#53. Life Lessons From “Skin In The Game”
Insights on Building Resilience and Success
Welcome to blog post #53!
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“Skin in the game” is the phrase we often hear in investing, probably popularized by Warren Buffet.
However, its relevance extends far beyond finances.
These are other forms of skin in the game:
Time
Effort
Emotion
Resources
Reputation
“Skin in the game” by Nassim Taleb is not an easy read for me, but it offers me five valuable lessons for the personal growth.
Lessons from “Skin In The Game”
1. The Power of Doing, Not Talking
“Avoid taking advice from someone who gives advice for a living, unless there is a penalty for their advice.”
Actions speak louder than words.
It's easy to offer advice without facing the consequences, but having "skin in the game" means committing to your actions and accepting the potential outcomes. This commitment ensures authenticity and trustworthiness.
I’m often cautious when listening to advice, especially from those claiming experts. True experts don't always need to flaunt titles or monetize their reputation.
When you google “How to learn investing”, there are thousands of results for suggested courses. Yet, the irony lies in the fact that many of these prolific course creators derive their primary income from selling these courses and books rather than from actual investments.
Therefore, be wary of self-proclaimed gurus; seek guidance from those who live by their own words, even if they haven't written a best-selling book.
When I was a teenager, I read Robert Kiyosaki's Rich Dad, Poor Dad series. While the book provided valuable lessons on wealth creation, it became apparent that Kiyosaki's revenue streams were predominantly fueled by seminars and courses. This raised my doubts about the authenticity of the Rich Dad character and whether it was more of a marketing tool than a real-life success story.
The key takeaway isn't to disregard books or courses but rather to be discerning in what you consume. Stay conscious while absorbing information, and be selective in choosing sources that align with genuine success stories.
Legends like Warren Buffet and Charlie Munger impart not only investing knowledge but also profound life philosophies. Naval Ravikant, my favorite source of inspiration, also shares insights on leading a content and fulfilled life without relying on book sales or courses.
2. The Symmetry of Risk and Reward
“Things designed by people without skin in the game tend to grow in complication (before their final collapse).”
Consequences align with actions.
This principle emphasizes fair play and personal responsibility. Those who make decisions or offer advice should feel the impact of their choices, just like those following their leads.
Nassim Taleb paints a vivid picture with a pilot analogy. Imagine this: the pilot isn't just steering the plane; he’s in it with you, sharing the risks. That's not just responsibility; it's personal.
Taleb also gave an example through the financial crisis in 2008. The crisis was caused by a series of greedy behaviours by banks and financial institutions when they created trillions of dollars in risky mortgages, packaged, repackaged, and sold those loans to investors around the world.
However, the most vulnerable to this crisis were low-income households, while executives of financial institutions who earned millions of dollars from those loans held the least responsibility in the collapse of the financial system in 2008. Some banks, like Lehman Brothers and Bear Stearns, collapsed. Some were bailed out by the government, such as Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo.
Apparently, in this case, the risk of individual investors is asymmetric with the risk of financial institutions, which ultimately leads to excessive risk-taking and severe consequences for individual investors.
3. Embrace Risk & Antifragility
"What matters in life isn’t how frequently one is “right” about outcomes, but how much one makes when one is right.”
Taking calculated risks builds resilience.
Consider this: If you live in a sterile environment or in a natural environment, which one will make you healthy? Of course, a natural environment can help your immune systems get used to bacteria in nature and then gradually strengthen their resistance.
In "Skin in the Game," Nassim Taleb shows that avoiding all risk makes you fragile, like a porcelain doll that shatters at the slightest touch.
Conversely, embracing calculated risks builds resilience and antifragility, making you like an anti-gravity trampoline that bounces back stronger after every hit.
In this book, he reminded us of the concepts of being fragile, robust, and antifragile that were discussed in his Antifragility book.
Fragile: Things that break or deteriorate easily with stress or uncertainty. Think of the porcelain doll or a sand castle.
Robust: Things that can withstand stress and uncertainty but don't necessarily benefit from it. Think of a sturdy chair that might get scratches but stays intact.
Antifragile: Things that actually grow and improve with stress and uncertainty. Think of muscles that get stronger with exercise or the immune system that gets better at fighting viruses with exposure.
In essence, Taleb advocates for a strategic approach to risk – not an avoidance strategy but a calculated engagement that allows for growth and resilience in the face of uncertainty.
4. Be a “Wolf”, not a “Sheep”
“Alexander said that it was preferable to have an army of sheep led by a lion than an army of lions led by a sheep.”
Embrace critical thinking.
Taleb used the metaphor of a wolf and a sheep to call out the constrasting approaches to life.
Wolves can be related to as:
Independent thinkers: They rely on their own judgment and analysis, questioning assumptions and challenging conventions.
Risk-takers: They embrace calculated risks and learn from both successes and failures, building resilience and antifragility.
Self-reliant: They take responsibility for their choices and actions, accepting the consequences without blaming others.
Active learners: They seek out knowledge and experience, constantly striving to improve and adapt.
Sheep:
Conformists: They blindly follow the herd, adhering to popular trends and unquestioningly accepting established narratives.
Risk-averse: They prioritize safety and security, often missing out on opportunities due to fear of failure.
Dependent: They rely on others for guidance and decision-making and are easily influenced by external pressures.
Passive learners: They accept information passively, failing to critically evaluate or challenge it.
It’s worth noting that it’s not a liberal comparison between wolves and sheep but a metaphor to emphasize the importance of critical and independent thinking.
In alignment with Taleb's philosophy, Charlie Munger also underscores the pivotal role of critical thinking for differentiation in the world, stating:
"I'm not entitled to have an opinion unless I can state the arguments against my position better than the people who are supporting it."
5. The Asymmetry of Information
“No amount of advertising will match the credibility of a genuine user.”
Ever wondered why you're more inclined to believe product reviews from friends or family than slick advertisements? It's all about trust and authenticity.
In the dynamics of sellers and buyers, there is an asymmetry of information. Sellers hold the cards with more insight into their products, allowing them to craft and control the narrative.
On the flip side, buyers possess limited information, relying on external sources. The quality of a buyer's choice hinges on their ability to seek authentic external information and sidestep narrative biases.
Consider high-end cosmetics, functional foods, or organic products – they share a common thread.
They command a premium based on the narrative surrounding them. Exploiting consumer desires for enhanced beauty, health, and environmental sustainability, these products hinge on the strength of their brand narrative to justify the price premium.
In a bigger context, it’s a reminder when consuming information. Some questions should be raised in your mind:
Source Credibility: Who is behind the information? Can they be considered credible?
Nature of Information: Is the information grounded in facts and data, or is it merely someone's opinion?
Motivations: Why is this information being shared with you specifically? Are there underlying motivations?
Timing: Why now and not later? Consider the implications of the timing of information release.
Expected Cause and Consequence: What are the anticipated outcomes of this action or information?
While the asymmetry of information is inevitable, asking these questions acts as a safeguard against falling into narrative traps and helps filter out biases.
Apply “Skin In The Game” in personal growth
The core concept of “Skin in the Game” revolves around putting your heart and mind into what you do. The greater your personal stake, the more accountable you become, leading to better outcomes. Let’s delve into applying this principle in the way you learn, work, and live.
1. Learning
Commit to a learning challenge with real stakes
Instead of passively watching tutorials, sign up for a course with a certification exam or a public speaking competition. The pressure of examination or competition will boost engagement and focus.
Practice what you learn with your money
Reflecting on my own journey in financial investing over the past eight years, a crucial lesson emerged: true learning happens when you have real skin in the game.
While books and courses are valuable, the psychology behind success or failure in investing is best learned through personal experiences and mistakes..
Make learning public
When you commit something in public, you put your trustworthiness into it. Therefore, your accountability will increase.
You can try by sharing your learning journey on a blog or social media. The scrutiny of a public audience serves as a motivating force, keeping you on track and driving better results.
2. Working
Take on challenging projects with high visibility
Be willing to take on a challenging task, lead on a new initiative, or present your work to senior management. Immersing yourself in a "must-win" game will ignite your creativity and drive innovative solutions.
While the risk of failure can be daunting, the potential rewards of success are even greater.
Choose partners with “skin in the game” incentive
When seeking a partner for products or services, establish a direct link between their performance and compensation, including contract extensions.
When aligning rewards with tangible results, you create a robust "skin in the game" incentive for your partner. Therefore, it’s important to foster a collaborative environment driven by shared success.
3. Living
Choose an antifragile mindset
The more you skin in the game, the more critical experiences you accumulate, and the higher chances you have to bounce back in adversity.
Just as muscle building is important for physical fitness, cultivating mental strength plays an equivalent role in honing antifragility.
Turn procrastination into action
Nothing is better to kill procrastination than taking action.
Instead of just wishing, set a deadline for taking a step towards your dream, even if it's small. Celebrate each action, even if the outcome isn't perfect.
Challenge your own narrative and biases
Given the inevitable presence of narrative biases in the asymmetry of information, consistently question your assumptions. Actively seek diverse perspectives and experiences to broaden your understanding.
Maintain an open mind, ready to challenge old ways of thinking and embrace change when necessary.
Above are my 5 lessons from this book. How about yours?
Till next week!
Cheers,
Do Thi Dieu Thuong