students learn anything
Fortune 500 CEOs make millions whether or not shareholders do well
“Too big to fail” banks made billions buying high-interest subprime mortgages, but were bailed out by the government when the mortgages defaulted

It is hard to imagine a more stupid or more dangerous way of making decisions than by putting those decisions in the hands of people who pay no price for being wrong.

-Thomas Sowell

In any bureaucratic organization there will be two kinds of people: those who work to further the actual goals of the organization, and those who work for the organization itself. Examples in education would be teachers who work and sacrifice to teach children, vs. union representatives who work to protect any teacher including the most incompetent. The Iron Law states that in all cases, the second type of person will always gain control of the organization, and will always write the rules under which the organization functions.

-Jerry Pournelle

There are also those who shoulder risk for others because of personal values. Taleb says these people have “soul in the game”:

Saints
Warriors
Prophets
Artists
Innovators
Maverick scientists
Investigative journalists

…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.

-Nassim Taleb

In your life, it can be useful to find those with skin (or soul) in the game:

Social entrepreneur Salman Khan founded Khan Academy. Its mission is to “provide a free, world-class education to anyone, anywhere.”
99% of Warren Buffett’s net worth is in shares of his company Berkshire Hathaway Inc.
Vanguard Group’s founder Jack Bogle structured the company to be owned by owners of its index funds. Unlike other financial firms, this incentivizes Vanguard to continually lower fees.

If a statue is ever erected to honor the person who has done the most for American investors, the hands-down choice should be Jack Bogle. In his early years, Jack was frequently mocked by the investment management industry. Today, however, he has the satisfaction of knowing he helped millions of investors realize far better returns on their savings than they otherwise would have. He is a hero to them and me.

-Warren Buffett

The difference between the great and good societies and the regressing, deteriorating societies is largely in terms of the entrepreneurial opportunity and the number of such people in the society. I think everyone would agree that the most valuable 100 people to bring into a deteriorating society would be not 100 chemists, or politicians, or professors, or engineers, but rather 100 entrepreneurs.

-Abraham Maslow

References

Taleb NN. (2018). Skin in the game: Hidden asymmetries in daily life. Penguin Random House.

Subprime mortgage crisis. (2021, March 8). Wikipedia. https://en.wikipedia.org/wiki/Subprime_mortgage_crisis

Donors. (2021, March 9). Khan Academy. https://www.khanacademy.org/donors

Huddleston T. (2020, August 19). How Warren Buffet spends his billions. CNBC. https://www.cnbc.com/2020/08/19/how-warren-buffett-spends-his-billions.html

Edwards J. (2019, June 22). Who are the owners of Vanguard Group? Investopedia. https://www.investopedia.com/articles/investing/110515/who-are-owners-vanguard-group.asp

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