How to home in on truth and filter out nonsense.
Every day each of us is deluged with advice on what to expect, what we should think about subjects that are important but well beyond our immediate expertise, whom to believe, and how we should or should not act. All of it is delivered with authority and assurance, yet we instinctively know that most of it is bull***t. So, how do we quickly and correctly separate the informational chicken salad from what comes out of the other end of the chicken? None of us, no matter how hard we try and how well informed we are, has the time or knowledge to judiciously weigh the arguments pro and con. Even if we did, the world is such a complex, uncertain place, that we probably would get it wrong a good bit of the time. The best we can do is reduce our perceptual error rate and keep honing a roughly right process for deciding what makes sense and what is nonsense.
The best way to cope with this conundrum we all face comes from Nassim Taleb in his new book, Skin in the Game (Random House, 2018). If you read only a couple of books this year, this should be one of them.
As the title implies, the first step in deciding whether to heed what someone is saying is to ask yourself, “What personal stake does the speaker or writer have in the truth of what he says and the consequences if he or she is wrong?” It is not enough to look at incentives; it is equally important to consider disincentives: does the person suffer personally if what he says turns out to be wrong? Taleb illustrates the point by quoting a piece of Hammurabi’s code, posted on a basalt stele about 3,800 years ago: “If the architect built a house and the house subsequently collapses, killing the firstborn son of the master, the firstborn son of the architect shall be put to death.” The architect had a positive incentive to have the house built right and a disincentive to get it wrong.
You might reply by asking me to tell you something you don’t already know, but a moment’s thought will show you how profound and useful the “skin in the game” test is. First, it is a very efficient way of helping you decide whether something you hear is enlightening, entertaining (but otherwise useless), or garbage. The “skin in the game” [SITG] test is analog, not digital, but it helps you learn where to focus your attention and how to screen out bull***t. You may end up watching a lot less TV or becoming amused at how much of it is a gong show. Second, the SITG test will give you a way of examining just about any public policy proposal – tariffs, gun control, whether your town should build a new library, tax cuts, etc. – wisely. By “wisely” I mean the conclusion you reach is one that, with the benefit of hindsight, you are pleased with. The SITG test requires you to focus not on intentions but on consequences, long term as well as short term. Today, especially among the chattering classes, the focus is on intentions, e.g., “we need to do this for our children”. The right response is to ask, “OK fine, I am all for helping kids, but what are the consequences of what is being proposed and how do you know? What are the second and third order effects? The reason why outcomes so often are at odds with what we are told will happen is that the advocates have not had their own SITG to a meaningful degree.
Certain occupations are more conducive to SITG than others. Here is a sample, arrayed from high SITG to low:
Military in combat
Entrepreneurs, especially small, local business people
Plumbers, electricians, contractors
Big businesses, provided they can be sued if what they make or do causes harm
Policy activists [advocates of one cause or another]
What jumps out as I write this is the sad point that over the last several decades, there has been a shift in political and economic power toward people and occupations with little skin in the game but with easy access to the apparatus of mass communication. Perhaps this helps explain why the performance of many of our institutions, especially government, is performing less and less well.
What about people who advise you about your money? If they screw up, you can lose years of savings. Just as you would not ask a butcher whether you should buy meat, so you should not ask a financial advisor whether you should invest. The right question is not “What should I do”, but, “What are you doing and why?” Furthermore, you should understand your advisor’s SITG relative to yours. For example, the investment advisory firm that my former partner and I built was grounded in two rules designed to assure that our incentives and disincentives were aligned with those of our clients. First, we could only own what we bought for a client, nothing more, nothing less. Second, we had a LILO rule – last in, last out. We couldn’t buy until clients’ positions were filled; we couldn’t sell personally until we had liquidated our clients’ positions. You can be sure we were, very, very careful. Failure to understand your advisor’s SITG can be costly.
Finally, “What is my skin in the gamewith this blog?” I do not now and will not get any money from this venture. The incentive and disincentive derive from the same source: TRUST. I have earned the trust of family and friends; while I can’t guarantee that my views will prove true over the long term, but I can guarantee that I will always proceed with intellectual integrity. That is the only way I can assure the continued trust of people I care about. Maintaining trust is huge SITG for me. I hope to gain and keep your trust.