review essay

C HAPTER 23 S KIN IN THE G AME : A NTIFRAGILITY AND O PTIONALITY AT THE E XPENSE OF O THERS Making talk less cheap—Looking at the spoils—Corporations with random acts of pity?—Predict and inverse predict This chapter will look at what we are getting ourselves into when someone gets the upside, and a different person gets the downside.

The worst problem of modernity lies in the malignant transfer of fragility and antifragility from one party to the other, with one getting the benefits, the other one (unwittingly) getting the harm, with such transfer facilitated by the growing wedge between the ethical and the legal. This state of affairs has existed before, but is acute today—modernity hides it especially well. It is, of course, an agency problem.

And the agency problem, is of course, an asymmetry.

We are witnessing a fundamental change. Consider older societies—those societies that have survived. The main difference between us and them is the disappearance of a sense of heroism; a shift away from a certain respect—and power—to those who take downside risks for others. For heroism is the exact inverse of the agency problem: someone elects to bear the disadvantage (risks his own life, or harm to himself, or, in milder forms, accepts to deprive himself of some benefits) for the sake of others. What we have currently is the opposite:

power seems to go to those, like bankers, corporate executives (nonentrepreneurs), and politicians, who steal a free option from society.

And heroism is not just about riots and wars. An example of an inverse agency problem: as a child I was most impressed with the story of a nanny who died in order to save a child from being hit by a car. I find nothing more honorable than accepting death in someone else’s place.

In other words, what is called sacrifice. And the word “sacrifice” is related to sacred, the domain of the holy that is separate from that of the profane.

In traditional societies, a person is only as respectable and as worthy as the downside he (or, more, a lot more, than expected, she ) is willing to face for the sake of others. The most courageous, or valorous, occupy the highest rank in their society: knights, generals, commanders. Even mafia dons accept that such rank in the hierarchy makes them the most exposed to be whacked by competitors and the most penalized by the authorities. The same applies to saints, those who abdicate, devote their lives to serve others—to help the weak, the deprived, and the dispossessed.

So Table 7 presents another Triad: there are those with no skin in the game but who benefit from others, those who neither benefit from nor harm others, and, finally, the grand category of those sacrificial ones who take the harm for the sake of others.

T ABLE 7. E THICS AND THE FOUNDATIONAL ASSYMMETRY N O S KIN IN THE G AME S KIN IN THE G AME S KIN IN THE GAME FOR OTHERS :

S OUL IN THE G AME keeps upside; transfers downside to others; owns a hidden option at someone else's expense keeps his own downside; takes his own risk takes the downside on behalf of others or universal values bureaucrats citizens saints, knights, warriors, soldiers cheap talk (Fat Tony's “tawk”) actions, no tawk expensive talk consultants, sophists merchants, businessmen prophets, philosophers (in the pre-modern sense) businesses artisans artists, some artisans corporate executives (with suits) entrepreneurs entrepreneurs / innovators theoreticians, data miners, observational studies laboratory and field experimenters maverick scientists centralized government city-state government municipal government editors writers great writers journalists who “analyze” and predict speculators journalists who take risks and expose frauds (powerful regimes, corporations) politicians activists rebels, dissidents, revolutionaries bankers traders these folk would not engage in vulgar commerce Fragilista Professor Dr. Joseph Stiglitz Fat Tony Nero Tulip Risk vendors taxpayers (not quite voluntarily soul in the game, but they are victims) Let me follow my emotions and start with the third column, on the far right, the one about heroes and people of courage. The robustness—even antifragility—of society depends on them; if we are here today, it is because someone, at some stage, took some risks for us. But courage and heroism do not mean blind risk taking—it is not necessarily recklessness. There is a pseudocourage that comes from risk blindness, in which people underestimate the odds of failure. We have ample evidence that the very same people become chicken and overreact in the face of real risks; the exact opposite. For the Stoics, prudence is connatural to courage—the courage to fight your own impulses (in an aphorism by—who else— Publilius Syrus, prudence was deemed the courage of the general).

Heroism has evolved through civilization from the martial arena to that of ideas. Initially, in preclassical times, the Homeric hero was someone principally endowed with physical courage—since everything was physical. In later classical times, for such people as the great Lacedaemonian king Agesilaus, a truly happy life was one crowned by the privilege of death in battle, little else, perhaps even nothing else. But for Agesilaus, courage had already evolved from purely martial prowess into something greater. Courage was often seen in acts of renunciation, as when one is ready to sacrifice himself for the benefit of others, of the collective, something altruistic.

Finally, a new form of courage was born, that of the Socratic Plato, which is the very definition of the modern man: the courage to stand up for an idea, and enjoy death in a state of thrill, simply because the privilege of dying for truth, or standing up for one’s values, had become the highest form of honor. And no one has had more prestige in history than two thinkers who overtly and defiantly sacrificed their lives for their ideas—two Eastern Mediterraneans; one Greek and one Semite.

We should pause a little when we hear happiness defined as an economic or otherwise puny materialistic condition. You can imagine how distraught I feel when I hear about the glorified heroism-free “middle class values,” which, thanks to globalization and the Internet, have spread to any place easily reached by British Air, enshrining the usual opiates of the deified classes: “hard work” for a bank or a tobacco company, diligent newspaper reading, obedience to most, but not all, traffic laws, captivity in some corporate structure, dependence on the opinion of a boss (with one’s job records filed in the personnel department), good legal compliance, reliance on stock market investments, tropical vacations, and a suburban life (under some mortgage) with a nice-looking dog and Saturday night wine tasting. Those who meet with some success enter the gallery of the annual billionaire list, where they will hope to spend some time before their fertilizer sales are challenged by competitors from China. They will be called heroes— rather than lucky. Further, if success is random, a conscious act of heroism is nonrandom. And the “ethical” middle class may work for a tobacco company— and thanks to casuistry call themselves ethical. I am even more distraught for the future of the human race when I see a nerd behind a computer in a D.C. suburb, walking distance from a Starbucks coffeehouse, or a shopping mall, capable of blowing up an entire battalion in a remote place, say Pakistan, and afterward going to the gym for a “workout” (compare his culture to that of knights or samurai). Cowardice enhanced by technology is all connected: society is fragilized by spineless politicians, draft dodgers afraid of polls, and journalists building narratives, who create explosive deficits and compound agency problems because they want to look good in the short term.

A disclaimer. Table 7 does not imply that those with soul in the game are necessarily right or that dying for one’s ideas makes one necessarily good for the rest of us: many messianic utopians have caused quite a bit of harm. Nor is a grandiose death a necessity: many people fight evil in the patient grind of their daily lives without looking like heroes; they suffer society’s ingratitude even more —while media-friendly pseudoheroes rise in status. These people will not get a statue from future generations.

A half-man (or, rather, half-person) is not someone who does not have an opinion, just someone who does not take risks for it.

The great historian Paul Veyne has recently shown that it is a big myth that gladiators were forced labor. Most were volunteers who wanted the chance to become heroes by risking their lives and winning, or, when failing, to show in front of the largest crowd in the world how they were able to die honorably, without cowering—when a gladiator loses the fight the crowd decides whether he should be spared or put to death by the opponent. And spectators did not care for nonvolunteers, as these did not have their soul in the fight.

My greatest lesson in courage came from my father—as a child, I had admired him before for his erudition, but was not overly fazed since erudition on its own does not make a man. He had a large ego and immense dignity, and he demanded respect. He was once insulted by a militiaman at a road check during the Lebanese war. He refused to comply, and got angry at the militiaman for being disrespectful. As he drove away, the gunman shot him in the back. The bullet stayed in his chest for the rest of his life so he had to carry an X-ray image through airport terminals. This set the bar very high for me: dignity is worth nothing unless you earn it, unless you are willing to pay a price for it.

A lesson I learned from this ancient culture is the notion of megalopsychia (a term expressed in Aristotle’s ethics), a sense of grandeur that was superseded by the Christian value of “humility.” There is no word for it in Romance languages; in Arabic it is called s hhm — best translated as nonsmall . If you take risks and face your fate with dignity, there is nothing you can do that makes you small; if you don’t take risks, there is nothing you can do that makes you grand, nothing. And when you take risks, insults by half-men (small men, those who don’t risk anything) are similar to barks by nonhuman animals: you can’t feel insulted by a dog.

HAMMURABI Let us now work with the elements of Table 7 and bring the unifying foundational asymmetry (between upside and downside) into our central theme, ethics. Just as only business school professors and similar fragilistas separate robustness and growth, we cannot separate fragility and ethics.

Some people have options, or have optionality, at the expense of others. And the others don’t know it.

The effects of transfers of fragility are becoming more acute, as modernity is building up more and more people on the left column—inverse heroes, so to say.

So many professions, most arising from modernity, are affected, becoming more antifragile at the expense of our fragility—tenured government employees, academic researchers, journalists (of the non-myth-busting variety), the medical establishment, Big Pharma, and many more. Now how do we solve the problem?

As usual, with some great help from the ancients.

Hammurabi’s code—now about 3,800 years old—identifies the need to reestablish a symmetry of fragility, spelled out as follows: If a builder builds a house and the house collapses and causes the death of the owner of the house—the builder shall be put to death. If it causes the death of the son of the owner of the house, a son of that builder shall be put to death. If it causes the death of a slave of the owner of the house—he shall give to the owner of the house a slave of equal value.

It looks like they were much more advanced 3,800 years ago than we are today. The entire idea is that the builder knows more, a lot more, than any safety inspector, particularly about what lies hidden in the foundations—making it the best risk management rule ever, as the foundation, with delayed collapse, is the best place to hide risk. Hammurabi and his advisors understood small probabilities.

Now, clearly the object here is not to punish retrospectively, but to save lives by providing upfront disincentive in case of harm to others during the fulfillment of one’s profession. These asymmetries are particularly severe when it comes to small- probability extreme events, that is, Black Swans—as these are the most misunderstood and their exposure is easiest to hide.

Fat Tony has two heuristics.

First, never get on a plane if the pilot is not on board.

Second, make sure there is also a copilot.

The first heuristic addresses the asymmetry in rewards and punishment, or transfer of fragility between individuals. Ralph Nader has a simple rule: people voting for war need to have at least one descendant (child or grandchild) exposed to combat.

For the Romans, engineers needed to spend some time under the bridge they built —something that should be required of financial engineers today. The English went further and had the families of the engineers spend time with them under the bridge after it was built.

To me, every opinion maker needs to have “skin in the game” in the event of harm caused by reliance on his information or opinion (not having such persons as, say, the people who helped cause the criminal Iraq invasion come out of it completely unscathed). Further, anyone producing a forecast or making an economic analysis needs to have something to lose from it, given that others rely on those forecasts (to repeat, forecasts induce risk taking; they are more toxic to us than any other form of human pollution).

We can derive plenty of sub-heuristics from Fat Tony’s rules, particularly to mitigate the weaknesses of predictive systems. Predicting—any prediction— without skin in the game can be as dangerous for others as unmanned nuclear plants without the engineer sleeping on the premises. Pilots should be on the plane.

The second heuristic is that we need to build redundancy, a margin of safety, avoiding optimization, mitigating (even removing) asymmetries in our sensitivity to risk.

The rest of this chapter will present a few syndromes, with, of course, some ancient remedies. THE TALKER’S FREE OPTION We closed Book I by arguing that we need to put entrepreneurs and risk takers, “failed” or not, on top of the pyramid, and, unless they take personal risks when they expose others, academizing academics, talkers, and political politicians at the bottom. The problem is that society is currently doing the exact opposite, granting mere talkers a free option.

The idea that Fat Tony milked suckers when they ran to the exit door seemed at first quite inelegant to Nero. Benefiting from the misfortune of others—no matter how hideous these are and can be—is not the most graceful approach to life. But Tony had something at risk, and would have been personally harmed by an adverse outcome. Fat Tony had no agency problem. This makes it permissible.

For there is an even worse problem associated with the opposite situation: people who just talk, prognosticate, theorize.

In fact, speculative risk taking is not just permissible; it is mandatory. No opinion without risk; and, of course, no risk without hope for return. If Fat Tony had an opinion, he felt he needed, for ethical reasons, to have a corresponding exposure. As they say in Bensonhurst, you got to do so if you have an opinion.

Otherwise, you do not really have an opinion at all. You need to be earmarked as someone who has no downside for his opinion, with a special status in society, perhaps something below that of ordinary citizen. Commentators need to have a status below ordinary citizens. Regular citizens, at least, face the downside of their statements.

So counter to the entire idea of the intellectual and commentator as a detached and protected member of society, I am stating here that I find it profoundly unethical to talk without doing, without exposure to harm, without having one’s skin in the game, without having something at risk. You express your opinion; it can hurt others (who rely on it), yet you incur no liability. Is this fair?

But this is the information age. This effect of transferring fragility might have been present throughout history, but it is much more acute now, under modernity’s connectivity, and the newfound invisibility of causal chains. The intellectual today is vastly more powerful and dangerous than before. The “knowledge world” causes separation of knowing and doing (within the same person) and leads to the fragility of society. How?

In the old days, privilege came with obligations—except for the small class of intellectuals who served a patron or, in some cases, the state. You want to be a feudal lord—you will be first to die. You want war? First in battle. Let us not forget something embedded in the U.S. Constitution: the president is commander in chief. Caesar, Alexander, and Hannibal were on the battlefield—the last, according to Livy, was first-in, last-out of combat zones. George Washington, too, went to battle, unlike Ronald Reagan and George W. Bush, who played video games while threatening the lives of others. Even Napoleon was personally exposed to risks; his showing up during a battle was the equivalent of adding twenty-five thousand troops. Churchill showed an impressive amount of physical courage. They were in it; they believed in it.

Status implied you took physical risks.

Note that in traditional societies even those who fail—but have taken risks— have a higher status than those who are not exposed.

Now, again, the idiocy of predictive systems, making me emotional. We may have more social justice today than before the Enlightenment, but we also have more, a lot more transfers of optionality, more than ever—a patent setback. Let me explain. This knowledge-shmknowledge business necessarily means shifting to talk. Talk by academics, consultants, and journalists, when it comes to predictions, can be just talk, devoid of embodiment and stripped of true evidence. As in anything with words, it is not the victory of the most correct, but that of the most charming—or the one who can produce the most academic-sounding material.

We mentioned earlier how the political philosopher Raymond Aron sounded uninteresting in spite of his predictive abilities, while those who were wrong about Stalinism survived beautifully. Aron was about as colorless as they come: in spite of his prophetic insights he looked, wrote, and lived like a tax accountant while his enemy, say, Jean-Paul Sartre, who led a flamboyant lifestyle, got just about everything wrong and even put up with the occupying Germans in an extremely cowardly manner. Sartre the coward looked radiant, impressive, and, alas, his books survived (please stop calling him a Voltaire; he was no Voltaire). I got nauseous in Davos making eye contact with the fragilista journalist Thomas Friedman who, thanks to his influential newspaper op-eds, helped cause the Iraq war. He paid no price for the mistake. The real reason for my malaise was perhaps not just that I saw someone I consider vile and harmful. I just get disturbed when I see wrong and do nothing about it; it is biological. It is guilt, for Baal’s sake, and guilt is what I do not have to put up with. There is another central element of ancient Mediterranean ethics: Factum tacendo, crimen facias acrius: For Publilius Syrus, he who does not stop a crime is an accomplice. (I’ve stated my own version of this in the prologue, which needs to be reiterated: if you see fraud and don’t say fraud, you are a fraud.) Thomas Friedman was a bit responsible for the Iraq invasion of 2003, and not only paid no penalty for it but continues to write for the op-ed page of The New York Times, confusing innocent people. He got—and kept—the upside, others get the downside. A writer with arguments can harm more people than any serial criminal. I am singling him out here because, at the core, the problem is his promotion of the misunderstanding of iatrogenics in complex systems. He promoted the “earth is flat” idea of globalization without realizing that globalization brings fragilities, causes more extreme events as a side effect, and requires a great deal of redundancies to operate properly. And the very same error holds with the Iraq invasion: in such a complex system, the predictability of the consequences is very low, so invading was epistemologically irresponsible.

Natural and ancestral systems work by penalties: no perpetual free option given to anyone. So does society in many things with visible effects. If someone drives a school bus blindfolded, and has an accident, he either exits the gene pool the old- fashioned way, or, if for some reason he is not harmed by the accident, he will incur enough penalties to be prevented from driving other people ever again.

The problem is that the journalist Thomas Friedman is still driving the bus.

There is no penalty for opinion makers who harm society. And this is a very bad practice. The Obama administration was after the crisis of 2008 populated with people who drove the bus blindfolded. The iatrogenists got promoted.

Postdicting Words are dangerous: postdictors, who explain things after the fact—because they are in the business of talking—always look smarter than predictors.

Because of the retrospective distortion, people who of course did not see an event coming will remember some thought to the effect that they did, and will manage to convince themselves that they predicted it, before proceeding to convince others. There will be after every event many more postdictors than true predictors, people who had an idea in the shower without taking it to its logical conclusion, and, given that many people take a lot of showers, say, nearly twice a day (if you include the gym or the episode with the mistress), they will have a large repertoire to draw from. They will not remember the numerous bath- generated ideas they had in the past that were either noise, or that contradicted the observed present—but as humans crave self-consistency, they will retain those elements of what they thought in the past that cohere with their perception of the present. So opinion makers who were so proudly and professionally providing idle babble will eventually appear to win an argument, since they are the ones writing, and suckers who got in trouble from reading them will again look to them for future guidance, and will again get in trouble.

The past is fluid, marred with selection biases and constantly revised memories. It is a central property of suckers that they will never know they were the suckers because that’s how our minds work. (Even so, one is struck with the following fact: the fragilista crisis that started in 2007–2008 had many, many fewer near-predictors than random.) The asymmetry (antifragility of postdictors): postdictors can cherry-pick and produce instances in which their opinions played out and discard mispredictions into the bowels of history. It is like a free option—to them; we pay for it.

Since they have the option, the fragilistas are personally antifragile:

volatility tends to benefit them: the more volatility, the higher the illusion of intelligence.

But evidence of whether one has been a sucker or a nonsucker is easy to ferret out by looking at actual records, actions. Actions are symmetric, do not allow cherry-picking, remove the free option.

When you look at the actual history of someone’s activities, instead of what thoughts he will deliver after the facts, things become crystal clear. The option is gone. Reality removes the uncertainty, the imprecision, the vagueness, the self- serving mental biases that make us appear more intelligent.

Mistakes are costly, no longer free, but being right brings actual rewards. Of course, there are other checks one can do to assess the bullshit component of life:

investigate people’s decisions as expressed through their own investments. You would discover that many people who claim to have foreseen the collapse of the financial system had financial companies in their portfolios. Indeed, there was no need to “profit” from events like Tony and Nero to show nonsuckerness: just avoiding being hurt by them would have been sufficient.

I want predictors to have visible scars on their body from prediction errors, not distribute these errors to society.

You cannot sit and moan about the world. You need to come out on top. So Tony was right to insist that Nero take a ritual look at the physical embodiment of the spoils, like a bank account statement—as we said, it had nothing to do with financial value, nor purchasing power, just symbolic value. We saw in Chapter 9 how Julius Caesar needed to incur the cost of having Vercingetorix brought to Rome and paraded. An intangible victory has no value.

Verba volent, words fly. Never have people who talk and don’t do been more visible, and played a larger role, than in modern times. This is the product of modernism and division of tasks.

Recall that I said that America’s strength was risk taking and harboring risk takers (the right kind, the Thalesian king of high-failure, long-optionality type).

Sorry, but we have been moving away from this model.

The Stiglitz Syndrome There is something more severe than the problem with Thomas Friedman, which can be generalized to represent someone causing action while being completely unaccountable for his words.

The phenomenon I will call the Stiglitz syndrome, after an academic economist of the so-called “intelligent” variety called Joseph Stiglitz, is as follows.

Remember the fragility detection in Chapter 19 and my obsession with Fannie Mae. Luckily, I had some skin in the game for my opinions, be it through exposure to a smear campaign. And, in 2008, no surprise, Fannie Mae went bust, I repeat, costing the U.S. taxpayer hundreds of billions (and counting)—generally, the financial system, with similar risks, exploded. The entire banking system had similar exposures.

But around the same period, Joseph Stiglitz, with two colleagues, the Orszag brothers (Peter and Jonathan), looked at the very same Fannie Mae. They assessed, in a report, that “on the basis of historical experience, the risk to the government from a potential default on GSE debt is effectively zero.” 1 Supposedly, they ran simulations—but didn’t see the obvious. They also said that the probability of a default was found to be “so small that it is difficult to detect.” It is statements like these and, to me, only statements like these (intellectual hubris and the illusion of understanding of rare events) that caused the buildup of these exposures to rare events in the economy. This is the Black Swan problem that I was fighting. This is Fukushima.

Now the culmination is that Stiglitz writes in 2010 in his I-told-you-so book that he claims to have “predicted” the crisis that started in 2007–2008.

Look at this aberrant case of antifragility provided to Stiglitz and his colleagues by society. It turns out that Stiglitz was not just a nonpredictor (by my standards) but was also part of the problem that caused the events, these accumulations of exposures to small probabilities. But he did not notice it! An academic is not designed to remember his opinions because he doesn’t have anything at risk from them.

At the core, people are dangerous when they have that strange skill that allows their papers to be published in journals but decreases their understanding of risk. So the very same economist who caused the problem then postdicted the crisis, and then became a theorist on what happened. No wonder we will have larger crises.

The central point: had Stiglitz been a businessman with his own money on the line, he would have blown up, terminated. Or had he been in nature, his genes would have been made extinct—so people with such misunderstanding of probability would eventually disappear from our DNA. What I found nauseating was the government hiring one of his coauthors. 2 I am reluctantly calling the syndrome by Stiglitz’s name because I find him the smartest of economists, one with the most developed intellect for things on paper —except that he has no clue about the fragility of systems. And Stiglitz symbolizes harmful misunderstanding of small probabilities by the economics establishment. It is a severe disease, one that explains why economists will blow us up again.

The Stiglitz syndrome corresponds to a form of cherry-picking, the nastiest variety because the perpetrator is not aware of what he is doing. It is a situation in which someone doesn’t just fail to detect a hazard but contributes to its cause while ending up convincing himself—and sometimes others—of the opposite, namely, that he predicted it and warned against it. It corresponds to a combination of remarkable analytical skills, blindness to fragility, selective memory, and absence of skin in the game.

Stiglitz Syndrome = fragilista (with good intentions) + ex post cherry-picking There are other lessons here, related to the absence of penalty. This is an illustration of the academics-who-write-papers-and-talk syndrome in its greatest severity (unless, as we will see, they have their soul in it). So many academics propose something in one paper, then the opposite in another paper, without penalty to themselves from having been wrong in the first paper since there is a need only for consistency within a single paper, not across one’s career. This would be fine, as someone may evolve and contradict earlier beliefs, but then the earlier “result” should be withdrawn from circulation and superseded with a new one—with books, the new edition supersedes the preceding one. This absence of penalty makes them antifragile at the expense of the society that accepts the “rigor” of their results. Further, I am not doubting Stiglitz’s sincerity, or some weak form of sincerity: I believe he genuinely thinks he predicted the financial crisis, so let me rephrase the problem: the problem with people who do not incur harm is that they can cherry-pick from statements they’ve made in the past, many of them contradictory, and end up convincing themselves of their intellectual lucidity on the way to the World Economic Forum at Davos.

There is the iatrogenics of the medical charlatan and snake oil salesperson causing harm, but he sort of knows it and lies low after he is caught. And there is a far more vicious form of iatrogenics by experts who use their more acceptable status to claim later that they warned of harm. As these did not know they were causing iatrogenics, they cure iatrogenics with iatrogenics. Then things explode.

Finally, the cure to many ethical problems maps to the exact cure for the Stiglitz effect, which I state now.

Never ask anyone for their opinion, forecast, or recommendation. Just ask them what they have—or don’t have—in their portfolio.

We now know that many innocent retirees have been harmed by the incompetence of the rating agencies—it was a bit more than incompetence. Many subprime loans were toxic waste dressed as “AAA,” meaning near-government grade in safety. People were innocently led into putting their savings into them— and, further, regulators were forcing portfolio managers to use the assessment of the rating agencies. But rating agencies are protected: they present themselves as press—without the noble mission of the press to expose frauds. And they benefit from the protection of free speech—the “First Amendment” so ingrained in American habits. My humble proposal: one should say whatever he wants, but one’s portfolio needs to line up with it. And, of course, regulators should not be fragilistas by giving their stamp to predictive approaches—hence junk science.

The psychologist Gerd Gigerenzer has a simple heuristic. Never ask the doctor what you should do. Ask him what he would do if he were in your place.

You would be surprised at the difference.

The Problem of Frequency, or How to Lose Arguments Recall that Fat Tony was in favor of just “making a buck” as opposed to being “proven right.” The point has a statistical dimension. Let us return to the distinction between Thalesian and Aristotelian for a minute and look at evolution from the following point of view. The frequency, i.e., how often someone is right is largely irrelevant in the real world, but alas, one needs to be a practitioner, not a talker, to figure it out. On paper, the frequency of being right matters, but only on paper—typically, fragile payoffs have little (sometimes no) upside, and antifragile payoffs have little downside. This means that one makes pennies to lose dollars in the fragile case; makes dollars to lose pennies in the antifragile one. So the antifragile can lose for a long time with impunity, so long as he happens to be right once; for the fragile, a single loss can be terminal.

Accordingly if you were betting on the downfall of, say, a portfolio of financial institutions because of their fragilities, it would have cost you pennies over the years preceding their eventual demise in 2008, as Nero and Tony did.

(Note again that taking the other side of fragility makes you antifragile.) You were wrong for years, right for a moment, losing small, winning big, so vastly more successful than the other way (actually the other way would be bust). So you would have made the Thekels like Thales because betting against the fragile is antifragile. But someone who had merely “predicted” the event with just words would have been called by the journalists “wrong for years,” “wrong most of the time,” etc.

Should we keep tally of opinion makers’ “right” and “wrong,” the proportion does not matter, as we need to include consequences. And given that this is impossible, we are now in a quandary.

Look at it again, the way we looked at entrepreneurs. They are usually wrong and make “mistakes”—plenty of mistakes. They are convex. So what counts is the payoff from success.

Let me rephrase again. Decision making in the real world, that is, deeds, are Thalesian, while forecasting in words is Aristotelian. As we saw in the discussion in Chapter 12 , one side of a decision has larger consequences than the other—we don’t have evidence that people are terrorists but we check them for weapons; we don’t believe the water is poisonous but we avoid drinking it; something that would be absurd for someone narrowly applying Aristotelian logic. To put in Fat Tony terms: suckers try to be right, nonsuckers try to make the buck, or:

Suckers try to win arguments, nonsuckers try to win.

To put it again in other words: it is rather a good thing to lose arguments.

The Right Decision for the Wrong Reason More generally, for Mother Nature, opinions and predictions don’t count; surviving is what matters.

There is an evolutionary argument here. It appears to be the most underestimated argument in favor of free enterprise and a society driven by individual doers, what Adam Smith called “adventurers,” not central planners and bureaucratic apparatuses. We saw that bureaucrats (whether in government or large corporations) live in a system of rewards based on narratives, “tawk,” and the opinion of others, with job evaluation and peer reviews—in other words, what we call marketing. Aristotelian, that is. Yet the biological world evolves by survival, not opinions and “I predicted” and “I told you so.” Evolution dislikes the confirmation fallacy, endemic in society.

The economic world should, too, but institutions mess things up, as suckers may get bigger—institutions block evolution with bailouts and statism. Note that, in the long term, social and economic evolution nastily takes place by surprises, discontinuities, and jumps. 3 We mentioned earlier Karl Popper’s ideas on evolutionary epistemology; not being a decision maker, he was under the illusion that ideas compete with each other, with the least wrong surviving at any point in time. He missed the point that it is not ideas that survive, but people who have the right ones, or societies that have the correct heuristics, or the ones, right or wrong, that lead them to do the good thing. He missed the Thalesian effect, the fact that a wrong idea that is harmless can survive.

Those who have wrong heuristics—but with a small harm in the event of error—will survive. Behavior called “irrational” can be good if it is harmless.

Let me give an example of a type of false belief that is helpful for survival.

In your opinion, which is more dangerous, to mistake a bear for a stone, or mistake a stone for a bear? It is hard for humans to make the first mistake; our intuitions make us overreact at the smallest probability of harm and fall for a certain class of false patterns—those who overreact upon seeing what may look like a bear have had a survival advantage, those who made the opposite mistake left the gene pool.

Our mission is to make talk less cheap.

THE ANCIENTS AND THE STIGLITZ SYNDROME We saw how the ancients understood the Stiglitz syndrome—and associated ones —rather well. In fact they had quite sophisticated mechanisms to counter most aspects of agency problems, whether individual or collective (the circular effect of hiding behind the collective). Earlier, I mentioned the Romans forcing engineers to spend time under the bridge they built. They would have had Stiglitz and Orszag sleep under the bridge of Fannie Mae and exit the gene pool (so they wouldn’t harm us again).

The Romans had even more powerful heuristics for situations few today have thought about, solving potent game-theoretic problems. Roman soldiers were forced to sign a sacramentum accepting punishment in the event of failure—a kind of pact between the soldier and the army spelling out commitment for upside and downside.

Assume that you and I are facing a small leopard or a wild animal in the jungle. The two of us can possibly overcome it by joining forces—but each one of us is individually weak. Now, if you run away, all you need to be is just faster than me, not faster than the animal. So it would be optimal for the one who can run away the fastest, that is, the most cowardly, to just be a coward and let the other one perish.

The Romans removed the soldiers’ incentive to be a coward and hurt others thanks to a process called decimation . If a legion loses a battle and there is suspicion of cowardice, 10 percent of the soldiers and commanders are put to death, usually by random lottery. Decimation—meaning eliminating one in ten— has been corrupted by modern language. The magic number is one in ten (or something equivalent): putting more than 10 per cent to death would lead to weakening of the army; too little, and cowardice would be a dominant strategy.

And the mechanism must have worked well as a deterrent against cowardice, since it was not commonly applied.

The English applied a version of it. Admiral John Byng was court-martialed and sentenced to death as he was found guilty of failing to “do his utmost” to prevent Minorca from falling to the French following the Battle of Minorca in 1757.

To Burn One’s Vessels Playing on one’s inner agency problem can go beyond symmetry: give soldiers no options and see how antifragile they can get.

On April 29, 711, the armies of the Arab commander Tarek crossed the Strait of Gibraltar from Morocco into Spain with a small army (the name Gibraltar is derived from the Arabic Jabal Tarek, meaning “mount of Tarek”). Upon landing, Tarek had his ships put to the fire. He then made a famous speech every schoolchild memorized during my school days that I translate loosely: “Behind you is the sea, before you, the enemy. You are vastly outnumbered. All you have is sword and courage.” And Tarek and his small army took control of Spain. The same heuristic seems to have played out throughout history, from Cortés in Mexico, eight hundred years later, to Agathocles of Syracuse, eight hundred years earlier— ironically, Agathocles was heading southward, in the opposite direction as Tarek, as he was fighting the Carthaginians and landed in Africa.

Never put your enemy’s back to the wall. How Poetry Can Kill You Ask a polyglot who knows Arabic who he considers the best poet—in any language—and odds are that he would answer Almutanabbi, who lived about a thousand years ago; his poetry in the original has a hypnotic effect on the reader (listener), rivaled only by the grip of Pushkin on Russian speakers.

The problem is that Almutanabbi knew it; his name was literally “He who thinks of himself as a prophet,” on account of his perceived oversized ego. For a taste of his bombast, one of his poems informs us that his poetry is so potent “that blind people can read it” and “deaf people can listen to it.” Well, Almutanabbi was that rare case of a poet with skin in the game, dying for his poetry.

For in the same egotistical poem, Almutanabbi boasts, in a breathtaking display of linguistic magic, that he walks the walk, in addition to being the most imaginably potent poet—which I insist he was—he knew “the horse, the night, the desert, the pen, the book”—and thanks to his courage he got respect from the lion.

Well, the poem cost him his life. For Almutanabbi had—characteristically— vilified a desert tribe in one of his poems and they were out to get him. They reached him as he was traveling. As he was outnumbered, he started to do the rational thing and run away, nothing shameful, except that one of his companions started reciting “the horse, the night …” back at him. He turned around and confronted the tribe to his certain death. Thus Almutanabbi remains, a thousand years later, the poet who died simply to avoid the dishonor of running away, and when we recite his verses we know they are genuine.

My childhood role model was the French adventurer and writer André Malraux. He imbued his writings with his own risk taking: Malraux was a school dropout—while extremely well read—who became an adventurer in Asia in his twenties. He was an active pilot during the Spanish Civil War and later an active member of the French underground resistance during the Second World War. He turned out to be a bit of a mythomaniac, unnecessarily glorifying his meetings with great men and statesmen. He just could not bear the idea of a writer being an intellectual. But unlike Hemingway, who was mostly into image building, he was the real thing. And he never engaged in small talk—his biographer reports that while other writers were discussing copyrights and royalties, he would steer the conversation to theology (he supposedly said, T he twenty-first century will be religious or will not be ). One of my saddest days was when he died. The Problem of Insulation The system does not give researchers the incentive to be a Malraux. The great skeptic Hume was said to leave his skeptical angst in the philosophical cabinet, then go party with his friends in Edinburgh (though his idea of partying was rather too … Edinburgh). The philosopher Myles Burnyeat called this the “problem of insulation,” particularly with skeptics who are skeptics in one domain but not another. He provides the example of a philosopher who puzzles about the reality of time, but who nonetheless applies for a research grant to work on the philosophical problem of time during next year’s sabbatical—without doubting the reality of next year’s arrival. For Burnyeat, the philosopher “insulates his ordinary first order judgments from the effects of his philosophizing.” Sorry, Professor Doctor Burnyeat; I agree that philosophy is the only field (and its sibling, pure mathematics) that does not need to connect to reality. But then make it a parlor game and give it another name … Likewise, Gerd Gigerenzer reports a more serious violation on the part of Harry Markowitz, who started a method called “portfolio selection” and received the same iatrogenic Swedish Riskbank prize (called “Nobel” in economics) for it, like other fragilistas such as Fragilista Merton and Fragilista Stiglitz. I spent part of my adult life calling it charlatanism, as it has no validity outside of academic endorsements and causes blowups (as explained in the Appendix). Well, Doctor Professor Fragilista Markowitz does not use his method for his own portfolio; he has recourse to more sophisticated (and simpler to implement) cabdrivers’ methodologies, closer to the one Mandelbrot and I have proposed.

I believe that forcing researchers to eat their own cooking whenever possible solves a serious problem in science. Take this simple heuristic—does the scientific researcher whose ideas are applicable to the real world apply his ideas to his daily life? If so, take him seriously. Otherwise, ignore him. (If the fellow is doing pure mathematics or theology, or teaching poetry, then there is no problem. But if he is doing something applicable, then: red flag.) This brings us to Triffat-type fakeness compared to Seneca, the talker versus the doer. I applied this method of ignoring what an academic writes and focusing on what he does when I met a researcher on happiness who held that anything one makes beyond $50,000 does not bring any additional happiness —he was then earning more than twice that at a university, so according to his metric he was safe.

The argument seen through his “experiments” published in “highly cited papers” (that is, by other academics) seemed convincing on paper—although I am not particularly crazy about the notion of “happiness” or the vulgarity of the modern interpretation of “seeking happiness.” So, like an idiot, I believed him. But a year or so later, I heard that he was particularly avid for dollars and spent his time on the road speaking for fees. That, to me, was more sufficient evidence than thousands of citations.

Champagne Socialism Another blatant case of insulation. Sometimes the divorce between one’s “tawk” and one’s life can be overtly and convincingly visible: take people who want others to live a certain way but don’t really like it for themselves.

Never listen to a leftist who does not give away his fortune or does not live the exact lifestyle he wants others to follow. What the French call “the caviar left,” la gauche caviar, or what Anglo-Saxons call champagne socialists, are people who advocate socialism, sometimes even communism, or some political system with sumptuary limitations, while overtly leading a lavish lifestyle, often financed by inheritance—not realizing the contradiction that they want others to avoid just such a lifestyle. It is not too different from the womanizing popes, such as John XII, or the Borgias. The contradiction can exceed the ludicrous as with French president François Mitterrand of France who, coming in on a socialist platform, emulated the pomp of French monarchs. Even more ironic, his traditional archenemy, the conservative General de Gaulle, led a life of old-style austerity and had his wife sew his socks.

I have witnessed even worse. A former client of mine, a rich fellow with what appeared to be a social mission, tried to pressure me to write a check to a candidate in an election on a platform of higher taxes. I resisted, on ethical grounds. But I thought that the fellow was heroic, for, should the candidate win, his own taxes would increase by a considerable amount. A year later I discovered that the client was being investigated for his involvement in a very large scheme to be shielded from taxes. He wanted to be sure that others paid more taxes.

I developed a friendship over the past few years with the activist Ralph Nader and saw contrasting attributes. Aside from an astonishing amount of personal courage and total indifference toward smear campaigns, he exhibits absolutely no divorce between what he preaches and his lifestyle, none. Just like saints who have soul in their game. The man is a secular saint. Soul in the Game There is a class of people who escape bureaucrato-journalistic “tawk”: those who have more than their skin in the game. They have their soul in the game.

Consider prophets. Prophecy is a pledge of belief, little else. A prophet is not someone who first had an idea; he is the one to first believe in it—and take it to its conclusion.

Chapter 20 discussed prophecy, when done right, as subtraction, and detection of fragility. But if having skin in the game (and accepting downside) is what distinguishes the genuine thinker from ex post “tawk,” there is one step beyond needed to reach the rank of prophet. It is a matter of commitment, or what philosophers call doxastic commitment, a type of belief-pledge that to Fat Tony and Nero needed to be translated into deeds (the reverse-Stiglitz). Doxa in Greek used to mean “belief,” but distinguished from “knowledge” (episteme); to see how it involves a commitment of sorts beyond just words, consider that in church Greek it took the meaning of glorification .

Incidentally, this notion also applies to all manner of ideas and theories: the main person behind a theory, the person to be called the originator, is someone who believed in it, in a doxastic way, with a costly commitment to take it to its natural conclusion; and not necessarily the first person to mention it over dessert wine or in a footnote.

Only he who has true beliefs will avoid eventually contradicting himself and falling into the errors of postdicting.

OPTIONS, ANTIFRAGILITY, AND SOCIAL FAIRNESS The stock market: the greatest, industrial-sized, transfer of antifragility in history —due to a vicious form of asymmetric skin in the game. I am not talking about investment here—but the current system of packaging investments into shares of “public” corporations, with managers allowed to game the system, and of course, getting more prestige than the real risk takers, the entrepreneurs.

A blatant manifestation of the agency problem is the following. There is a difference between a manager running a company that is not his own and an owner-operated business in which the manager does not need to report numbers to anyone but himself, and for which he has a downside. Corporate managers have incentives without disincentives—something the general public doesn’t quite get, as they have the illusion that managers are properly “incentivized.” Somehow these managers have been given free options by innocent savers and investors. I am concerned here with managers of businesses that are not owner-operated.

As I am writing these lines the United States stock market has cost retirees more than three trillion dollars in losses over the past dozen years compared to leaving money in government money market funds (I am being generous, the difference is even higher), while managers of the companies composing the stock market, thanks to the asymmetry of the stock option, are richer by close to four hundred billion dollars. They pulled a Thales on these poor savers. Even more outrageous is the fate of the banking industry: banks have lost more than they ever made in their history, with their managers being paid billions in compensation— taxpayers take the downside, bankers get the upside. And the policies aiming at correcting the problem are hurting innocent people while bankers are sipping the Rosé de Provence brand of summer wine on their yachts in St. Tropez.

The asymmetry is visibly present: volatility benefits managers since they only get one side of the payoffs. The main point (alas, missed by almost everyone) is that they stand to gain from volatility—the more variations, the more value to this asymmetry. Hence they are antifragile.

To see how transfer of antifragility works, consider two scenarios, in which the market does the same thing on average but following different paths.

Path 1: market goes up 50 percent, then goes back down to erase all gains.

Path 2: market does not move at all.

Visibly Path 1, the more volatile, is more profitable to the managers, who can cash in their stock options. So the more jagged the route, the better it is for them.

And of course society—here the retirees—has the exact opposite payoff since they finance bankers and chief executives. Retirees get less upside than downside. Society pays for the losses of the bankers, but gets no bonuses from them. If you don’t see this transfer of antifragility as theft, you certainly have a problem.

What is worse, this system is called “incentive-based” and supposed to correspond to capitalism.

Supposedly managers’ interests are aligned with those of the shareholders.

What incentive? There is upside and no downside, no disincentive at all.

The Robert Rubin Free Option Robert Rubin, former treasury secretary, earned $120 million from Citibank in bonuses over about a decade. The risks taken by the institution were hidden but the numbers looked good … until they didn’t look good (upon the turkey’s surprise). Citibank collapsed, but he kept his money—we taxpayers had to compensate him retrospectively since the government took over the banks’ losses and helped them stand on their feet. This type of payoff is very common, thousands of other executives had it.

This is the same story as the one of the architect hiding risks in the basement for delayed collapse and cashing big checks while protected by the complexities of the legal system.

Some people suggest enforcing a “clawback provision” as a remedy, which consists of making people repay past bonuses in cases of subsequent failure. It would be done as follows: managers cannot cash their bonuses immediately, they can only do so three or five years later if there are no losses. But this does not solve the problem: the managers still have a net upside, and no net downside. At no point is their own net worth endangered. So the system still contains a high degree of optionality and transfer of fragility.

The same applies to the fund manager involved in managing a pension fund —he, too, has no downside.

But bankers used to be subjected to Hammurabi’s rule. The tradition in Catalonia was to behead bankers in front of their own banks (bankers tended to skip town before failure was apparent, but that was the fate of at least one banker, Francesco Castello, in 1360). In modern times, only the mafia executes these types of strategies to remove the free option. In 1980, the “Vatican banker” Roberto Calvi, the chief executive of Banco Ambrosiano that went bust, ran to take refuge in London. There, he supposedly committed suicide—as if Italy was no longer a good place for acts of drama such as taking one’s own life. It was recently discovered that it was not quite suicide; the mafia killed him for losing their money. The same fate befell the Las Vegas pioneer Bugsy Siegel, who ran an unprofitable casino in which the mafia had investments.

And in some countries such as Brazil, even today, top bankers are made unconditionally liable to the extent of their own assets.

Which Adam Smith?

Many right-wingers-in-love-with-large-corporations keep citing Adam Smith, famous patron saint of “capitalism,” a word he never uttered, without reading him, using his ideas in a self-serving selective manner—ideas that he most certainly did not endorse in the form they are presented. 4 In Book IV of The Wealth of Nations, Smith was extremely chary of the idea of giving someone upside without downside and had doubts about the limited liability of joint-stock companies (the ancestor of the modern limited liability corporation). He did not get the idea of transfer of antifragility, but he came close enough. And he detected—sort of—the problem that comes with managing other people’s business, the lack of a pilot on the plane:

The directors of such companies, however, being the managers rather of other people’s money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own.

Further, Smith is even suspicious of their economic performance as he writes:

“Joint-stock companies for foreign trade have seldom been able to maintain the competition against private adventurers.” Let me make the point clearer: the version of “capitalism” or whatever economic system you need to have is with the minimum number of people in the left column of the Triad. Nobody realizes that the central problem of the Soviet system was that it put everyone in charge of economic life in that nasty fragilizing left column.

THE ANTIFRAGILITY AND ETHICS OF (LARGE) CORPORATIONS Have you noticed that while corporations sell you junk drinks, artisans sell you cheese and wine? And there is a transfer of antifragility from the small in favor of the large—until the large goes bust.

The problem of the commercial world is that it only works by addition ( via positiva ), not subtraction ( via negativa ): pharmaceutical companies don’t gain if you avoid sugar; the manufacturer of health club machines doesn’t benefit from your deciding to lift stones and walk on rocks (without a cell phone); your stockbroker doesn’t gain from your decision to limit your investments to what you see with your own eyes, say your cousin’s restaurant or an apartment building in your neighborhood; all these firms have to produce “growth in revenues” to satisfy the metric of some slow thinking or, at best, semi-slow thinking MBA analyst sitting in New York. Of course they will eventually self-destruct, but that’s another conversation.

Now consider companies like Coke or Pepsi, which I assume are, as the reader is poring over these lines, still in existence—which is unfortunate. What business are they in? Selling you sugary water or substitutes for sugar, putting into your body stuff that messes up your biological signaling system, causing diabetes and making diabetes vendors rich thanks to their compensatory drugs. Large corporations certainly can’t make money selling you tap water and cannot produce wine (wine seems to be the best argument in favor of the artisanal economy). But they dress their products up with a huge marketing apparatus, with images that fool the drinker and slogans such as “125 years of providing happiness” or some such. I fail to see why the arguments we’ve used against tobacco firms don’t apply —to some extent—to all other large companies that try to sell us things that may make us ill.

The historian Niall Ferguson and I once debated the chairperson of Pepsi- Cola as part of an event at the New York Public Library. It was a great lesson in antifragility, as neither Niall nor I cared about who she was (I did not even bother to know her name). Authors are antifragile. Both of us came totally unprepared (not even a single piece of paper) and she showed up with a staff of aides who, judging from their thick files, had probably studied us down to our shoe sizes (I saw in the speakers’ lounge an aide perusing a document with an ugly picture of yours truly in my pre-bone-obsession, preweight-lifting days). We could say anything we wanted with total impunity and she had to hew to her party line, lest the security analysts issue a bad report that would cause a drop of two dollars and thirty cents in the stock price before the year-end bonus. In addition, my experience of company executives, as evidenced by their appetite for spending thousands of hours in dull meetings or reading bad memos, is that they cannot possibly be remarkably bright. They are no entrepreneurs—just actors, slick actors (business schools are more like acting schools). Someone intelligent—or free— would likely implode under such a regimen. So Niall immediately detected her weak point and went straight for the jugular: her slogan was that she contributed to employment by having six hundred thousand persons on her staff. He immediately exposed her propaganda with the counterargument—actually developed by Marx and Engels—that large bureaucratic corporations seized control of the state just by being “big employers,” and can then extract benefits at the expense of small businesses. So a company that employs six hundred thousand persons is allowed to wreck the health of citizens with impunity, and to benefit from the implied protection of bailouts (just like American car companies), whereas artisans like hairdressers and cobblers do not get such immunity.

A rule then hit me: with the exception of, say, drug dealers, small companies and artisans tend to sell us healthy products, ones that seem naturally and spontaneously needed; larger ones—including pharmaceutical giants—are likely to be in the business of producing wholesale iatrogenics, taking our money, and then, to add insult to injury, hijacking the state thanks to their army of lobbyists.

Further, anything that requires marketing appears to carry such side effects. You certainly need an advertising apparatus to convince people that Coke brings them “happiness”—and it works.

There are, of course, exceptions: corporations with the soul of artisans, some with even the soul of artists. Rohan Silva once remarked that Steve Jobs wanted the inside of the Apple products to look aesthetically appealing, although they are designed to remain unseen by the customer. This is something only a true artisan would do—carpenters with personal pride feel fake when treating the inside of cabinets differently from the outside. Again, this is a form of redundancy, one with an aesthetic and ethical payoff. But Steve Jobs was one of the rare exceptions in the Highly Talked About Completely Misunderstood Said to Be Efficient Corporate Global Economy.

Artisans, Marketing, and the Cheapest to Deliver Another attribute of the artisanal. There is no product that I particularly like that I have discovered through advertising and marketing: cheeses, wine, meats, eggs, tomatoes, basil leaves, apples, restaurants, barbers, art, books, hotels, shoes, shirts, eyeglasses, pants (my father and I have used three generations of Armenian tailors in Beirut), olives, olive oil, etc. The same applies to cities, museums, art, novels, music, painting, sculpture (I had at some point an obsession with ancient artifacts and Roman heads). These may have been “marketed” in some sense, by making people aware of their existence, but this isn’t how I came to use them—word of mouth is a potent naturalistic filter. Actually, the only filter.

The mechanism of cheapest-to-deliver-for-a-given-specification pervades whatever you see on the shelves. Corporations, when they sell you what they call cheese, have an incentive to provide you with the cheapest-to-produce piece of rubber containing the appropriate ingredients that can still be called cheese—and do their homework by studying how to fool your taste buds. Actually, it is more than just an incentive: they are structurally designed and extremely expert at delivering the cheapest possible product that meets their specifications. The same with, say, business books: publishers and authors want to grab your attention and put in your hands the most perishable journalistic item available that still can be called a book. This is optimization at work, in maximizing (image and packaging) or minimizing (costs and efforts).

I said about marketing by soft drink companies that it is meant to maximally confuse the drinker.

Anything one needs to market heavily is necessarily either an inferior product or an evil one. And it is highly unethical to portray something in a more favorable light than it actually is. One may make others aware of the existence of a product, say a new belly dancing belt, but I wonder why people don’t realize that, by definition, what is being marketed is necessarily inferior, otherwise it would not be advertised.

Marketing is bad manners—and I rely on my naturalistic and ecological instincts. Say you run into a person during a boat cruise. What would you do if he started boasting of his accomplishments, telling you how great, rich, tall, impressive, skilled, famous, muscular, well educated, efficient, and good in bed he is, plus other attributes? You would certainly run away (or put him in contact with another talkative bore to get rid of both of them). It is clearly much better if others (preferably someone other than his mother) are the ones saying good things about him, and it would be nice if he acted with some personal humility.

Actually this is not at all far-fetched. As I was writing this book, I overheard on a British Air flight a gentleman explain to the flight attendant less than two seconds into the conversation (meant to be about whether he liked cream and sugar in his coffee) that he won the Nobel Prize in Medicine “and Physiology” in addition to being the president of a famous monarchal academy. The flight attendant did not know what the Nobel was, but was polite, so he kept repeating “the Nobel Prize” hoping that she would wake up from her ignorance. I turned around and recognized him, and the character suddenly deflated. As the saying goes, it is hardest to be a great man to one’s chambermaid. And marketing beyond conveying information is insecurity.

We accept that people who boast are boastful and turn people off. How about companies? Why aren’t we turned off by companies that advertise how great they are? We have three layers of violations: First layer, the mild violation: companies are shamelessly self-promotional, like the man on the British Air flight, and it only harms them. Second layer, the more serious violation: companies trying to represent themselves in the most favorable light possible, hiding the defects of their products—still harmless, as we tend to expect it and rely on the opinion of users. Third layer, the even more serious violation: companies trying to misrepresent the product they sell by playing with our cognitive biases, our unconscious associations, and that’s sneaky. The latter is done by, say, showing a poetic picture of a sunset with a cowboy smoking and forcing an association between great romantic moments and some given product that, logically, has no possible connection to it. You seek a romantic moment and what you get is cancer.

It seems that the corporate system pushes companies progressively into the third layer. At the core of the problem with capitalism—again, please do not invoke Adam Smith—lies the problem of units that are different from individuals. A corporation does not have natural ethics; it just obeys the balance sheet. The problem is that its sole mission is the satisfaction of some metric imposed by security analysts, themselves (very) prone to charlatanism.

A (publicly listed) corporation does not feel shame. We humans are restrained by some physical, natural inhibition.

A corporation does not feel pity.

A corporation does not have a sense of honor—while, alas, marketing documents mention “pride.” A corporation does not have generosity. Only self-serving actions are acceptable. Just imagine what would happen to a corporation that decided to unilaterally cancel its receivables—just to be nice. Yet societies function thanks to random acts of generosity between people, even sometimes strangers.

All of these defects are the result of the absence of skin in the game, cultural or biological—an asymmetry that harms others for their benefit.

Now, such systems should tend to implode. And they do. As they say, you can’t fool too many people for too long a period of time. But the problem of implosion is that it does not matter to the managers—because of the agency problem, their allegiance is to their own personal cash flow. They will not be harmed by subsequent failures; they will keep their bonuses, as there is currently no such thing as negative manager compensation.

In sum, corporations are so fragile, long-term, that they eventually collapse under the weight of the agency problem, while managers milk them for bonuses and ditch the bones to taxpayers. They would collapse sooner if not for the lobby machines: they start hijacking the state to help them inject sugary drinks into your esophagus. In the United States large corporations control some members of Congress. All this does is delay the corporation’s funeral at our expense. 5 Lawrence of Arabia or Meyer Lansky Finally, if you ever have to choose between a mobster’s promise and a civil servant’s, go with the mobster. Any time. Institutions do not have a sense of honor, individuals do.

During the Great War, T. E. Lawrence, nicknamed Lawrence of Arabia, struck a deal with the Arab desert tribes to help the British against the Ottoman Empire. His promise: to deliver to them in return an Arab state. As the tribes did not know better, they made good on their side of the bargain. But, it turned out, the French and British governments had made a secret agreement, the Sykes-Picot Agreement, to divide the area in question between themselves. After the war, Lawrence went back to live in the U.K., supposedly in a state of frustration, but, of course, not much more. But he left us with a good lesson: never trust the words of a man who is not free. Now on the other hand, a mobster’s greatest asset is that “his word is gold.” It was said that “a handshake from the famous mobster Meyer Lansky was worth more than the strongest contracts that a battery of lawyers could put together.” In fact he held in his mind the assets and liabilities of the Sicilian mafia, and was their bank account, without a single record. Just his honor.

As a trader I never trusted transactions with “representatives” of institutions; pit traders are bound by their bonds, and I’ve never known a single self-employed trader over a two-decade-long career who did not live up to his handshake.

Only a sense of honor can lead to commerce. Any commerce.

Next We saw how, thanks to the misunderstanding of antifragility (and asymmetry or convexity), some classes of people use hidden options and harm the collective without anyone realizing. We also saw the solution in forcing skin in the game.

Next, we will look at another form of optionality: how people can cherry-pick ethical rules to fit their actions. Or how they use public office as a means to satisfy personal greed.

NOTES 1 GSE is Fannie Mae and Freddie Mac—they both blew up.

2 I find it truly disgusting that one of the Orszag brothers, Peter, after the crisis got a job with the Obama administration—another rehiring of blindfolded bus drivers. Then he became vice chairman of Citibank, which explains why Citibank will blow up again (and we taxpayers will end up subsidizing his high salary).

3 My suggestion to deter “too big to fail” and prevent employers from taking advantage of the public is as follows. A company that is classified as potentially bailable out should it fail should not be able to pay anyone more than a corresponding civil servant. Otherwise people should be free to pay each other what they want since it does not affect the taxpayer. Such limitation would force companies to stay small enough that they would not be considered for a bailout in the event of their failure.

4 I have had the same experience with journalists citing each other about my books without the smallest effort to go to my writings—my experience is that most journalists, professional academics, and other in similar phony professions don’t read original sources, but each other, largely because they need to figure out the consensus before making a pronouncement.

5 There seems to be a survival advantage to small or medium-sized owner-operated or family-owned companies. *Cite this chaper (in an essay bibliography, for example) like this:

Taleb, N. N. 2012. “Skin in the Game.” Chapter 23 in Antifragile: Things That Gain from Disorder.

New York: Random House.