Skin in The Game – Nassim Taleb

Market Meditations | March 30, 2021

Skin in The Game 

Today, we talk about Nassim Taleb’s Skin in The Game. Our mission is to bring you summaries of all the best work in the field of trading and investing. This way, you can use the wisdom of the greatest minds when you place your next bet.

1️⃣What Skin in The Game Means 

Skin in the Game’ is a phrase that is thrown around a lot. In its purest form, it’s about symmetry: If you are able to enjoy the benefits of a positive outcome, so too should you share the downside if something goes wrong. Perhaps this is clearer in an example. The year is 2007. Consider two individuals: Banker Bob ? and Pilot Peter ✈️. Who has skin in the game?

  • Upside ✅ Banker Bob’s upside is that his risky trades pay off. He enjoys a nice commission. Pilot Peter’s upside is a safe flight. He gets a decent share of the passenger fees.
  • Downside ❌ Well, if Banker Bob is selling Mortgage Backed Securities and a series of derivatives contracts that go on to cause a Global Financial Crisis in 2008, he doesn’t experience much downside. What would (and did) happen, is that the banks bail him out. At the same time, millions of people suffer unemployment and poverty. On the other hand, if Pilot Peter’s plane crashes, he literally goes down with the rest of the passengers.

Only Pilot Peter has skin in the game: he shares the upside and the downside. Banker Bob does not have skin in the game: he stands to benefit from the upside and avoids the downside.

2️⃣How Skin in The Game Can Help You 

? Making You A Better Trader. 

Taleb often tells the story of how hopeless it was for him to learn about probability and statistics in college. It was only when he got his first job in trading that everything started to make sense. The best way to learn is to put Skin in The Game: to start trading and investing with your money. Only then will all your reading and researching begin to come together. Not to mention, when you have money on the line, everything becomes much more exciting. It’s much more interesting to read financial statements if you own a share of a company.

Passive Investing. 

Skin in The Game is really important when it comes to taking financial advice. You don’t need people to tell you what they think, you need them to tell you what’s in their portfolio. It’s all well and good if someone is telling you to buy $LINK but are they long themselves? Surely, if it is such a good investment, they would take their own advice. This can also be considered when investing in actively managed funds or investing partnerships. Make sure the money manager has Skin in The Game; that they also have something to lose if they turn out to be wrong.

? Active Investing.

If you are actively selecting projects or companies to invest in, take a look at the leadership and make sure they too have Skin in The Game. Leadership who do not have Skin in The Game could have incentives to make decisions favouring the short term over the long term. One of the good things about angel investing is that the founders tend to be all in; with complete Skin in The Game.