Can Skin In The Game Fix Things?

It’s not just for airport bookstands

If you fly, you know the book genre. A book with a well known thinker with a catchy name but not much meat in it. It will be weird and new yet reinforce current proper thinking. Nassim Nicholas Taleb's book "Skin in the Game: Hidden Asymmetries in Daily Life" explores the concept that individuals or entities should have a personal stake or exposure to risk in the decisions they make. Taleb argues that having "skin in the game" promotes accountability, responsibility, and better decision-making. We can review of the key concepts from the book and suggest some policies inspired by Taleb's insights to improve the behavior of politicians.

Taleb begins by explaining the asymmetries present in various aspects of life, where certain individuals or institutions have the ability to take risks or make decisions without bearing the consequences. He argues that this lack of accountability leads to moral hazard, where actors may act recklessly or exploit others without facing any personal costs. This is a well known idea but he uses a slick phrase to stretch out a magazine article into a book.

The concept of "skin in the game" is central to Taleb's argument. He contends that individuals should have a personal stake in the outcomes of their decisions, whether through financial exposure, reputational risk, or other forms of accountability. By having "skin in the game," people are more likely to act prudently, ethically, and in the best interests of society as a whole. Expanded bureaucracies destroy this concept.

Taleb applies this principle to various fields, including finance, politics, academia, and medicine, highlighting how the absence of skin in the game can lead to systemic failures and perverse incentives. The financial crisis of 2008 is one of the most obvious examples of this. He emphasizes the importance of decentralization, redundancy, and robustness in systems to mitigate the impact of unforeseen events and ensure resilience.

Can we use this to ameliorate our political situation? Inspired by Taleb's emphasis on accountability and transparency, one policy suggestion to improve the behavior of politicians is the implementation of mandatory financial disclosure requirements. Politicians should be required to publicly disclose their financial interests, investments, and sources of income to ensure transparency and identify potential conflicts of interest. This disclosure should include not only their current holdings but also any transactions or investments made during their tenure in office. Congress is trying to ban trading by members and failing. It would be a great first step, but just forcing immediate disclosure would be a good move.

Additionally, politicians should be required to divest from certain financial assets or business interests that could create conflicts of interest with their public duties. This would ensure that they have "skin in the game" and are not making decisions that primarily benefit their personal financial interests at the expense of the public good. By promoting transparency and accountability, such policies can help restore trust in elected officials and strengthen democratic governance.

How can we tie performance to consequences? Another policy suggestion informed by Taleb's insights is the implementation of performance-based compensation for politicians. Instead of receiving fixed salaries or benefits, politicians could be compensated based on the outcomes of their policy decisions and the overall well-being of their constituents. This could be measured through objective metrics such as economic growth, unemployment rates, crime rate deltas, healthcare outcomes, and public satisfaction surveys.

By tying politicians' compensation to the real-world consequences of their actions, this policy would ensure that they have a direct stake in the outcomes of their decisions. It would incentivize them to prioritize the long-term interests of society over short-term political gains or special interests. Additionally, performance-based compensation could help attract more competent and ethical individuals to public service, as those who are truly committed to improving the lives of their constituents would be rewarded accordingly. A more ambitious application would be tying consequences to the actions of our permanent bureaucracy. There needs to be a way to remove bad actors and bar them from further roles (hello State Department).

It’s an airport book, but Nassim Taleb's book "Skin in the Game" offers valuable insights into the importance of accountability, responsibility, and ethical decision-making. By applying the principle of "skin in the game" to politics and policymaking, we can promote transparency, integrity, and better governance. The policy suggestions above might be a pipe dream but are just a starting point for using Taleb's insights into political reform efforts, but they demonstrate how his ideas can be translated into concrete measures to improve the behavior of politicians and strengthen democratic institutions.