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Summary
Summary
#1 NEW YORK TIMES BESTSELLER * A bold work from the author of The Black Swan that challenges many of our long-held beliefs about risk and reward, politics and religion, finance and personal responsibility
In his most provocative and practical book yet, one of the foremost thinkers of our time redefines what it means to understand the world, succeed in a profession, contribute to a fair and just society, detect nonsense, and influence others. Citing examples ranging from Hammurabi to Seneca, Antaeus the Giant to Donald Trump, Nassim Nicholas Taleb shows how the willingness to accept one's own risks is an essential attribute of heroes, saints, and flourishing people in all walks of life.
As always both accessible and iconoclastic, Taleb challenges long-held beliefs about the values of those who spearhead military interventions, make financial investments, and propagate religious faiths. Among his insights:
* For social justice, focus on symmetry and risk sharing. You cannot make profits and transfer the risks to others, as bankers and large corporations do. You cannot get rich without owning your own risk and paying for your own losses. Forcing skin in the game corrects this asymmetry better than thousands of laws and regulations.
* Ethical rules aren't universal. You're part of a group larger than you, but it's still smaller than humanity in general.
* Minorities, not majorities, run the world. The world is not run by consensus but by stubborn minorities imposing their tastes and ethics on others.
* You can be an intellectual yet still be an idiot. "Educated philistines" have been wrong on everything from Stalinism to Iraq to low-carb diets.
* Beware of complicated solutions (that someone was paid to find). A simple barbell can build muscle better than expensive new machines.
* True religion is commitment, not just faith. How much you believe in something is manifested only by what you're willing to risk for it.
The phrase "skin in the game" is one we have often heard but rarely stopped to truly dissect. It is the backbone of risk management, but it's also an astonishingly rich worldview that, as Taleb shows in this book, applies to all aspects of our lives. As Taleb says, "The symmetry of skin in the game is a simple rule that's necessary for fairness and justice, and the ultimate BS-buster," and "Never trust anyone who doesn't have skin in the game. Without it, fools and crooks will benefit, and their mistakes will never come back to haunt them."
Author Notes
Nassim Nicholas Taleb was born in 1960 in Amioun, Lebanon. He is a researcher, essayist, trader, epistemologist, and former practitioner of mathematical finance.
Taleb received his bachelors and masters degree in science from the University of Paris. He holds an MBA from the Wharton School at the University of Pennsylvania, and a Ph.D. in Management Science from the University of Paris- Dauphine.
Taleb began his financial mathematics career in several of New York City's Wall Street firms before becoming a scholar in the epistemology of chance events, randomness, and the unknown. Taleb's book, Fooled by Randomness, was translated into 23 languages. His book, The Black Swan, was translated into 27 languages and spent several months on the New York Times Bestseller list.
Taleb is a Distinguished Professor of Risk Engineering at Polytechnic Institute of New York University and visiting professor of Marketing (Cognitive Science) at London Business School. Taleb has also taught at the University of Massachusetts in Amherst, Courant Institute of New York University, and the Wharton Business School Financial Institutions Center. His title Bed of Procrustes made the N.Y. Times Bestseller List for 2010 and his title Antifragile: Things That Gain from Disorder made The 2012 New York Times Bestseller List.
Excerpts
Excerpts
Chapter 1 Why Each One Should Eat His Own Turtles: Equality in Uncertainty Taste of turtle--Where are the new customers?--Sharia and asymmetry--There are the Swiss, and other people--Rav Safra and the Swiss (but different Swiss) You who caught the turtles better eat them, goes the ancient adage. The origin of the expression is as follows. It was said that a group of fishermen caught a large number of turtles. After cooking them, they found out at the communal meal that these sea animals were much less edible than they thought: not many members of the group were willing to eat them. But Mercury happened to be passing by--Mercury was the most multitasking, sort of put-together god, as he was the boss of commerce, abundance, messengers, the underworld, as well as the patron of thieves and brigands and, not surprisingly, luck. The group invited him to join them and offered him the turtles to eat. Detecting that he was only invited to relieve them of the unwanted food, he forced them all to eat the turtles, thus establishing the principle that you need to eat what you feed others. A Customer Is Born Every Day I have learned a lesson from my own naive experiences: Beware of the person who gives advice, telling you that a certain action on your part is "good for you" while it is also good for him, while the harm to you doesn't directly affect him. Of course such advice is usually unsolicited. The asymmetry is when said advice applies to you but not to him--he may be selling you something, or trying to get you to marry his daughter or hire his son-in-law. Years ago I received a letter from a lecture agent. His letter was clear; it had about ten questions of the type "Do you have the time to field requests?," "Can you handle the organization of the trip?" The gist of it was that a lecture agent would make my life better and make room for the pursuit of knowledge or whatever else I was about (a deeper understanding of gardening, stamp collections, Mediterranean genetics, or squid-ink recipes) while the burden of the gritty would fall on someone else. And it wasn't any lecture agent: only he could do all these things; he reads books and can get in the mind of intellectuals (at the time I didn't feel insulted by being called an intellectual). As is typical with people who volunteer unsolicited advice, I smelled a rat: at no phase in the discussion did he refrain from letting me know that it was "good for me." As a sucker, while I didn't buy into the argument, I ended up doing business with him, letting him handle a booking in the foreign country where he was based. Things went fine until, six years later, I received a letter from the tax authorities of that country. I immediately contacted him to wonder if similar U.S. citizens he had hired incurred such tax conflict, or if he had heard of similar situations. His reply was immediate and curt: "I am not your tax attorney"--volunteering no information as to whether other U.S. customers who hired him because it was "good for them" encountered such a problem. Indeed, in the dozen or so cases I can pull from memory, it always turns out that what is presented as good for you is not really good for you but certainly good for the other party. As a trader, you learn to identify and deal with upright people, those who inform you that they have something to sell, by explaining that the transaction arises for their own benefit, with such questions as "Do you have an ax?" (meaning an inquiry whether you have a certain interest). Avoid at all costs those who call you to tout a certain product disguised with advice. In fact the story of the turtle is the archetype of the history of transactions between mortals. I worked once for a U.S. investment bank, one of the prestigious variety, called "white shoe" because the partners were members of hard-to-join golf clubs for proto-aristocrats where they played the game wearing white footwear. As with all such firms, an image of ethics and professionalism was cultivated, emphasized, and protected. But the job of the salespeople (actually, salesmen) on days when they wore black shoes was to "unload" inventory with which traders were "stuffed," that is, securities they had in excess in their books and needed to get rid of to lower their risk profile. Selling to other dealers was out of the question as professional traders, typically non-golfers, would smell excess inventory and cause the price to drop. So they needed to sell to some client, on what is called the "buy side." Some traders paid the sales force with (percentage) "points," a variable compensation that increased with our eagerness to part with securities. Salesmen took clients out to dinner, bought them expensive wine (often, ostensibly the highest on the menu), and got a huge return on the thousands of dollars of restaurant bills by unloading the unwanted stuff on them. One expert salesman candidly explained to me: "If I buy the client, someone working for the finance department of a municipality who buys his suits at some department store in New Jersey, a bottle of $2,000 wine, I own him for the next few months. I can get at least $100,000 profits out of him. Nothing in the mahket gives you such return." Salesmen hawked how a given security would be perfect for the client's portfolio, how they were certain it would rise in price and how the client would suffer great regret if he missed "such an opportunity"--that type of discourse. Salespeople are experts in the art of psychological manipulation, making the client trade, often against his own interest, all the while being happy about it and loving them and their company. One of the top salesmen at the firm, a man with huge charisma who came to work in a chauffeured Rolls Royce, was once asked whether customers didn't get upset when they got the short end of the stick. "Rip them off, don't tick them off" was his answer. He also added, "Remember that every day a new customer is born." As the Romans were fully aware, one lauds merrily the merchandise to get rid of it. The Price of Corn in Rhodes So, "giving advice" as a sales pitch is fundamentally unethical--selling cannot be deemed advice. We can safely settle on that. You can give advice, or you can sell (by advertising the quality of the product), and the two need to be kept separate. But there is an associated problem in the course of the transactions: how much should the seller reveal to the buyer? The question "Is it ethical to sell something to someone knowing the price will eventually drop?" is an ancient one--but its solution is no less straightforward. The debate goes back to a disagreement between two stoic philosophers, Diogenes of Babylon and his student Antipater of Tarsus, who took the higher moral ground on asymmetric information and seems to match the ethics endorsed by this author. Not a piece from both authors is extant, but we know quite a bit from secondary sources, or, in the case of Cicero, tertiary. The question was presented as follows, retailed by Cicero in De Officiis. Assume a man brought a large shipment of corn from Alexandria to Rhodes, at a time when corn was expensive in Rhodes because of shortage and famine. Suppose that he also knew that many boats had set sail from Alexandria on their way to Rhodes with similar merchandise. Does he have to inform the Rhodians? How can one act honorably or dishonorably in these circumstances? We traders had a straightforward answer. Again, "stuffing"--selling quantities to people without informing them that there are large inventories waiting to be sold. An upright trader will not do that to other professional traders; it was a no-no. The penalty was ostracism. But it was sort of permissible to do it to the anonymous market and the faceless nontraders, or those we called "the Swiss," some random suckers far away. There were people with whom we had a relational rapport, others with whom we had a transactional one. The two were separated by an ethical wall, much like the case with domestic animals that cannot be harmed, while rules on cruelty are lifted when it comes to cockroaches. Diogenes held that the seller ought to disclose as much as civil law requires. As for Antipater, he believed that everything ought to be disclosed--beyond the law--so that there was nothing that the seller knew that the buyer didn't know. Clearly Antipater's position is more robust--robust being invariant to time, place, situation, and color of the eyes of the participants. Take for now that The ethical is always more robust than the legal. Over time, it is the legal that should converge to the ethical, never the reverse. Hence: Laws come and go; ethics stay. For the notion of "law" is ambiguous and highly jurisdiction dependent: in the U.S., civil law, thanks to consumer advocates and similar movements, integrates such disclosures, while other countries have different laws. This is particularly visible with securities laws, as there are "front running" regulations and those concerning insider information that make such disclosure mandatory in the U.S., though this wasn't so for a long time in Europe. Indeed much of the work of investment banks in my day was to play on regulations, find loopholes in the laws. And, counterintuitively, the more regulations, the easier it was to make money. Equality in Uncertainty Which brings us to asymmetry, the core concept behind skin in the game. The question becomes: to what extent can people in a transaction have an informational differential between them? The ancient Mediterranean and, to some extent, the modern world, seem to have converged to Antipater's position. While we have "buyer beware" (caveat emptor) in the Anglo-Saxon West, the idea is rather new, and never general, often mitigated by lemon laws. (A "lemon" was originally a chronically defective car, say, my convertible Mini, in love with the garage, now generalized to apply to anything that moves). So, to the question voiced by Cicero in the debate between the two ancient stoics, "If a man knowingly offers for sale wine that is spoiling, ought he to tell his customers?," the world is getting closer to the position of transparency, not necessarily via regulations as much as thanks to tort laws, and one's ability to sue for harm in the event a seller deceives him or her. Recall that tort laws put some of the seller's skin back into the game--which is why they are reviled, hated by corporations. But tort laws have side effects--they should only be used in a nonnaive way, that is, in a way that cannot be gamed. As we will see in the discussion of the visit to the doctor, they will be gamed. Sharia, in particular the law regulating Islamic transactions and finance, is of interest to us insofar as it preserves some of the lost Mediterranean and Babylonian methods and practices--not to prop up the ego of Saudi princes. It exists at the intersection of Greco-Roman law (as reflected from people in Semitic territories' contact with the school of law of Berytus), Phoenician trading rules, Babylonian legislations, and Arab tribal commercial customs and, as such, it provides a repository of ancient Mediterranean and Semitic lore. I hence view Sharia as a museum of the history of ideas on symmetry in transactions. Sharia establishes the interdict of gharar, drastic enough to be totally banned in any form of transaction. It is an extremely sophisticated term in decision theory that does not exist in English; it means both uncertainty and deception--my personal take is that it means something beyond informational asymmetry between agents: inequality of uncertainty. Simply, as the aim is for both parties in a transaction to have the same uncertainty facing random outcomes, an asymmetry becomes equivalent to theft. Or more robustly: No person in a transaction should have certainty about the outcome while the other one has uncertainty. Gharar, like every legalistic construct, will have its flaws; it remains weaker than Antipater's approach. If only one party in a transaction has certainty all the way through, it is a violation of Sharia. But if there is a weak form of asymmetry, say, someone has inside information which gives an edge in the markets, there is no gharar as there remains enough uncertainty for both parties, given that the price is in the future and only God knows the future. Selling a defective product (where there is certainty as to the defect), on the other hand, is illegal. So the knowledge by the seller of corn in Rhodes in my first example does not fall under gharar, while the second case, that of a defective liquid, would. As we see, the problem of asymmetry is so complicated that different schools give different ethical solutions, so let us look at the Talmudic approach. Rav Safra and the Swiss Jewish ethics on the matter is closer to Antipater than Diogenes in its aims at transparency. Not only should there be transparency concerning the merchandise, but perhaps there has to be transparency concerning what the seller has in mind, what he thinks deep down. The medieval rabbi Shlomo Yitzhaki (aka Salomon Isaacides), known as "Rashi," relates the following story. Rav Safra, a third-century Babylonian scholar who was also an active trader, was offering some goods for sale. A buyer came as he was praying in silence, tried to purchase the merchandise at an initial price, and given that the rabbi did not reply, raised the price. But Rav Safra had no intention of selling at a higher price than the initial offer, and felt that he had to honor the initial intention. Now the question: Is Rav Safra obligated to sell at the initial price, or should he take the improved one? Such total transparency is not absurd and not uncommon in what seems to be a cutthroat world of transactions, my former world of trading. I have frequently faced that problem as a trader and will side in favor of Rav Safra's action in the debate. Let us follow the logic. Recall the rapacity of salespeople earlier in the chapter. Sometimes I would offer something for sale for, say, $5, but communicated with the client through a salesperson, and the salesperson would come back with an "improvement," of $5.10. Something never felt right about the extra ten cents. It was, simply, not a sustainable way of doing business. What if the customer subsequently discovered that my initial offer was $5? No compensation is worth the feeling of shame. The overcharge falls in the same category as the act of "stuffing" people with bad merchandise. Now, to apply this to Rav Safra's story, what if he sold to one client at the marked-up price, and to another one the exact same item for the initial price, and the two buyers happened to know one another? What if they were agents for the same customer? Excerpted from Skin in the Game: Hidden Asymmetries in Daily Life by Nassim Nicholas Taleb All rights reserved by the original copyright owners. Excerpts are provided for display purposes only and may not be reproduced, reprinted or distributed without the written permission of the publisher.
Table of Contents
Book 1 Introduction | p. 1 |
The Less Obvious Aspects of Skin in the Game | p. 4 |
Prologue, Part 1 Antaeus Whacked | p. 7 |
Libya After Antaeus | p. 8 |
Ludis de Alieno Corio | p. 10 |
Warlords Are Still Around | p. 11 |
The Bob Rubin Trade | p. 12 |
Systems Learn by Removing | p. 13 |
Prologue, Part 2 A Brief Tour of Symmetry | p. 16 |
I From Hammurabi to Kant | p. 16 |
Hammurabi in Paris | p. 16 |
Silver Beats Gold | p. 19 |
Fuhgedaboud Universalism | p. 20 |
II From Kant to Fat Tony | p. 22 |
Crook, Fool, or Both | p. 22 |
Causal Opacity and Preferences Revealed | p. 24 |
Skin in the Game, but Not All the Time | p. 27 |
III Modernism | p. 27 |
How to Beam Light on a Speaker | p. 28 |
Simplicity | p. 29 |
I Am Dumb Without Skin in the Game | p. 30 |
Regulations vs. Legal Systems | p. 31 |
IV Soul in the Game | p. 33 |
Artisans | p. 34 |
A Caveat with Entrepreneurs | p. 36 |
Arrogant Will Do | p. 36 |
Citizenship de Plaisance | p. 37 |
Heroes Were Not Library Rats | p. 37 |
Soul in the Game and Some (Not Too Much) Protectionism | p. 38 |
Skin in the Ruling | p. 40 |
Prologue, Part 3 The Ribs of the Incerto | p. 41 |
The Road | p. 42 |
An Enhanced Detector | p. 43 |
The Book Reviewers | p. 43 |
Organization of the Book | p. 45 |
Appendix: Asymmetries in Life and Things | p. 47 |
Book 2 A First Look at Agency | p. 49 |
Chapter 1 Why Each One Should Eat His Own Turtles: Equality in Uncertainty | p. 51 |
A Customer Is Born Every Day | p. 51 |
The Price of Corn in Rhodes | p. 54 |
Equality in Uncertainty | p. 55 |
Rav Safra and the Swiss | p. 57 |
Members and Non-Members | p. 58 |
Non Mihi non Tibi, sed Nobis (Neither Mine nor Yours, but Ours) | p. 60 |
Are You on the Diagonal? | p. 61 |
All (Literally) in the Same Boat | p. 62 |
Talking One's Book | p. 63 |
A Short Visit to the Doctor's Office | p. 64 |
Next | p. 66 |
Book 3 That Greatest Asymmetry | p. 67 |
Chapter 2 The Most Intolerant Wins: The Dominance of the Stubborn Minority | p. 69 |
Criminals with Peanut Allergies | p. 71 |
Renormalization Group | p. 75 |
The Veto | p. 76 |
Lingua Franca | p. 77 |
Genes vs. Languages | p. 79 |
The One-Way Street of Religions | p. 80 |
Decentralize, Again | p. 82 |
Imposing Virtue on Others | p. 83 |
Stability of the Minority Rule, a Probabilistic Argument | p. 84 |
Popper-Goedel's Paradox | p. 85 |
Irreverence of Markets and Science | p. 86 |
Unus sed Leo: Only One but a Lion | p. 87 |
Summary and Next | p. 88 |
Appendix to Book 3 A Few More Counterintuitive Things About the Collective | p. 89 |
Zero-Intelligence Markets | p. 91 |
Book 4 Wolves Among Dogs | p. 93 |
Chapter 3 How to Legally Own Another Person | p. 95 |
To Own a Pilot | p. 96 |
From the Company Man to the Companies Person | p. 98 |
Coase's Theory of the Firm | p. 100 |
Complexity | p. 101 |
A Curious Form of Slave Ownership | p. 101 |
Freedom is Never Free | p. 102 |
Wolves Among the Dogs | p. 103 |
Loss Aversion | p. 105 |
Waiting for Constantinople | p. 106 |
Do Not Rock Bureaucristan | p. 107 |
Next | p. 108 |
Chapter 4 The Skin of Others in Your Game | p. 109 |
A Mortgage and Two Cats | p. 109 |
Finding Hidden Vulnerabilities | p. 111 |
How to Put Skin in the Game of Suicide Bombers | p. 113 |
Next | p. 115 |
Book 5 Being Alive Means Taking Certain Risks | p. 117 |
Chapter 5 Life in the Simulation Machine | p. 119 |
Jesus Was a Risk Taker | p. 120 |
Pascal's Wager | p. 121 |
The Matrix | p. 121 |
The Donald | p. 122 |
Next | p. 122 |
Chapter 6 The Intellectual Yet Idiot | p. 123 |
Where to Find a Coconut | p. 123 |
Science and Scientism | p. 124 |
Intellectual Yet Philistine | p. 125 |
Never Gotten Drunk with Russians | p. 126 |
To Conclude | p. 127 |
Postscript | p. 127 |
Chapter 7 Inequality and Skin in the Game | p. 128 |
Inequality vs. Inequality | p. 128 |
The Static and the Dynamic | p. 130 |
Pikketism and the Revolt of the Mandarin Class | p. 133 |
Cobbler Envies Cobbler | p. 135 |
Inequality, Wealth, and Vertical Socialization | p. 136 |
Empathy and Homophily | p. 137 |
Data, Shmata | p. 137 |
Ethics of Civil Service | p. 138 |
Next | p. 140 |
Chapter 8 An Expert Called Lindy | p. 141 |
Who Is the "Real" Expert? | p. 142 |
The Lindy of Lindy | p. 143 |
Do We Need a Judge? | p. 144 |
Tea with the Queen | p. 145 |
Institutions | p. 146 |
Against One's Interest | p. 147 |
Soul in the Game, Again | p. 148 |
Science is Lindy-Prone | p. 148 |
Empirical or Theoretic? | p. 149 |
The Grandmother vs. the Researchers | p. 150 |
A Brief Tour of Your Grandparents' Wisdom | p. 151 |
Book 6 Deeper Into Agency | p. 153 |
Chapter 9 Surgeons Should Not Look like Surgeons | p. 155 |
Looking the Part | p. 155 |
The Green Lumber Fallacy | p. 157 |
Best-Dressed Business Plan | p. 158 |
A Bishop for Halloween | p. 159 |
The Gordian Knot | p. 160 |
Overintellectualization of Life | p. 161 |
Another Business of Intervention | p. 162 |
Gold and Rice | p. 162 |
The Compensation | p. 164 |
Education as Luxury Good | p. 164 |
A BS Detection Heuristic | p. 165 |
Real Gyms Don't Look Like Gyms | p. 165 |
Next | p. 166 |
Chapter 10 Only the Rich Are Poisoned: The Preference of Others | p. 167 |
Venerium in Auro Bibitur | p. 168 |
Large Funeral Homes | p. 169 |
Conversation | p. 170 |
Nonlinearity of Progress | p. 170 |
Next | p. 171 |
Chapter 11 Facta non Verba (Deeds Before Words) | p. 172 |
An Offer Very Hard to Refuse | p. 172 |
The Assassins | p. 174 |
Assassination as Marketing | p. 175 |
Assassination as Democracy | p. 176 |
The Camera for Skin in the Game | p. 176 |
Chapter 12 The Facts Are True, the News Is Fake | p. 178 |
How to Disagree with Yourself | p. 178 |
Information Doesn't Like to Be Owned | p. 179 |
The Ethics of Disagreement | p. 181 |
Next | p. 182 |
Chapter 13 The Merchandising of Virtue | p. 183 |
The Public and the Private | p. 184 |
The Virtue Merchants | p. 185 |
To Be or to Seem? | p. 186 |
Simony | p. 187 |
Virtue Is About Others and the Collective | p. 188 |
Unpopular Virtue | p. 188 |
Take Risk | p. 189 |
Chapter 14 Peace, Neither Ink nor Blood | p. 190 |
Mars vs. Saturn | p. 191 |
Where Are the Lions? | p. 192 |
History Seen from the Emergency Room | p. 193 |
Next | p. 196 |
Book 7 Religion, Belief, and Skin in the Game | p. 197 |
Chapter 15 They Don't Know What They Are Talking About When They Talk About Religion | p. 199 |
Belief vs. Belief | p. 201 |
Libertarianism and Church-Free Religions | p. 202 |
Next | p. 203 |
Chapter 16 No Worship Without Skin in the Game | p. 204 |
The Gods Do Not Like Cheap Signaling | p. 204 |
The Evidence | p. 207 |
Chapter 17 Is the Pope Atheist? | p. 208 |
Religious in Words | p. 210 |
Next | p. 210 |
Book 8 Risk and Rationality | p. 211 |
Chapter 18 How to Be Rational About Rationality | p. 213 |
Ocular Deception | p. 214 |
Ergodicity First | p. 214 |
From Simon to Gigerenzer | p. 216 |
Revelation of Preferences | p. 216 |
What Is Religion About? | p. 217 |
"Tawk" and Cheap "Tawk" | p. 219 |
What Does Lindy Say? | p. 219 |
The Nondecorative in the Decorative | p. 220 |
Chapter 19 The Logic of Risk Taking | p. 222 |
Ergodicity | p. 225 |
Repetition of Exposures | p. 226 |
Who Is "You"? | p. 228 |
Courage and Precaution Aren't Opposites | p. 230 |
Rationality, Again | p. 230 |
Love Some Risks | p. 231 |
Naive Empiricism | p. 231 |
Summary | p. 233 |
Epilogue: What Lindy Told Me | p. 235 |
Acknowledgments | p. 237 |
Glossary | p. 239 |
Technical Appendix | p. 243 |
Notes | p. 255 |
Bibliography | p. 259 |
Index | p. 265 |