Book 5: Being Alive Means Taking Certain Risks
Chapter 5: Life in the Simulation Machine
One day, the author saw magician David Blaine getting an ice pick through his hand.
Now, the magic trick, in fact, was real.
Blaine did get the ice pick through his hand. He sacrificed himself for his show.
-> real life is risk-taking.
If you don’t undertake the risk of real harm, it can’t possibly be an adventure.
-> the real requires peril.
Trump won because he was real. Because he took risks, because he had scars.
And scars signal exposure.
-> always do more than you talk.
Chapter 6: The Intellectual Yet Idiot
What has been happening in the world since 2014 (the vote against the establishment) is a rebellion against people who have no exposure and yet, pretend to tell us:
- What to do
- What to eat
- How to speak
- How to think
- Who to vote for
The truth is that psychological studies don’t replicate, dietary advice changes every 30 years, economic policies don’t work, etc.
In this context, people better rest on their millennial old instinct, than on these “intellectuals”.
These intellectuals are called IYI – Intellectual Yet Idiot.
Today, they have taken over.
They speak of things they have no SIG in, which makes them ill-placed to judge pretty much anything -> so, they actually judge everything.
Eg:
- They defend the lower classes but would never go have a drink with them.
Chapter 7: Inequality and Skin in the Game
There are two types of inequality. The one people tolerate, and the one people don’t.
The first one is inequality between stars, singers, entrepreneurs, artists, and the common people. People become fans of them, usually.
The second is inequality people hate because the subject appears to be someone just like them, except that he has been playing the system, and getting himself into rent-seeking, acquiring privileges that are not warranted.
These people are: bankers, bureaucrats, senators, etc.
These people are hated because they benefit from asymmetric results without any exposure -> they have no skin in the game.
Put plainly, people hate the people that make a lot of money…on a salary (when you think about it, this is an oxymoron).
This is why they have respect for entrepreneurs, and look at them as role models. Entrepreneurs have SIG.
Bankers don’t.
Economists Don’t Understand Inequality
-> true equality is equality in probability.
-> skin in the game prevents systems from rotting.
Economists don’t understand the difference between things that move, and things that do not.
What does it mean?
-> Static inequality is a snapshot view of inequality; it does not reflect what will happen to you in the course of your life.
America is said to be unequal, but half of Americans will spend some time in the top 10% of all Americans at some point.
-> the present doesn’t determine the future.
While in Europe, where inequality is “smaller”, people stay within their social strife.
Eg: in Florence, rich families have been rich for five centuries.
Dynamic (ergodic) inequality takes into account the entire future and past life.
As a result, the US isn’t so bad.
To make society more equal, you need to get the rich to rotate and exit the 1%.
Mobility = anyone can become rich. We need more than that.
The no-absorbing-barrier = someone who is rich should never be certain he will stay rich.
A perfectly equal society would never guarantee the rich would stay rich.
-> dynamic equality is what restores ergodicity, making time and ensemble probabilities substitutable.
What is ergodicity?
If a society is made out of:
- 1% of ultra-rich
- 10% of rich
- 50% of white-collar
- 39% of blue-collar,
Under perfect ergodicity, everyone in society, over the length of a century, would spend
- 1 year in the 1%
- 10 years in the 10%
- 50 years in the 50%
- 39 years in the 39%
The exact opposite is absorption, which happens when a particle that moves hits an obstacle, and gets absorbed or gets stuck to it.
Ironically, people at the top are more certain to stay there in countries with big “socialist” governments, than the opposite.
Pikettism and the Revolt of the Mandarin Class
Thomas Piketty is a French economist who wrote a Marxist book on inequality called “Capital in the 21st Century“.
According to him, inequality rises as capital tends to command too much return in relation to labor.
However, this isn’t true, since software engineers, for example, can become millionaires off their job.
Furthermore, Piketty makes conclusions out of static measures of inequality, not dynamic.
Real measure of inequality consists in taking the ownership of the 1 or 10%, and measuring its variation. And it is higher in Europe, a place considered to have “less inequality”.
Furthermore, Piketty does not understand inequality.
Inequality happens when the rich have a disproportionate role in society. Any form of control of wealth usually tends to lock people in their class -> the rich stay rich, and the poor stay poor.
-> the solution is to let the system destroy the rich so new people can take their place. And that works best in the US.
Now, the thing about these economists and other academics is that they have no downside in life.
They get paid by the states, and the more wealth control they push to instigate, the more secure they become – since it locks them up in the social ladder.
Piketty is part of the people that engage with the oppressed while consolidating their privileges.
These people tend to view themselves from a hierarchical perspective – and assume others do it too.
They are much more likely to feel envy and resent the rich (“how can a person less intelligent than me be richer”) than the actual blue-collar class, who do not see everything as a hierarchy.
Blue collars don’t even hate the mega-rich. They have respect for them.
They envy the other blue collars with slightly better things than them.
Chapter 8: An Expert Called Lindy
The Lindy effect is named after a New York restaurant where comedians found out that Broadway’s plays that lasted 100 days would last 100 days more, and that the ones that lasted 200 days would last 200 days more, etc.
The Lindy effect calls on notions of fragility.
Fragility is defined as sensitivity to disorder. Fragile things want a quiet and regular life. As soon as disorder spreads, they break.
Now, time, in a way, is equivalent to disorder -> survival is the ability to handle disorder.
That which is fragile has an asymmetric response to volatility and other stressors, that is, will experience more harm than benefit from it.
Lindy answers a very important question: in the long term, who will survive? Who will guard the guard, and judge the judge?
Time operates through SIG -> if you don’t have SIG and yet survived, you may collapse at any moment.
Things handle time in two different ways:
- Aging
- Hazard of accidents
These cannot be subject to the Lindy effect, since that which is lindy is what ages in reverse: life expectancy increases with time.
Time and survival are the ultimate judges of the validity and quality of an idea.
-> you don’t want a book review in the NYT. You want a book review in 100 years (which will mean someone will still be reading your book, which means it must be good).
As a result, the idea that your work is best when positively assessed by your peers is wrong. Readers judge a book, not authors.
-> contemporary peers are valuable collaborators, not final judges.
Peer assessment taken to the extreme leads to the bureaucratization of the activity, where university administrators are the ones calling the shots on academic knowledge.
This leads to situations where as long as you have 20 academics vouching for your work (even if it’s bs), you can create a new department of study (eg: gender studies).
-> academia has a tendency to evolve into a ritualistic self-referential publishing game, when left unchecked.
Against One’s Interest
The most convincing statements are those in which one stands to lose -> they have maximum skin in the game. The less convincing statements are those where one stands to enhance oneself (virtue signaling).
Karl Popper sees science not as something that holds true, but as something that has not yet been proven false.
The longer an idea has been around without being falsified, the longer its future life expectancy, according to Lindy.
For things to survive, they need to be solid against risk. If an idea has skin in the game, it is not in truth, but in harm.
-> an idea that survives is an idea that doesn’t harm those that have it.
-> ideas from grandmother are likelier to work than ideas from children.
Let’s look at some examples of ideas that have both been known for a long time, and confirmed by today’s science.
- Cognitive dissonance: when behavior and belief do not align.
- Loss aversion: a loss is more painful than a gain is pleasant
- Negative advice: the good is not as good as the absence of bad.
- Skin in the game
- Antifragility
- Time discounting: a bird in the hand is better than ten on the tree
- Madness of crowds: madness is rare in individualities, but in groups, parties, nations, it is the rule
- Less is more
- Overconfidence
- The paradox of progress: the idea that progress would enable to do…what you can already do.
Book 6: Deeper Into Agency
Chapter 9: Surgeons Should Not Look Like Surgeons
You have two choices between two surgeons.
One looks like he’s from Harvard, the other looks like a butcher.
Which one do you take?
Answer: the butcher, because his lack of being perceived as a surgeon means he had to go over much bigger obstacles than the first one to succeed and as a result, is probably much better too.
-> image matters less when results come from dealing with reality.
-> In any type of activity divorced from real-life results (no SIG), the majority of people look the part, but are clueless about the subject.
Beautiful apples don’t taste better.
What we perceive to be important for the success of an enterprise isn’t necessarily what is important.
In the end, what is really important is revealed by Lindy.
The Bishop Doesn’t Dress for Halloween
The problem today with science is that someone that looks like a scientist is more likely to be taken as such than an actual scientist.
Academics get their stature out of the role they play, not out of the things they do – they have no SIG.
-> true intellect should not appear intellectual. Anything that appears intellectual likely isn’t.
All you need is results -> don’t untie the knot, just cut it.
-> people with no SIG often over-complexify. Often, because they have no incentives to find easy solutions since they get paid to find difficult ones.
Consider the problem of hunger.
80-90% of food price is due to transportation, and we waste 1/3 of produced food due to transportation issues.
The gain to solve logistics issues would far outweigh those of farming techniques.
This is why the tech people saw a great opportunity to solve hunger by creating new types of rice, since they could easily get rich from it.
No SIG -> complex solutions.
On Evaluation
Once someone starts to judge something based on metrics instead of real-life results, it becomes distorted.
Eg: traders had to fill up the number of days they were profitable, and the ones they weren’t -> doesn’t make sense because banks, for example, are profitable most of the time, but that one time they lose, they lose so big that they go bankrupt.
-> what matters isn’t the number of days you are profitable, it is the overall money you make.
Education as Luxury Good
Education doesn’t make society richer. Rather, it’s rich societies that can afford to send people to be educated.
Once again, you want to hire the person that doesn’t look the part at all, because they likely had to get real results to get where they are now. So, don’t hire Ivy league people.
How to tell the degree of BS of a bachelor: if you need to graduate from a good university for it to have value, it’s BS (Malcolm Gladwell and Tyler Cowen talked about this).
-> MBA programs VS degree in mathematics.
Chapter 10: Only the Rich Are Poisoned: The Preferences of Others
When people get rich, they lose their skin in the game and substitute their preferences for the preferences of people that want to sell them something. As a result, they become miserable.
Poison is drunk in golden cups.
If rich or intelligent, you need to hide your IQ or net worth. People can only be real friends if they don’t try to outsmart or outstage one another.
Chapter 11: Facta non Verba (Deeds Before Words)
The sect of the Assassins, in fact, didn’t assassinate much. They understood it was much better to control alive people than to kill them.
The Assassins once put a knife next to the bed of a ruler to tell him that his life was between their hands, and that as long as he behaved, nothing would happen to him.
Doing > talking.
Assassination as Democracy
The advantage of absolutism was that if the leader didn’t deliver, he was assassinated and replaced.
Democracy blocks that.
While democracy, ironically, was supposed to help with the turnover of leaders, it stifled it.
Consider socialist Francois Mitterrand, which stayed president of France for 14 years, many more than most French kings.
Politicians of today, have no SIG. One can argue that in Rome, which could see up to 5 emperors assassinated per YEAR, the leader had much more SIG.
Chapter 12: The Facts Are True, the News Is Fake
Journalism isn’t backed by Lindy, and its biggest flaw is that it doesn’t allow a two-way flow of communication, like social media do.
Journalism will eventually collapse, and when it does, it will merely be a self-correction.
It is evident since journalists don’t write for their audience, but to impress other journalists.
Chapter 13: The Merchandising of Virtue
-> It is immoral to oppose a system and yet, live and profit from it.
-> It is much more immoral to claim virtue without fully living with its direct consequences.
This chapter will be about people exploiting virtue for personal gain and image – or anything that doesn’t share the downside of negative action.
Eg:
- Rich students talking about class privilege won’t give up their privilege to the less fortunate.
-> if your opinion and private life conflict, your opinion is canceled, not your private life.
So, what is virtue? Virtue is doing something for the collective when it conflicts with your own interests.
-> courage is the only virtue you cannot fake.
So, what should you do to be virtuous?
- Never engage in virtue signaling
- Never engage in rent-seeking
- Start a business. Put yourself on the line.
-> if you get rich, give all your money.
Courage is the highest virtue.
And it is best emboldened by entrepreneurs.
Chapter 14: Peace, Neither Ink nor Blood
Humans are mainly collaborative – except when institutions get in the way.
The best way to have peace somewhere, is to let the people figure something out without intervening. They are the ones with skin in the game, after all.
History is largely peace with short episodes of war.
The problem is that historians are more interested in telling how countries fought each other, than how they collaborated.
Past wars and conflicts are always inflated in terms of the number of victims.
Furthermore, history is based on past accounts. It’s not because something isn’t narrated that it didn’t happen, so this error should be taken into account.
Finally, the existence of war doesn’t mean that everyone is fighting 24/7.
War, is actually extremely localized, and the world doesn’t stop because people fight.
-> the world wasn’t more violent in the past. Far from it.
Book 7: Religion, Belief, and Skin in the Game
Chapter 15: They Don’t Know What They Are Talking About When They Talk About Religion
Religion often means different things to different people.
For jews and Muslims, religion was law.
For Romans, religion was social events.
For Christians, religion is purely holy.
This heterogeneity of meanings for religions is a problem.
It means that politicians, in general, do not understand Salafism, which isn’t a religion, but a political system rejecting the values and institutions of the West.
Chapter 16: No Worship Without Skin in the Game
In the past, you could not be part of a religion and benefit from its advantages without sacrificing to gods.
The idea was once again, symmetry.
No religion without SIG.
Chapter 17: Is the Pope Atheist?
After all, when the Pope is sick, he behaves exactly like an atheist: he goes to the doctor.
Except that the Pope will surely see the doctor first. Why? Because he made sacrifices to be Pope, so conventional wisdom demands that he benefits from a few advantages.
-> we distinguish an atheist from a religious in deeds, not in beliefs.
There are people who are atheist in actions, but religious in words (most Christians). And others that are religious in both (Islamists and suicide bombers).
Nobody is both atheist in words and actions. We all have some sort of beliefs (not necessarily in a religion per se, but we believe in the Universe, in some superstitions, in certain political systems, etc).
Book 8: Risk and Rationality
Chapter 18: How to Be Rational About Rationality
Religion is not about gods.
It’s about the purpose they serve.
In science, belief is literal, it is whether right, or wrong. But in real life, belief is an instrument, not the end of something.
In this case, it is an instrument that helps humans live better lives and survive.
-> survival comes first. Truth, understanding, and science come later.
-> you do not need science to survive, but you must survive to do science.
Rationality doesn’t look like rationality. Herb Simon explains we cannot look at the world like a computer, objectively, so we take some shortcuts -> our knowledge is fundamentally incomplete.
Kan Binmore further showed that the term “rational” is not well defined, because there is nothing irrational in a belief since it often serves a specific purpose.
All that matters is the rationality of the action, which can be judged only in the context of evolution.
-> the action reveals the “revealed preferences”, which separates what people say from what they do.
What they do is all that matters.
So, what is religion about?
Religion exists to enforce tail risk management (Black Swans) thanks to rules to respect, which are easy to teach.
Religion provides behavioral indications aimed at surviving, that science wouldn’t be able to provide.
The real world is extremely messy, and science itself is bound to “science”, which means it is only valid in certain domains (like math).
As we have seen, psychology replicates very few studies -> it isn’t science.
-> what we call beliefs is “background furniture” for the human mind, which may be more metaphorical than real.
Who cares as long as it leads to rational actions?
Now, there is a difference between decorative beliefs, and beliefs that map action.
One leads to nothing, the other leads to risk-taking.
-> how much you believe in something can be manifested only through what you are willing to risk.
So, why are there decorative beliefs?
The notion of rationality as we understand it today was born in a post-enlightenment period, after Max Weber. It was at a time we thought we understood almost everything about the world – while we did in fact, understand very little.
The only definition of rationality that we can use is the following: what is rational is that which allows for survival -> anything that prevents one’s survival is irrational.
-> what is decorative may not in fact be decorative.
We need to realize that it’s not beliefs that survive but the people that have them.
Eg: kosher laws. Kosher laws had probably another cause than “God told me”. You likely didn’t eat pork because pigs competed with humans in terms of food – while beef didn’t.
These laws also likely brought cohesion to the tribe, which led to trust, which led to commerce, etc.
In any way, Jews have survived, where many have perished -> the beliefs are vested by Lindy.
-> rationality depends only on what allows you to survive. Not everything that happens happens for a reason, but everything that survives, survives for a reason.
-> rationality is risk-management.
Chapter 19: The Logic of Risk-Taking
As we said, science requires survival, but survival doesn’t require science.
Imagine 100 people going to a casino. Does the result of John influence whether Peter wins? No.
On average, about 1/100 will go bankrupt at the casino, which does not influence other gamblers. Let’s call it ensemble probability.
Now, when your cousin Jack goes to the casino 100 times, will his bankruptcy on day 29 affect his gambling on day 30? Yes.
Let’s call it time probability.
As a result, when you invest in the stock market, you won’t get returns as high as the market because you are subject to risks that the market isn’t – like selling all of your shares to go on vacations.
-> in order to succeed, you must first survive.
-> in any situation, the presence of ruin (death, Black Swan events) disqualifies cost-benefit analyses.
The problem in social sciences statistics is that they don’t account for the difference between ensemble and time.
-> 1 person x 100 times ≠ 100 people x 1 time!!!
And no one got that – besides for some mathematicians and physicists.
So, why didn’t anyone understand? Lack of skin in the game.
One fears Black Swan events only when one is heavily invested.
Ergodicity
Ergodic situations are situations that are “likely going to continue“.
A situation is deemed non-ergodic when observed past probabilities do not apply to future processes.
There is an absorbing barrier somewhere that will prevent people from surviving it.
Let’s call these “ruins”.
Ruin make cost-benefit analyses impossible, as if you play enough time, you will always lose it all.
Psychologists tell us we “overestimate” risks, but we don’t, especially when these risks tend to…kill us.
A plane being safe at 98% would kill pretty much every pilot over time.
As for cigarettes, smoking just one won’t kill you, which is why it’s dumb to refuse to smoke one cigarette with such a little tail risk. It is smoking over the long term that will kill you.
-> 1 x 100 ≠ 100 people x 1
The thing is, every risk you take in life adds up to reducing your life expectancy.
If you climb mountains and run on motorcycles and smoke and etc, the repetition of these activities creates paranoia about events that are technically low in probability, but highly possible because of the repetition.
If medicine is progressively improving your life expectancy, you need to be even more paranoid!
As if there is a tiny risk, and you repeat the behavior, you will eventually suffer from the risk.
-> the flaw in social science papers is to believe that individuals only take the risk which is discussed in the experience, and no other risks in his life.
-> the loss aversion effect was not well measured, and in fact, does not really exists, as risks must be taken from a compounding point of view. There is no such thing as loss aversion.
Who is “you”?
Most people consider that their own death is the worst that could happen to them.
This isn’t true.
The worst-case scenario is your own death + the death of everybody else.
-> individual death is not as bad as collective death.
As a result, one should take care of ensuring the survival of everything else, not only of oneself.
One should strive for both courage and precaution to save the collective.
Courage is when you sacrifice your own well-being for the sake of the survival of a layer higher than yours.
Layers are organized as follows:
- Ecosystem
- Humanity
- Extended tribe
- Tribe
- Family and friends
- You
-> actions derive from beliefs, and if “good” action needs a superstition to be done, let it be.
Buffett made his billions by establishing a certain filter that lowered tailed risk for him, then went all-in on these opportunities.
“The difference between successful people and really successful people is that really successful people say no to almost everything.”
-> say no to tail risks.
To summarize:
- One may be risk-loving yet completely averse to ruin.
- In a strategy that entails ruin, benefits never offset the risks of ruin.
- Ruin and other changes in condition are different animals.
- Every single risk you take adds up to ruin your life expectancy.
- Rationality is avoidance of systemic ruin.
Book conclusion
No muscles without strength.
No science without skepticism.
No friendship without trust.
And nothing without skin in the game.
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