Skin In The Game

Invested With Shared Risk And Reward

In business, competent action is required as well as shared risk and reward



Skin In The Game - Overview

The phrase "skin in the game" has commonly been attributed to Warren Buffet, referring to his own investment in his initial fund. But Buffet has denied this reflecting that he simply popularised the phrase.

It is said that the origin of the phrase “to have skin in the game” comes from horse racing and describes the situation where the owner of a horse competing in a race is said to have “skin” in “the game”, meaning that the owner has a lot riding on the outcome of the event.

More recently the phrase has been popularised by former trader and now popular writer Nassim Taleb, who in his latest book Skin In The Game describes it as:

"...an assessment of asymmetries in human interactions, aimed at helping you understand where and how gaps in uncertainty, risk, knowledge, and fairness emerge, and how to close them."

As with all his books, Taleb has a lot to say, says a lot about it and then takes a long time to say it... but in essence it all boils down to this:



    Only take advice from people who are already invested in the situation they are advising you about, and where they have something to lose if you fail as a result of following their advice.







Asymmetries & Disconnects

Taleb also counsels us to pay careful attention to the asymmetries and the disconnects:


  • Asymmetries arise where those dispensing advice are not exposed to your downside risk.
  • Disconnects occur when there is a gap between what people say and what they do, when they are not walking their talk.

Taleb is known for his aphorisms and here are a few on this subject:




    "Avoid taking advice from someone who gives advice for a living, unless there is a penalty for their advice."

    "If you have the rewards, you must also get some of the risks, not let others pay the price of your mistakes."

    "Don’t tell me what you 'think,' just tell me what’s in your portfolio."

    "If you do not take risks for your opinion, you are nothing."








Skin In The Game In Business Relationships

Often in the world of business its not just about taking advice, its more often about making decisions about who to get involved with, who to invest your time and resources in, and who to trust.

  • The concept of someone having skin in the game takes on a qualitative dimension.
  • Having a shared risk and reward with someone is not enough, it requires that they show competent action as well as commitment.

Based on my own experiences of business I make the following observations:


[1] Just because someone looks the part doesn't mean they are...

  • First impressions [instincts & intuitions] may be right but must be confirmed from direct experience.
  • Don’t be over-awed or impressed by wealth, prestige and power.
  • Don’t rely on people’s own assessment of their worth – without corroboration from your own direct experience.
  • Don’t rely on someone else’s assessment of a person’s worth – without corroboration from your own direct experience.






[2] Just because someone you know and trust believes something to be true, does not make it so, it just means that they genuinely believe it to be true.

  • To paraphrase Donald Rumsfelt: There are the "known knowns", the "known unknowns" and then there are far more troubling "unknown unknowns".




[3] Until you have clear and repeated evidence, and thus a good understanding, of someone's circle of competence watch the other guy's actions, pay close attention to the detail, specifically:

  • Watch out for early warning signals of “talk-walk” gap.
  • Watch out for early signs of those who “punch above their weight”.
  • Be wary of people who are distrusting and overly protective of disclosure – they are often hiding something and/or untrustworthy.
  • Ambition in a business partner is a good thing but identify early warning signals of people who: “don’t know what they don’t know, and don’t know that they don’t know”.




[4] You really cannot truly know someone’s strengths and weaknesses until you have been in action with them for an extended period of time.

  • Knowledge is subordinate to results.





[5] In a competitive world of "smoke and mirrors" always watch the other guy's feet to see his true intentions.

  • When there is a disconnect between someone's words and actions, always pay close attention to their actions.
  • You can forgive a guy one wrong step, two is a problem and three is a pattern and reveals the truth.






    Don't explain your philosophy. Embody it! [Epictetus]








Return from "Skin In The Game" to: Mental Models

 





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