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Skin in the Game
I’m reading a phenomenal book entitled Skin in the Game, written by Nassim Taleb. The book is challenging many of my views.
I’m a capitalist. The best, most fair, and most advantageous mechanism to improve quality of life for the most amount of people is to let free markets reward innovation. I’ve always considered the idea of having skin in the game as a representation of incentive.
There is a Charlie Munger quote I think of often. It reads …
“The iron rule of nature is: you get what you reward for. If you want ants to come, you put sugar on the floor.”
Capital markets incentivize people to perform. Those who perform the best (or bring the most value to the market) are most rewarded.
However, this book is giving me an entire new insight on the other side of capitalism that we rarely talk about. If people are to be rewarded for providing value, how do we adequately disperse the downside for those who have generated suffering?
Skin in the game is more than having a piece of the upside, it’s also having a piece of the downside.
Our system protects people against the downside, but not in the way it should. For instance, the people who create the problems in our system rarely suffer the consequences for them. The 2008 great financial crisis is a great example of this.
The bankers who blew the system up stayed rich, while the working people lost their homes, their savings, and often times their 401k.
When Covid was first happening, I remember having arguments with my father about the status of the airline industry. He thought the government should bail out the airlines, I thought we should let the airlines crumble.
The reason is because the executives at airlines have been ruthlessly buying back stocks and left zero cash reserves for a rainy day. There wasn’t even enough cash for the airlines to operate for 30 days. They were playing fast and lose with the businesses and concentrated only on the up side.
Obviously, the damage to the airline industry would have been severe. But, that’s the way it should be. If entrepreneurs are receiving a disproportionate piece of the upside, then they need to share in the downside. That’s what entrepreneurship is. It’s managing risk with expectation of reward. If we remove the risk from the equation, then all we get is corruption, extraction, and cronyism.
Now, every airline exec in the country knows that when shit hits the fan, they will be bailed out. There’s no incentive for them to protect against the downside. So in the short term, we “saved the airline industry.” But did we really? Did we make the airline industry more robust? or did we make it more vulnerable and fragile? The airline execs get all the rewards and share none of the risk.
I’m not “anti regulation.” Left to it’s own devises, capitalism will always monopolize, and we need mechanisms in place to prepare for that. However, we need WAY LESS regulation. Over a long enough timeline, monopolies will always fall because the bigger companies get, the less flexibility they have.
Inevitably, innovation finds a way.
We are much better off getting out of the way and letting free markets do their thing. Of course, reasonable regulation is needed and required. But instead of regulation, what if we demanded that companies and people have skin in the game? What if plastic bag manufacturers had to pay for cleaning up the pile of trash in the Pacific ocean? What if the Coca Cola had to fund for diabetes treatment? Skin in the game is a better solution than regulation.
We need to make sure the right people are suffering the consequences of their own decisions and remove the ability to deflect the consequences onto others.
Talk to you tomorrow.
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