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Overview

Nassim Nicholas Taleb’s book Skin in the Game (2018) argues that balancing risk and reward is essential to creating a fair society. He says that when there isn’t a balance between risk and reward, people take unnecessary risks because they don’t have skin in the game—they aren’t personally affected by their decisions. This leads to an overcomplicated world with too much risk.

The balance between risk and reward is important in social systems. If someone has power over another, they should share the consequences of failure as well as the rewards of success. In other words, people who are in charge should have skin in the game. This will ensure that everyone involved shares both good and bad outcomes equally. Only when this happens can we restore balance to society by ensuring that there’s symmetry between talk and action, as well as abstract ideas and concrete ones.

There are many imbalances in the world. For example, doctors have a vested interest in their patients’ health because they can be sued if they misdiagnose or treat it incorrectly. Hospital administrators and pharmaceutical companies do not have that same vested interest, so they may brush aside ailments to reduce costs. As a result, healthcare is bad in America.

Another example is employee vs. contractor relationships. When a company hires an outside worker, they can write penalties into their agreements to ensure that the workers will do their jobs well if they fail to perform them. However, even with these measures in place, employees who do the same job will always be more reliable than contractors because of their stake in the company’s success and identity on the job. Employees depend entirely on this job for income as well as self-identity; therefore, they are much more committed to doing a good job than contractors are.

By looking at how different people share in the consequences and rewards of their actions, we can see that social systems are built on interdependencies. When people don’t share in the consequences of their risks, they will have problems with those social systems.

Key Point 1: When two parties enter into an arrangement involving some risk, they should share both risk and reward.

Abuse of power occurs when a person or group takes advantage of another. People in positions of authority have more influence and control than others, so they can take advantage of those under them. In finance, there is concern about abuse of power because some people think that the people who invest money are taking too much risk with other people’s money. The banks’ risky investments nearly brought down the economy in 2008, but many bankers were still rewarded with large bonuses for their work. This upset many investors who thought that these bankers should not receive such big rewards when their investments failed because it encouraged reckless behavior on their part.

A 2017 working paper by Anya Kleymenova and A. İrem Tuna found that the British banks became less risky, and their risk of failure fell after bonus caps were introduced. The law had some unintended consequences though; for example, it made it harder to keep up with how executives were paid because the compensation schemes in their contracts became more complex.

Key Point 2: People can really only care about those in their immediate vicinity.

In small towns, everyone knows each other. Therefore, people are more concerned about their neighbors and friends because they have a stake in them. However, in larger cities where there are many strangers (people who do not know each other), people cannot rely on those strangers for support or help when needed.