Thank you BlockCon for organizing this event and making the recording available. Link to the official video.
Thank you Nassim and Naval for the interesting conversation. Thank you Reese Jones for uploading your recording so soon after the event, I was impatient to listen. Thank you jnaanarthi for cleaning up the audio of Reese’s recording before the official video was released.
Check out Nassim’s book Skin in the Game on Amazon, or borrow it from your local library as I have. You can also get the first 4 books of the Incerto for a steal of a deal, definitely Christmas wishlist material (or the newest Incerto package with all 5 books). Naval recommends Nassim’s books very strongly:
“Nassim has written books that I think people will be reading a thousand years from now. His new book Skin In The Game is fantastic, it’s part five in his Incerto series which includes Fooled by Randomness, Black Swan, Antifragile, The Bed of Procrustes. It’s written in a very timeless way, the concepts are very simple, there’s not a lot of math to it although there is a huge math backing to the Incerto if you want to get into it, and I would rather reread his work than anything on the bestseller lists, and I have. Many of his books I’ve reread.”
“I think the books are absolutely worth reading, if you haven’t read all 5 of his books I wouldn’t read anything else this year I would literally just absorb them. And I don’t say that lightly. That’s true for me; like I’m going through Skin in the Game again a second time.”
“…Well I recommend everybody just devour all of Nassim’s books; it’ll improve your decision-making in life, in crypto … how you should conduct yourself honorably and morally, I think it’s an amazing work and I hope he keeps putting them out.”
The images credited to BlockCon are from screenshots during the BlockCon YouTube video when they displayed Nassim Taleb’s slides fullscreen. The other images credited to Reese Jones are from the YouTube video he uploaded.
I’ve done my best to transcribe and format this conversation as accurately as possible, though I am not a professional transcriptionist. Stutters and needless repetitions of words have been removed, as well as certain times when someone misspeaks and immediately corrects themselves I only kept the intended word. During the presentation section, I’ve done my best to insert the slide images at the time where Nassim changed slides. Feel free to leave a comment if you notice any errors.
Word count: 14,325
Reading time: 72 minutes (approx.)
[start of Reese Jones upload]
Nassim: So, I’m honored to be here. Hopefully, this will fail because the best way to illustrate the problem with technical devices is by having a failure. Oh, it failed, it’s not working. What do you think? Ah, unfortunately, it didn’t fully fail.
So, Naval. We’re going to do a mono for a little bit and then we’ll have a conversation. And tell me during my mono, stop me if I’m covering points that you want to cover yourself.
Nassim: It’s much easier. That’s the whole idea of having someone to rely upon when you forget your own ideas.
Naval: We’re going to keep it interactive and informal.
[start of official BlockCon video]
Nassim: So, this is the German version of Skin In The Game. Given that I don’t read German I don’t know what it means. But they use the English words “skin in the game”. So let me talk about the concept, but it’s not as straightforward as you think. So I’m going to start with a counterintuitive aspect of skin in the game before I even define it. It’s about how you acquire knowledge, how you do things.
So, my origin, my natural origin is Trader. A lot of people have a natural origin as mathematician or scientist or something like that and then they become traders, I started as a trader. This means I stood with these people at some point and, you know, they spit on you and you acquire all the germs. Particularly if they have children, go to schools, so on, and in a couple of years, it can practically cover every possible airborne disease that the planet can have in staying with these people in the pit. And it’s not always crazy but when it’s crazy it’s even crazier than it seems here.
So, you spend your time as a trader, I was working with mathematical products, I was also trading from a desk as well which is less romantic as this kind of wild jungle atmosphere, so when you do mathematical trading you quickly realize that theoreticians are full of baloney, to be polite. There’s something wrong about theory and their view of the world clashes with, you know, with that of every trader. We do things – like people who ride bicycles or say a prostitute being lectured by nuns about, you know, about how to do their business. It’s the kind of thing that, academics for us were people really outside the practical world who’ve never done anything and their models – it’s not that they’re imprecise, it’s a different world.
Okay, so that’s how the idea of skin the game came to me. Because, eventually, you retire from trading. You lose hair, I had hair when I started, I lost my hair. You want to do something else with your life. Twenty-one years of trading, you know, you sort of miss it but you want to grow up and become a real person. So what do you do? I kept looking for professions, but I wasn’t good at anything else. Then I tried the retirement activities; tennis, do you play tennis?
Naval: No. That’s why I don’t, though. Terrible.
Nassim: Okay. I can’t concentrate, you know, playing tennis. So you lose concentration and particularly when you play – when you have partners they get angry at you. Okay, couldn’t play tennis, couldn’t play chess for the same reason. You have an idea to start meditating or playing chess and you forget you’re playing chess. So I realized I wasn’t good at anything. So I said okay, I’m going to give a little academia a try, so I tried – I started an academic career, working on modeling. And telling academics they’re full of baloney, alright. And I’m being polite; the Bologna replaced with the usual things that are clipped on the radio, okay.
So this is the idea, this is my bio: so in other words instead of going from theory to practice, I went from practice to theory. I saw something completely different. So, and let me explain something, I developed something called the Ludic Fallacy. The Ludic Fallacy is that the randomness – and I deal with probability – the randomness that you encounter in real life has absolutely nothing to do with the randomness you find in textbooks or in games. And I used the word “ludic” because ludic means “games” in Latin.
Now, sure enough, someone has a painting for sale at Saatchi you know, or I think exhibited at a Saatchi museum, called the Ludic Fallacy. And I, you know, can’t make heads or tails of what it means, alright, but it’s nice to have your concept – someone painting something after your concept. He’s probably on drugs and painted something and then read the Ludic Fallacy and decide to name what he painted the Ludic Fallacy. Whatever it is I’m just showing it to you in case you can figure it out because I couldn’t figure it out.
Now comes the Expert Problem. Still, I haven’t defined Skin In The Game, have you noticed, okay, I may leave it to you. But see my bio, started practice to theory, realized that things in practice are much more complicated than theory and that of course in theory there’s no difference between theory and practice, in practice there is. And then that concept of Ludic Fallacy because my specialty was randomness and probability, and give it a name as we can see in the painting. So, with this I’m going to explain the Expert Problem because there’s two kinds of professions. In The Black Swan I define there’s a profession in which the professionals aren’t really professionals, and they don’t know what the hell is going on yet nobody knows that they don’t know or at least, you know, those who pay them don’t know that they don’t know what’s going on – and the professions where people know what’s going on.
But how can we make the difference between these two? So in The Black Swan I said okay, in domains like what I call Black Swan fraught – like climate studies, they have no clue. But weather forecaster over next week has a lot of clue, otherwise they can’t survive.
So I came up with this idea of Expert Problem, but I can illustrate it best with a story of a friend of mine who’s also a trader and had the brilliant idea to go lose his money in the restaurant business. And when you retire, he, you know, he, and it was very nice because he lost his money and prevented me from losing mine in that business. Now, what did he learn in the restaurant business? Something quite central that can illustrate what’s going on with our society. All the ills of society summarized in one, as well as the Ludic Fallacy.
In the restaurant business they have awards, granted by newspapers, and of course by other restaurateurs; “the best wood-paneled restaurant in the eastern United States”, “the best tuna sushi in Western Canada”, okay and then you have all these awards.
So my friend noticed that there was a gala dinner at every year, you know, say every year and during that dinner, the awards are given. So guess what? Most restaurants that got awards were out of business by the time they had the gala dinner. So what’s the lesson there? Very simple lesson: whenever you’re judged by peers you don’t want to impress your peers and that’s one thing I learned as a trader.
As a trader there’s a rule, and I remember when I was very very young as a trader I had a lot of hair and the badge said “new trader”, “new member” it’s called. There’s an old fellow, you know bald typically, old trader, grouchy and bored, alright, so he said “hey come in here kiddo”, he said “stand up here” okay, he said “if people like you over here, you got to be doing something wrong. Okay kiddo, now you can go now”. Right, so the lesson I learned from when you’re judged by reality; it’s a complete different dynamics than when you’re judged by your peers. So businesses were you’re charged by peers, are businesses – like the restaurant business – will rot, okay, and businesses where you’re d by reality, by your P&L, by your accountant; the only person you want to impress at the end of the day is your accountant. Now, true, you don’t want to be hated by your peers but they’re not the ones whose approval you need to seek.
Now, academia, it’s a business where people are entirely judged by peers. Entirely. This is what causes all the problems we have; bureaucrats – who judges bureaucrats? Other bureaucrats. The boss, this, it doesn’t work. There starts to have meetings, you see, and when a firm becomes very large you start – you cannot associate the P&L attributed directly to a certain person. That you start having meetings, busy, fly to Omaha, come back, you know, do things, you know, talk to you on the phone for two hours, write long emails, stuff like that, that’s the problem.
Naval: Yeah we see this in the tech industry too. There’s a lot of tracking of inputs instead of tracking outputs.
Naval: A great engineer can create a billion dollars worth of value, look at Satoshi Nakamoto, and a bad engineer can cost you value. It has nothing to do with the amount of time they put in, yet they’re still managers who want the engineers in at 8:00 a.m., they want them working 40-50 hour weeks and it’s just complete nonsense.
Nassim: Exactly, and trading basically you’re just judged by your P&L; if you lose money, no matter how nice you are, it’s not gonna work and if you make money, no matter how nasty you are, it doesn’t make a difference. So, here, plumbers; a plumber has got to be judged not by other plumbers. You don’t, like, you know, their compensation isn’t determined by like our government calls up other plumbers “how much should we give them in bonus”, alright it doesn’t work that way, okay, it’s judged by you. Same with a dentist; if you show up to the dentist office with your teeth intact and leave the dentist’s office with half of them missing, visibly, there’s a problem, okay. You can catch incompetence very quickly. So there’s a judgment either by metrics, as in mathematics or physics, or in hard science, or engineering, or by some – or because they have laws – or by some the clients, by reality, just like restaurants.
So, but, you have businesses where people are judged entirely by other people. So the minute – this is why you can figure out if journalism is going to die, because journalists try to impress other journalists, that’s their business. They’re not, you know, they’re not trying working on the reader. So you can have monoculture and become very vulnerable. So this to me explains what I call the expert problem; is that they don’t get it, the New Yorker doesn’t get it because they are part of the expert problem. There’s that 1% of people that you’re gonna call the IYI (intellectual yet idiots) and that class of people, they have no accountability to reality they just account to one another and of course they’re gonna have, it’s gonna degrade as a business. And this is where, what do experts do when they want, when you catch them with their pants down? Basically macroeconomists have never forecast anything; a guy like Paul Krugman – I hope I’m recorded, please make sure I’m recorded – Paul Krugman, he knows, it’s like worse than random, okay. Why do we keep – why don’t we replace him with Miss Bri, she’s an astrologist in the Lower East Side, and has a much better track record. Why don’t we … Miss Bri?
Naval: I think the equivalent with this crowd is someone like a Nouriel Roubini or all the people who are recently criticizing crypto.
Nassim: I don’t want to comment on my friends. Okay, let me comment on-
Naval: Well, this is a crypto conference, and with a crypto crowd, right, it’s become popular to say like “Bitcoin is rat poison” or “it’s a ponzi” and so on. And every time one of these experts has called it out as being a failure it goes up, you know, 10x in the next year.
Nassim: I see, okay, yeah. I know, but if these guys had a P&L, there we go, if Paul Krugman had a P&L; he’d be bust long before Bitcoin.
Nassim: He’d have been bust with the election. Because when you have a P&L you can’t really bullshit your way through life.
Naval: And the funny thing is, there’s no point in bullshitting financial assets because you can just go short it, just put your money where your mouth is.
Naval: But people get into arguments about, online, whether bitcoin is going to hit a certain price by a certain date. You don’t have to argue online, you can go to LedgerX, or you can go to your favorite exchange and short it or just take a position.
Nassim: Exactly, so yeah, I have an aphorism that “you don’t want to win an argument, you just want to win”. It’s very different.
Nassim: So, and here, of course, what do the pseudo-experts do? They compare themselves to pilots, and we know that a pilot is an expert because a pilot has skin in the game. Bad pilots; where are the bad pilots?
Nassim: Underwater, right, because they have skin in the game, okay. It’s even worse – it’s not just like a restaurant that can fold, they’re gone. So there is a selection mechanism that doesn’t depend on judgment of other pilots. At least you know, in the later phases of life.
So that’s the problem, so you end up having fields like economics. This is a mind, pick any economist, this is how they think. You know, they have that clarity of mind, that’s on a good day, after a cup of coffee, two espresso. That’s how they think, and it’s just to tell you how their mind works, okay, and they don’t realize what’s going on. So phase one –
Naval: I made the mistake of getting an economics degree alongside my computer science degree and I can tell you that in 20 years of venture investing in startups, macro has been completely worthless. If anything it’s been distraction, entertainment, arguing about things that don’t matter. It’s just another branch of politics. Micro has been very –
Nassim: Yeah, they’re not judged – even micro – they’re not judged by any contact with reality, basically. They don’t have a P&L; if you don’t have a P&L; you pretty much, can, because they can get what I call a “circular citation ring”, they can get into any kind of game, grant one another Nobels and nobody would know the difference.
So now I’m going to define Skin In The Game with a notion of symmetry. Okay, so before I was introducing Skin In The Game from the back door, you know, my own experience with it. This is in the Louvre in Paris, and this is Hammurabi’s code. It’s the earliest code we have found so far 3,800 years ago. This was in a public place in Babylon, most people couldn’t read, so there were people who would read it for you, tell them “hey reader, come over tell me what it says”, and it says the following: if the architect builds a house, and the house collapses, the architect shall be put to death.
Okay, now, of course, it’s quite harsh, it was Hammurabi remember. it’s not like, we’re not talking about Jimmy Carter or someone, this was much earlier, okay. So how was Hammurabi’s law – what does Hammurabi’s law aim at? It prevents you from hiding risk. You cannot hide risk and then walk away from it. The architect will always know more about where the risk is located then you, so they can hide it in the basement, in somewhere, they can hide it in a foundation, where they can cut corners and then walk away and go to another city and let the building collapse and say “oh it’s no longer my problem, you bought it”, ok, you can’t, you cannot walk away from the risk you’ve hidden. That’s the core of Hammurabi’s law.
And let me show how I encountered it in my life as a trader with something I call the Bob Rubin trade that people still don’t understand. It’s as follows; Robert Rubin collected 120 million dollars in compensation at CitiBank for over a decade and, of course, stuffing Citibank – he was a vice chairman – and Citibank was in a, you know, taking some classes of hidden risks in like industrial proportion. And sure enough, there was absolutely no edge to these trades, they just blow up infrequently. And in 2008 Citibank was insolvent. And who paid for Citibank? Who stopped it out?
Naval: We did.
Nassim: Taxpayers; we did. Taxpayers, Maybe not you because…
Naval: I’m a taxpayer.
Nassim: You’re a taxpayer, but I’m sure you know how to, uh, “defer taxes”.
Naval: Trust me, there are no loopholes if there were they would let me know.
Nassim: Okay, but so included in that class of people is your dentist, your bus driver, the uber drivers – they pay taxes, you know. That’s because anything online, anything electronic, you know…
Naval: Well the worst part is after these kinds of collapses, they say “never again” so then they put in place tax and policies that actually suppress entrepreneurship who are actually the people who would create the upside black swans.
Nassim: They put more regulation, and then they call it “some very unfortunate highly unexpected event, often called ‘Black Swan’ for which we apologize profusely but we are excused as nobody can predict these things”.
Naval: We’re actually all gathered here as a direct consequence of the Bob Rubin trade, because the Bob Rubins of the world lost enormous amounts of money. It was a generational theft of trillions of dollars, both through printing money and through taxes and hidden risk, we all paid for it, but in 2009 an unknown character named Satoshi Nakamoto released Bitcoin and in the genesis block of Bitcoin he cited bank bailouts as the reason why –
Nassim: Why you can’t trust the Fed.
Naval: – why he created Bitcoin.
Nassim: Ah really, really, alright.
Naval: I think he was inspired, at least a dedication to Bitcoin in the Genesis block is revenge for the Bob Rubin trade.
Nassim: That’s even more impressive, about that story. So, and of course, needless to say, that this has happened many times in history; in ‘93 there’s something called the Resolution Trust Corporation mint 600 billion dollars at a time to bail out a category called savings and loans, they all got rich, one of them went to jail, one single person went to jail, the rest they all got rich and retired, and of course nobody showed up with a checkbook. Like Bob Rubin didn’t show up on that day with his checkbook, he just resigned and say it’s a black swan. 1982, banks lost more money than they ever made in history, (inaudible), so banks virtually have never made any money they’ve just been living off of the taxpayer but yet bankers are very rich.
Naval: They just know how to socialize losses-
Nassim: Exactly, they know how to hide their losses. So that’s the Skin In The Game: “thou shalt not have the upside without bearing the downside yourself”, you need to own your own risk. So that’s the whole idea. After Hammurabi of course, we have had a little more, let’s say more, what should we call them, more human, you know, softer rules, okay, like don’t do to others – no more of this killing architects or something. It became the notion of symmetry, society became based on notion of symmetry, okay. You don’t want to punish someone too much you want to punish too little, you don’t want to have you know someone victimize others with impunity.
So there’s a bunch of rules, of which the better-known one is the Golden Rule: “do to others as you want them to do to you”, and I of course in Skin In The Game don’t like the Golden Rule because the Golden Rule is a positive rule. If I, you know, I can force you to eat Lebanese Kibbeh, alright, because that’s what I’d like to do. So, and it also can invite busybodies, governmental people –
Nassim: – who make you do things because they like it. So, much more robust is the Silver Rule: “don’t do to others what you don’t want them to do to you”, or the “negative Golden Rule” – vastly more robust.
Naval: It’s like all the people who are talking about censorship mechanisms of social media, I think the intellectually honest way is you build the censorship mechanism then you hand it over to your enemy to run it and if you’re not willing to do that then what you’re basically just saying is “I want to be in charge” but you’re trying to do it in an intellectually dishonest way, you’re trying to do it a face-saving way where people will give it to you but it’s just a naked exercise of power again.
Nassim: I see. So, and, but the Greeks and the ancients were aware of it. Basically that the captain of the ship needs to be, you get off last, not like the, you don’t sneak out first like the captain of the Titanic. And then you had rules one of which was that you eat your own cooking. Mercury was walking by one day and a bunch of fishermen had a lot of, I think it was tortoises right?
Naval: Tortoises, yeah.
Nassim: So yeah a bunch of tortoises, in Libya it was or somewhere, and they didn’t like him so they invited him to eat the tortoises. So Mercury looked at them and said “do you think I’m an idiot?” okay, like with a New Jersey accent. Mercury, he said okay you guys are gonna eat all these tortoises, right, first, and then I’ll eat the rest. So he forced them to eat their own cooking.
So that has been present in, pretty much, in commercial law forever, as a guiding principle, ethical principle, and you even see entire sections of the Talmud are based on the symmetry. In other words in transactions where there’s consideration in the contract, in Anglo-Saxon contract based on consideration; that’s where that comes from. Whether someone is taking too much risk for others, like for example in Rodian law, that comes from Phoenician law, for example, if a boat sinks, if you know pirates say take the merchandise or something, who loses the money? How do you share it? Okay, all parties who can benefit from the transaction are obligated to pay the cost, so you have to have complete, you know, equity there.
And there are other concepts like how much information should you disclose to the buyer, say how much should you disclose to the buyer when you have a transaction? There’s an ethical – there are series of ethical rules, yes if the buyer is someone from your community you’re obligated to divulge everything, but if he’s a stranger? How much do you divulge? A lot of ethical rules that have, I mean from that you can see in the Talmud, you can see in Islamic law, and you can see it of course in Roman ethics.
Naval: There’s also the phenomenon when you have like long caravans of people crossing the desert or going through a difficult situation like the exodus from Pakistan to India, during that separation. If you were in the last few carts you were most likely to get picked off by brigands and robbers and if you’d lost something there then the rest of the caravan was supposed to make it up to you, they’re supposed to repay you because you were taking the most dangerous position in the back.
Nassim: Yeah so this risk sharing, is actually, this was a part of Islamic caravans as well because in a desert it’s the same story as robbers will attack those who are isolated in the back, they won’t kill you but will take your merchandise and the other people are forced to compensate them or take turns on who’s gonna be in the back.
Nassim: So this is not new but there are a lot of nuances and as we will see in a conversation, basically, modern life has lost some of these considerations and we’ll see how.
At no point in time in history, I’m saying at no point in time with few exceptions; one exception was India another was I think like Egypt at some point, ancient Egypt, and one of them was modern-day France, I mean modern day like hundred years ago France. Except for these situations, at no time in history did you have leaders who took less physical risk than the common person, at no time. The whole idea being a Lord is you’ve got to protect; you’re trading status for obligation to protect, so now you’ve got to take more risk. And in the Falkland Wars, or sorry it’s called the Malvinas in some countries, you know the Falkland Wars they had to find someone from the royal family to fly, you know, take the most dangerous mission in helicopter simply to, you know, confirm that role.
So and of course, we lost that. So you can have some schmuck in Washington, warmonger, okay, you can have warmongers who never take risks.
Naval: Yeah, generals now lead from the rear, not from the front.
Nassim: Exactly, and no, but warmongers, civilian warmongers, whereas in the past warmongers had to be in battle. And what does this symmetry do, is that if you want to cause people to die you got to be exposed to it. It brings some kind of natural balance to society and let me explain how. If you get on the freeway, okay, you can easily kill 30 or 40 people, okay. All you have to do is go in reverse, okay. If you have a Tesla, a car that accelerates very well even better. Alright, how come you don’t see these freak accidents anymore?
Naval: Obvious, skin in the game.
Nassim: Skin in the game. Because the driver, bad drivers, are dead. Just like bad pilots. Okay, there is – so that is a regulator. It’s the same thing with wars. Hannibal was first in battle, Napoleon first in battle; Napoleon was actually, they complained, he was way too overexposed in battle, okay, on his horse going around the battlefield, okay, Napoleon. Roman emperors, this is Valerian, a Roman emperor, who was captured by the Persians. Why? because he had to be on the frontline, he wanted to be on the frontline, he’s an emperor, you gotta be, you know, you gotta have a little bit of dignity – come on. Julian, my hero, Julian the apostate and the Roman Emperor, died with a spear lodged in his chest. Why? He didn’t have a shield. So, you know, you had to take more risk because that’s your business.
Naval: Yeah, this guy, actually he ended up being used as a footstool by the Persians.
Nassim: Yeah, footstool. Valerian was used as a footstool by the Persian Emperor.
Naval: That’s risk. Holding crypto isn’t risk, this is risk.
Nassim: Only one-third of emperors died in their bed, and we’re not even sure they died of natural causes, okay.
So we never had that situation, but people aren’t fools. You can tell that a person, a warmonger in Washington, working for a think-tank wants to destroy Syria like the way we destroyed Iraq and Libya in the name of democracy, so we destroy because for them democracy is very important. So, they cannot learn from experiences. You can -, never learn from experiences. So these people, but we know they’re full of crap, we know Thomas Friedman is just a hack full of crap, okay. It’s just unfortunate that people listen to him in Washington, but the general population detects that because the general population can detect if a person has scars or not, takes more risks or not.
This is what’s called Zahavian Signaling, in the sense that when you’re a risk-taker you have scars, no? And you produce these scars as an ornament. Zahavian Signaling is a concept that we discovered, why do peacocks have these fancy tails? These tails, in fact, are a handicap, it’s just to show their genetic superiority that they can function in spite of having these large burdening tails that bring predators because they’re good and strong. And they use this – I took this in Jaipur India, this picture of the, in front of me, of the peacock – so there’s a concept of Zahavian Signaling, in other words, it’s called costly signaling. It’s not cheap signaling, it’s costly signaling. You see, there’re a lot of virtues, we’re going to talk about virtues, that are fake because anybody can signal these virtues. But risk-taking is real, you cannot fake risk-taking, you cannot fake risk; you can fake virtue. Or what we call, regularly, virtue.
So this explained to me, fundamentally, why we spend so much time haggling, I mean in theology, over the nature of the Christ – I come from that part of the world where if these discussions taking place, the Greek Orthodox Church, if you had I mean if you had to, if you had a library, you would have probably – you’d fill in a stadium with documents about the discussions of you know, and the arguments of whether the Christ was God or was not God but something like a God.
What’s the big difference? And why did they always revert to the notion that the Christ could not be full God, why? Because think about it, if you’re God, you don’t have skin in the game, it’s like in a Superman thing, alright, you have to have some vulnerability somewhere, alright, you have to suffer. So you suffer because you have skin in the game; that’s the whole concept. And in Christology people didn’t think of that, effectively, let’s think about it; if you go to a circus and see an acrobat with a parachute, or instead of an acrobat with a parachute they show you a movie, alright, of an acrobat. You want the person in front of you to take risks, that’s what you want, that’s what you paid for, okay, you want real risk because, otherwise, you’re not signaling any virtue unless you take these risks. And this is, that was the story of the Christ.
And this is something that people don’t get, is that any virtue that doesn’t entail some kind of sacrifice or cost is not virtue. The gods in the old days did not let you, you know, just, you know, claim to be their subject or something without paying a price, without having something to lose for it.
And now, in our society, we have fake virtue. What’s fake virtue? This is in a hotel room, they tell you “save the planet, dear guest, save the planet”. What am I doing here, saving the planet or saving their bottom line? Okay, so they’re using the planet as an excuse, alright, that’s what I call virtue signaling. A virtue that doesn’t cost you anything, doesn’t entail any risk-taking, there’s no risk in what they’re doing and you cannot have virtue that way.
So, here when young kids ask me “what should I be doing?”, okay, in life. Start a business. Don’t try to get a salary, don’t join an NGO because all they do is virtue signaling. Maybe initially the founders really mean well, but then you end up with people trying to game the system. People I call rent seekers. Like the UN office in Lebanon, for example, they talk about deforestation so they can have the staff and they can have the funds so they can fly first-class and get a nice apartment, but when you look at the numbers there’s no deforestation, you see. So you have all these, all this industry, of NGOs, so the first thing you tell a young person: do not join an NGO if you want to do well. Start a business and fail, alright. Because, basically, we need people – we can’t live off of, if everybody is a seller, you need to fail. To take risks. Just like a fallen soldier, okay, remains more honorable than someone who has never been a soldier. You see, is there such a thing as a dishonorable fallen soldier? No, that soldier is very honorable. Why a dead entrepreneur, or a failed entrepreneur – why should a failed entrepreneur be not something very honorable? More honorable than some who’ve never been an entrepreneur.
Naval: Come back with your shield or on it.
Nassim: Exactly, come back with your shield or on it. So this is the recommendation, you know, I make: is to start a business. And then one thing I noticed – some people won’t like this – but I didn’t think that Trump had any chance until I saw him standing with the 11 in the primary, with 11 or 12 Republican opponents. And at a time there was a campaign to explain to us that Trump was an incompetent businessman because he lost a billion dollars, of his own money. The American public is no fool. There’s something real about losing a billion dollars, if it’s only, if it’s your own money. So, although, it makes a professor at a university would think “oh it’s horrible to lose a billion dollars”, like failing an exam. Life is not an exam. Losing a billion dollars makes you real, and that helped him get elected, at least helped him in that stage of the election in the primary.
So, inequality. A lot of people talk about inequality. First of all there’s an error in the way we measure inequality; we measure static inequality. Static inequality in the U.S. we don’t do very well compared to say Italy or France. But dynamic inequality, you realize, that if you take 1982, the 1982 Forbes 500 richest people compare them to the 2012, you realize that only 10% of the families cross the list, okay. Whereas in Italy if you do Florence 1620, and Florence 2015, you will notice that the same names will be on the list, alright. You won’t find an outsider, on the list. So, you got to look at it dynamically, basically, in America, I think 60% of Americans spend 10 years, sorry, 1 year in the 10 percent. And something like more than 12 percent of Americans spend at least one year in the 1%. So we have the dynamic vs static.
That’s the thing, there’s something fundamental about inequality. People are willing to accept inequality if the person who is richer is taking risks, you see. You don’t accept inequality if it’s a rent-seeking CEO making fifty times a worker makes, and people got upset about it. But people are never upset about Steve Jobs being richer than others. And actually the Swiss were trying to pass a law, the Swiss could see the difference, the public who was trying to pass a law, I mean it didn’t pass but, you know, it was not close but it was like 30 or 40 percent of people wanted to limit the salary of CEOs, but not entrepreneurs. There’s a difference between entrepreneur, because entrepreneurs have skin in the game, to limit, because society doesn’t like rich people who made their wealth without skin in the game. You can detect it, that’s what’s unpopular.
Naval: Yeah, people with a political agenda will conflate equality of opportunity with equality of outcome. Equality of outcome is communism, it’s a terrible thing, it requires coercion.
Nassim: Exactly, yes.
Naval: But equality of opportunity is what you strive for, not that you can ever really have it – we all get dealt a different DNA hand, and where we were born, and how we grow up, and what we learn, and what our temperaments are, but you can kind of at least narrow it down through education.
Nassim: But you can measure, you can also measure this inequality, the equality of opportunity with a negative metric. Most people look at the opportunity of people to rise, well if you rise someone else has got to come down, no?
Nassim: So you got to take someone else’s spot. So, it’s not quite a zero-sum game but still, you don’t want dinosaurs to stick around, so the best metric is how many large corporations fail.
Nassim: Today, in the United States, the company’s average life in the S&P 500 is 11 years, today, and dropping. It used to be 60.
Naval: But the average price to earnings ratio is much higher than that. But that’s because of extremistan, there are a few huge outliers.
Nassim: Yeah, extremistan, exactly. So there’s nothing wrong, provided Google has – is exposed to going bust one day, you see. The same with the other firms, some of the firm’s in which you’ve invested.
Naval: Oh, the failure rate for small startups or for small cryptocurrencies, as we all know, is very very high.
Nassim: So I’m gonna finish with a – and then we start the conversation – with one more point, that again is a trader’s story, there’s something I call the Green Lumber Fallacy, is after the following metaphor. There’s a trader who is a fellow who wrote a book on “how I lost a million dollars”, which at the time when he wrote it is very respectable, a million dollars was a lot of money, okay. Now, you know, they didn’t have the Obama years and Greenspan, printing.
Okay, so how did he lose that million dollars. He traded green lumber, and he knew everything about green lumber. He knew the statistics, physics, chemistry, everything, the supply, the demand, the geography, the consumption – he knew everything about green lumber, read every magazine, every book he could find on lumber. And yet, he lost all his money. Turned out there was in the pit a fellow, an old trader, who was very very wealthy, and always made money trading green lumber, he traded nothing else. And one day the narrator discovered that that fellow thought that green lumber was not freshly cut lumber, that it was lumber that they took lumber and painted it green, right, and yet he made a fortune using green lumber.
So what does it tell us, it tells us that from the outside, like an academic approaching a problem, what you need to know it’s not that, what the fellow who made a lot of money his name is I think Siegel, like Jerry Siegel or something like that, was that what he knew was not like it’s not like he didn’t know anything, he knew a lot of stuff, but that stuff you can only detect from the inside, you can never know from the outside what it is, you see.
Naval: You have to play the game to understand it.
Nassim: You have to play the game to know what you need to know. Okay, from the inside not from the outside.
Naval: People are always asking me to recommend a game theory textbook, and the reality is I never read a game theory textbook, when I was young I just played a lot of games.
Naval: Okay, there you go. So you, from being in that game you see things differently. Which is why education, I think, in Antifragile – and hopefully we’ll discuss that – in Antifragile, I rail against education.
And then finally, my final slide, and we’re going to start a conversation, is about the following quiz. Which applies to any business where there is skin in the game. Say you go to a hospital and, for your brain surgery, you need to have a brain surgery, which probably will enhance your mathematical skills, there’s a special surgery, alright, you go and you can do integrals after that surgery. So you show up to the hospital and you have the choice between two doctors; the first one looks like what Hollywood here would put in a movie, you know; measured, clear English, Harvard degree on the wall, someone who really looked like a Hollywood doctor, Hollywood version of a doctor, a brain surgeon. And the other person, same rank in the hospital, looks like a butcher; thick fingers, no diploma on the wall, and speak with a thick New York accent, okay, like you can put him in a mafia movie if you’re going to put him somewhere, alright. So, and no diploma on the wall means he’s embarrassed by his background.
Which doctor should you rationally pick? Who would pick the butcher? Who would pick the slick Hollywood doctor? Okay, there you go. So the point is; unconditionally you should pick the Hollywood doctor, right, but here they’re the same rank in the University so think about it; the person who looks the least like a doctor has got to have the most skills because he had to overcome the perception bias against him.
Naval: There’s a similar learning in early-stage investing, where you tend to avoid teams that look incredibly polished.
Naval: They have good powerpoints, they’re well dressed, they present well. What you want is the person who’s been busy in front of the computer, flustered, gets up in front of a whiteboard, explains things a little too complicated but has the genuine substance.
Naval: But the form alone lets you avoid it, so you get business plans that are too well written and they use too many buzzwords and you reject them just on that basis, you know.
Nassim: I would take it one step further and argue against a business plan; anybody who’s capable of writing a business plan, you don’t want to invest with them.
Nassim: So okay, so now let’s start the conversation, based on these things-
Naval: Yeah before we get into it, I want to give Nassim a proper introduction because I should have done that at the beginning but I didn’t know I was going to be part of the presentation. I normally have a rule that I don’t travel for conferences, and neither probably should you because they fall very much on this whole side of signaling, right, where you’re kind of like looking busy for your boss rather than actually doing work. Now there can be huge benefits, you can network with the right people, when they’re small you can meet the right people, but you know sitting in an audience doesn’t have that much value for you, you could sit at home and watch it on YouTube.
So I normally don’t travel for conferences, but when I got the opportunity to speak with Nassim, I had to come down from San Francisco. To me, he is one of the very very few living natural philosophers; which is someone who practices science, does real work in science, but outside of a scientific institution, outside of the credentialed system and I think his work is the kind of work that will last for a thousand years. I don’t say that lightly. But I think people will be reading, you know, there are books that Nassim has written and I won’t insult him by calling him Dr. Taleb, is that ok – I’ll just call you Nassim?
Nassim: Yeah, it is an insult typically.
Naval: Yeah, so I won’t insult you by calling you Dr. Taleb, but Nassim has written books that I think people will be reading a thousand years from now. His new book Skin In The Game is fantastic, it’s part five in his Incerto series which includes Fooled by Randomness, Black Swan, Antifragile, The Bed of Procrustes. It’s written in a very timeless way, the concepts are very simple, there’s not a lot of math to it although there is a huge math backing to the Incerto if you want to get into it, and I would rather reread his work than anything on the bestseller lists, and I have. Many of his books I’ve reread. Now the interesting thing is that I I do get push-back when I say I’m talking to Nassim because people say “well, he’s so angry”, “he’s so mean”, “he’s so rude”, because they can’t they can’t fight him on the math and they can’t fight him on the principles so they go after just the-
Nassim: Also I think it’s that I derive a huge amount of pleasure from Twitter fights.
Naval: Yes, and he does.
Nassim: Yeah, so and why do I derive pleasure from Twitter fights? So think about it, if you’re bored it wakes you up. And at the gym, you see, I’m into weightlifting and you have to take 15-minute breaks between sets – perfect time.
Naval: Yeah and I think, you say that you do it for fun, but I think it’s also it’s having skin in the game in your principles, right, because as you say courage is the only virtue that cannot be faked. I can fake any virtue on Twitter, but the one that I can’t fake is courage, and that means going up under your name, not under some troll account name, and taking on somebody that you think has unfairly benefited from exploiting the system like the Bob Rubin trade for example, or the IYI’s, the intellectual idiots, that you call out and name, or when you call out Monsanto.
Nassim: Yeah, but he’s giving me too much credit, alright. I just, I don’t do it because of these principles.
Naval: He just likes to fight.
Nassim: I do it because I get bored, alright, and sometimes waiting in line or in traffic, when you’re stuck in traffic, that’s the best time for a Twitter fight. So, really it’s not as lofty a goal, but it so happened that, okay, it, you know, can impress people.
Naval: I mean there’s not a lot of people that’ll take on Saudi Arabia on Twitter and call them Saudi Barbaria on a regular basis. But anyways, so I’m very happy to be here with Nassim. I think the books are absolutely worth reading, if you haven’t read all 5 of his books I wouldn’t read anything else this year I would literally just absorb them. And I don’t say that lightly. That’s true for me; like I’m going through Skin in the Game again a second time.
Nassim: He’s gonna convince me to try to read my books now.
Naval: Yeah, they’re amazing.
Nassim: The first one was finished 20 years ago, so you gotta understand that I’m –
Naval: Well there is some redundancy in there, as you would expect, and I think a common theme that Nassim pointed out to me when we talked earlier running through the whole thing is this concept of symmetry and asymmetry. Skin in the Game is about symmetry between your consequences of your actions and learning and feedback loops, and asymmetry is about extreme outcomes, so you know Black Swan and those kinds of principles. So I think we can just dive into it.
Nassim: You want me to explain to them of the symmetry thing?
Naval: I’m sorry?
Nassim: I didn’t put slides on symmetry, hoping – you want me to explain it to them?
Naval: Yeah, I think – yeah, let’s go ahead, why don’t you explain symmetry and asymmetry in your words.
Nassim: Okay so, in other words, you don’t understand random events, you can’t predict what’s going to happen. But you can pretty much tell how the random event would hit you, no? You know whether you’re gonna make from it, lose from it, make a lot, lose a lot, okay. So you try to position yourself in a way to benefit more than you would lose from a random event, okay, or to lose less than your neighbor from a random event. That’s the idea of asymmetry. It’s pretty much like an option, when I call an option. An option you make more on the upside than you would on the downside. And if you, in general make more from a random event than you lose from it, then you’re gonna do very well in the long run provided you make sure you’re going to survive. That’s the asymmetry that’s present in contracts, and options, stuff like that. Asymmetry becomes bad when you make the upside, like Bob Rubin, and transfer the downside to someone else, and the easiest thing to transfer to, a person to transfer to is the taxpayer, anonymous taxpayer, you see. That is an asymmetry, okay, a bad asymmetry. But tinkering, trial and error, it is – has a really positive asymmetry. So, a simple, you know, example I give is if we wanted – what’s your favorite dish?
Naval: It’s pizza, but I shouldn’t be eating it.
Nassim: Pizza, okay, so pizza. Okay, so let’s say we decide to make the best pizza, we would call it the Santa Monica flying pizza, alright, here. So you rent a bus, you go to the local university and bring every chemist, run up every chemist you can find, okay. And then you take another bus and round up every overweight person you can find in LA who’s well dressed, this is my metric when you go to a restaurant is look at for overweight people who are well-dressed. That’s sort of like, you know, my thing. So, and then, so we have two crowds now, okay. So if we ask the chemist, that’s the top-down, okay, to invent that pizza, you ask the chemists, you have about 150 chemists all looking boring and poorly fed and visibly not well dressed, and then you ask the well-dressed people, whatever, and overweight, you tell them listen, let’s make the best pizza. So the way you do it is you take an existing recipe, and you start adding ingredients to it, no? And you taste, if it’s good you ratchet it up, okay, so you have the upside. If it’s good, you discovered something that really has good taste, you go up, or ratchet it up, in other words you lock up your gain, okay. Now, if it’s bad you give it to the chemists; very little to lose, alright. So that is trial and error, a lot of trial and error, and I showed in Antifragile – and that’s the main argument – that trial and error will always outperform design, simply because of that property. That we’re vastly more intelligent, we have an IQ of a thousand when we do trial and error.
Naval: Yeah these basic concepts, by the way, are cropping up all over in cryptocurrencies like Bitcoin, that it is literally a lot of your principles realized. Like Bitcoin, for example, is an asymmetric bet; if you lose, you just lose your money, if you win – if it becomes digital gold – you can make 50 times or 100 times your money, so it has that option –
Nassim: Obviously depends on what price you buy it at, if you buy it at $100,000 maybe not, if you buy it for here, maybe.
Naval: For sure, yeah. But it’s also antifragile in the sense that every time it survives a hack or an attack or a failure of some part of the ecosystem, the developers improve the code, they improve the system, and then it gets better at surviving future shocks.
Nassim: I see, so that’s Antifragile, yeah. So this idea of symmetry, you say convexity because a convex function is very simply makes – you make more when you go up than you lose when you go down, okay. And it links to fragility, it’s antifragile, because fragility has the exact opposite attribute, you see, if I jump from 10 meters I’m harmed more than twice that if I jump from 5 meters, and more than 10 times if I jumped 1 meter, and more than a hundred times… so that’s concave, it means you don’t like volatility, and if you’re convex during that range you like volatility. You’d rather have volatility, you’d rather have shocks, you’d rather have turmoil. So this is the idea of antifragile, which applies to both the physical system and anthropology.
Naval: It’s like people who are shorting cryptocurrencies, they’re on the wrong side of that. They’re doing concave trades.
Nassim: Concave trade, yeah. Because you have a lot more downside, I mean, think of Paul Krugman bearish at what, 40?
Nassim: He was bearish at 40? He was short –
Naval: Bearish 40, yeah.
Nassim: Imagine his P&L, if you went short at 40, okay, think about it. First of all, you would never hear of him.
Naval: He would have lost 100x, yeah.
Nassim: He would have disappeared if he had a P&L, so this is why, you know, I’m glad he didn’t because we want to just have someone to make fun of, alright. So, surprisingly he doesn’t engage me in Twitter fights. Because, simply he doesn’t, for some reason. He attacks other people, but not, for some reason, he doesn’t.
Naval: It’s easier to attack people from behind the shield of the New York Times than it is to go out and battle by yourself.
Nassim: Yeah, that’s true. But even the New York Times, they don’t. By the way, I saw a copy of it, Skin in the Game was open as a best-seller, two on a best-seller list, without a single book review. Not a single book review in America, in the United States, zero, okay. Just to tell you that we don’t really need the New York Times. Ok, it’s becoming…
Naval: Yeah, even in my industry what’s funny is that people give out awards like VC of the year or Angel of the year and so on, and they’re all nonsense because the reward is in investing and making the money, you know. Like, who wants to win the award for a Bitcoiner of the year? You just want to own the bitcoin, right?
Nassim: Okay, so there are a couple of things we’re going to talk about, the Lindy effect, linked to fragility, like the test of time.
Nassim: You present the Lindy, but let me first say one property of the news that was – that’s not, you know, never existed before in history. Before 1940, or 1946 I think when families had a television set, so you have a small family now watching television, getting one-way information, reading the New York Times, you don’t go to the square, you don’t get – okay, before that period in time, people did not get the news from one source, they, it was like Facebook or Twitter. People traditionally were both conveyors and recipients of the news, so we’re all involved in the news making, you see. So you go to the barber, you get the news, you go you transmit it, you tell the fisherman, they counter, then tell your barber you bring back information to the barber that was – so, news were something that was organically spread in society and it was nobody could control it as a source before the 1940s propaganda, New York Times, all that era of television, and we broke out of it with Twitter and social media. So and there’s a concept called Lindy and the news, the way, you know, it was organized during that period from 1946 to the election of 2016 was not Lindy, can you explain to them what Lindy is?
Naval: Yeah, Lindy just means sort of stands the test of time, which is like any book that’s been around for thousands of years is likely to be around for thousands of more years. The best predictor of the survivability of something is how long it has survived.
Nassim: For some-thing or all things?
Naval: For certain things, for things in the intellectual domain for things in the social domain.
Nassim: Exactly, so it was discovered Lindy is a restaurant in New York that has cheesecake, it was a horrible cheesecake, and I spoke about it and discussed it in Skin in the Game and it had the great idea to go bust on the Tuesday the very the same day Skin in the Game was published, alright, after 60-70 years. So Lindy was a restaurant were actors used to meet, and they discovered that plays that survived 200 days had 200 more days, a thousand days? A thousand more days. They discovered that rule. So you can classify things on whether they’re Lindy or not. Now Lindy tells you that technology, okay, it’s gonna be, old technology will outlive new technologies. Not because new technologies are bad, but they will be more vulnerable, new technologies, to other newer technologies whereas old ones are not.
Naval: Take the fork, for example, it is a piece of technology that’s become invisible to us but it is technology, something that helps you eat things, and the fork is going to be around forever – it’s a tried-and-true model. And the fact it’s been around thousands of years means it’ll be around for thousands of years.
Nassim: There’s something in blockchain, the concept of transaction coupled with, a commercial transaction, coupled with a financial transaction that’s entirely Lindy.
Nassim: And that’s the letter credit, which itself was replicating something used in maritime commerce. In other words, banking they devised this system by which you can – you trigger a currency the minute you deliver the merchandise. Now you own – you go there with merchandise, you come back with a currency. So mixing the physical transaction with the financial one, all in one, it’s the same transaction, coupling them, is an old very old thing.
Naval: Yeah and in crypto, like, Bitcoin is the Lindy currency. It survived a long time, survived the longest, and it won’t be digital gold until it’s survived long enough, but the longer it survives the longer it will survive, the more faith people can put in it and the more money they can put into it,
Nassim: Exactly and government-issued currencies has never been Lindy. People don’t realize, and you can you get a clear idea if you read history, okay. You know the story of the, remember the story of the Christ in the temple? Why did he fight the money changers? Why were there money changers in the temple? Because God of the temple did not like all these currencies, he didn’t trust these currencies, he wanted the shekel of Tyre and now current day in Phoenicia, okay, because they’re the only reputable ones. So he forced cities to, you know, to compete on who’s gonna have the most solid currency for the god to take it, and then money changers would change into that shekel of Tyre.
Naval: God’s practical.
Nassim: So, currencies have always – I mean the governments have always debased their currency.
Nassim: And but yet citizens had the choice between currencies, what currencies to use and what would God want? He would select the one that was the least debased.
Naval: You pointed out that one of the big things in history was separating the state from church, and some religions have done that and some haven’t, where they still combine them. But that was a major revolution; you render unto Caesar what is Caesar’s. And the interesting thing with crypto is we’re trying to separate money from the state and that transition, if it successfully happens, will probably be just as impactful and take quite a while to play out.
Nassim: I see, and it is interesting because if you start having competition between cryptocurrencies, it would be the same competition as the one that prevailed in ancient times between issuers. Because, you know, the was a Sater of Asia Minor, each King produced his or her, Queen her own currency, and then you’d go by the one that was the least prone to debasement, the one you can have faith in.
Naval: Right, in my opinion it’s good to have the competition though because it makes them antifragile, it exposes them to randomness and variation and makes them evolve.
Nassim: Exactly, exactly. It’s not until recently, where you’re forced, you know, you can only conduct transactions in peso, dollar, and this and that. In the past, people picked the currency that was the most reliable for transactions.
Naval: Yeah, another point in asymmetry that you brought up which I thought was very counterintuitive, at least for me, and completely changed the way I think about many important things in the world, is the Minority Rule. I don’t think that one’s obvious at all. It’s one of the things that maybe it’s obvious in hindsight, once you fully understand it, but I think the repercussions aren’t obvious and the fact that even it is a very stable outcome isn’t very obvious, so I’d love for you to just go to the Minority Rule.
Nassim: Okay, I discovered the Minority Rule one day, ironically, I was trying to explain what a complex system was at a barbecue of a complex system Institute, okay. And that complex systems have one attribute, that at different scales things behave differently, okay. So in other words, a collection of individuals don’t behave like separate individuals, they behave as separate animals, a very separate animal. Which is something that a lot of people don’t understand in government today, is that if I understood the psychology of each person in this room I can’t predict the collective, how they will behave collectively, okay. But nurses know that, people know that from children, alright, you know you could predict each child independently put them together it’s unpredictable, okay, it’s a different animal. So that’s the concept of complex systems.
Trying to explain it, okay, I was hit with the best example of a complex system because at that barbecue there was, there’s, you know, it had food, alright, and drinks and a delegation came from Jerusalem and they’re all Orthodox. Bunch of people. So a fellow showed up, you know, to say hello and I felt embarrassed, I said “oh I’m so sorry we don’t have kosher drinks”. He looked at me, he said “all drinks are kosher here” I said “what?” he said “yeah, where’d you buy the drinks?” “here in Boston” “okay, they’re going to be kosher”. What? I googled the proportion of kosher eaters and drinkers in America, less than 0.3%, that’s on a good day, alright, a religious holiday; 0.3%. Yet close to a hundred percent of drinks in America are kosher, why is that so?
Naval: Because the Jews run the world. [laughter] Don’t quote me on that!
Nassim: No, no. You’re being filmed, you’re being filmed. It’s because of this very simple concept, if let’s say I’m coca-cola what are you going to have: kosher coca-cola, nonkosher coca-cola? Alright, you’re gonna have different departments, different things, different trucks so they don’t get mixed? And then supermarkets will have a different, you know, ailes? This is kosher ailes? What you’re going to do is just make them all kosher, okay. Those who, like me, don’t know the difference, okay, will drink coca-cola – I don’t drink coca-cola – but so it so happened that when we looked at the bottom of the lemonade bottle there was a sign saying it was kosher, that only the kosher people know how to identify, okay. So that’s the Minority Rule. So if a martian came from space and sampled food preferences, okay, he would say that America’s 100% kosher in drinks, okay, not 0.3%, so why? There’s an asymmetry, the kosher person will never drink not kosher, but the nonkosher you see can drink kosher.
Naval: Yeah, that’s the key, that for the minority to control the majority, the minority has to be intransigent. They have to be absolutely unwilling to go along.
Nassim: So, for example, people didn’t notice one thing about the preferences, marketing preferences, they don’t understand, they look at marketing preference of individuals and they make cars accordingly. Most Americans at a time when where cars were, you know, still had stick shift preferred stick shift – the majority, seventy-five percent. But most of them had a family member who didn’t like stick shift, so you’re a family of five and one family member, at the time that people didn’t have a lot of cars per household, one household member can’t drive, so what do you do, this is gonna go automatic.
Naval: Yeah. Also, I think if someone in the house has a peanut allergy or gluten allergy their whole house ends up with no gluten or no peanuts.
Nassim: Exactly, same thing. So there’s nothing wrong with accommodating the minority, so long as you know it. Now the interesting thing about the Minority Rule is that seems to me that it’s a norm rather than the exception in society, and about anything. The reason we have non-smoking spaces – I joked with a friend of mine, one day I had a French visitor. When I was a student and he came, you know, he met me, I said meet me in front of this restaurant and book a table, He couldn’t find a non-smoking table. I told him did you try the smoking one, he said yeah, I said okay go buy pack of cigarettes and we’ll go to smoking section. He believed he thought that, you know, you’re forced to smoke in a smoking section. So, and we smoked in the smoking section, to be there, play the game. So, but, really we have these asymmetries actually running our lives. The formation of ethics.
Naval: Yeah and actually, so, this is very interesting for me because like on Twitter, for example, if you go on there you will always find somebody who’s outraged about something, right. There’s someone in the extreme left or the extreme right in politics, or in cryptoland, and they’re just really angry about something. And for a while I thought they were just being super ineffective, and that’s what I was hoping, I was hoping that the most outraged, most angry people are actually very ineffective and they’re just misguided and they’re kind of on the corner. But the sad thing is the minority rule kind of shows that if these people are intransigent enough they actually run and control society, they establish the laws for the rest of us. And we kind of intuitively know this, like from revolutions, like revolutionaries tend to be small bands, small groups that won’t put up with the status quo that overthrow the entire system. Because most people in the center just kind of don’t care, they just kind of want to get along, and they want to go along.
So this comes back to, like, if you’re willing to tolerate intolerance then you’re gonna live with the consequences. If you look at for example elections, there is a belief in politics and political science that it’s the voter in the center, the median voter, who everybody competes for and decides how the election runs. But that’s not true when you have third parties with intransigent minorities. So, for example, if the Bernie voters absolutely will not vote for the mainstream Democrat, the Clinton, or if the extreme, you know, right voters won’t vote for the Jeb Bush, then they’ll actually stay home or they’ll vote for a third party. Then you actually have to appeal to them, you have to go with their preferences. As long as there’s enough of them, it doesn’t have to be a large number, it’s just a few percentage points and they’re enough to control the entire outcome. So we live in a world that is actually structured around the preferences of radicals who won’t compromise, it’s not built around the will of the majority, the will of the majority does apply in some cases but in many more cases it’s the minority rule and there are all kinds of other implications –
Nassim: Ethics – I mean ethics, for example, people have the illusion that society is getting more ethical because the majority is becoming more ethical. No, no, it’s minority rule. Another mistake made by Monsanto is that when introducing GMOs they thought that all it took was convincing 51% of consumers to have GMOs, okay, they did not think it through properly because think about it; all you need is 3 percent of people who are absolutely against eating GMOs, alright, and then you’re gonna have a party here to celebrate the collapse of, say, Saudi Barbaria, say, okay, we have a party, alright, what do you do? You send a list saying GMO / non-GMO? We make everything non-GMO. You make everything organic. And the difference in price, when the difference in price is small everybody switches to the one that the minority wants, to the choice of the minority. When difference in price is large, then you may have two varieties. Like, for example, for meat; kosher meat and kosher stuff is much more cumbersome to have everything kosher, because it’s more costly and it’s complicated.
Naval: Right, so there’s the evidence the Jews don’t run the world.
Nassim: But believe it or not, 100 percent of the meat you get, imported meat, imported lamb, in the United States about a hundred percent is halal. Because New Zealand exports, ok, they’re the main exporter, what’re they gonna do, what if put in a ship to Malaysia what if Malaysia doesn’t want – there’s less demand – we’re gonna de-halal it to send it to the United States? So they made everything halal, so all their meat is, all their exports are halal. So, at Christmas, I saw this at Christmas, halal was – because I can detect, I read Arabic – it was all halal, yeah so it was probably, you know, they produce it and then we don’t have to worry about merchandising, about perishability, and stuff like that, to make it make everything halal it’s much simpler.
Naval: So the minority rule applies when the minority is not willing to compromise, when it’s relatively distributed amongst the whole population. Like if they’re off by themselves in a corner, then maybe you can service them just as a minority and leave the majority.
Nassim: Exactly, if you have a geographic diversity, ok, then you don’t have minority rules, alright, if you say the people who eat halal live in the neighborhood, people who eat kosher live in the neighborhood – have their own ecosystem – then you’d have, you won’t have minority rules. As you open up the country, then the minority rule would prevail about anything.
Nassim: And conditional on the majority not being ticked off by it.
Naval: That’s right.
Nassim: In Europe, for example, now pretty much schools have to have halal meat, and you have reaction. People didn’t know, I mean, you should have done it in a more –
Naval: Quiet way.
Nassim: – surreptitious way. Yeah. But because parents say no I refuse, you know, that my child eats halal, okay. Now we have a counter-reaction. Just like the Christians, in a Roman world, halal meat resembles all sacrificed meat in the near East, actually. You have to, you know, sacrifice the cow or the lamb, the sheep in a certain way. And Christians would never eat sacrificial meat, you know, in the old times pagans would have sacrificial meat and then a lot of people would die of hunger in front of a table full of meat just to show that they were Christian and they would not eat sacrificial meat. Because for them it’s polluted. So you may have a counter minority rule coming from somewhere, you see.
Naval: Yeah, I think for, there are cases where the minorities themselves are – and a minority here obviously you know what it means, it means a small group of people who are intransigent – themselves are very intolerant of maybe even the existence of the majority or the way the majority likes to function, so it does create a counter-reaction, so it’s not that all revolutionaries, you know, necessarily control the world, very often they just get lynched or stamped out.
Nassim: Exactly, so we have a thin balance here between majority rule and minority rule. And Tocqueville wanted to protect the minority from the majority, alright, and now we may have to do an inverse Tocqueville as well to bring symmetry, protect the majority from the minority.
Naval: Yeah, it applies in crypto, for example, if imagine that you know something like, I don’t know, if I had to make up a number like call it like ten or twenty percent of the good developers in Silicon Valley are now working on crypto related projects, or at least dabbling on it. And if they all announce tomorrow that they are only gonna work for companies that pay them in crypto then pretty soon you would see every payroll system switch to also offering crypto payments.
Nassim: That’s true, if you’re unconditional about getting or paying or receiving in crypto, you install the minority rule.
Naval: Minority rule is a very powerful concept, it’s one of the ones in Skin in the Game, I highly encourage you to go through it. Let’s talk a little bit about black swans, which is an old concept, you’re very famous for it, did you coin the term?
Nassim: No, Black Swan term was, the earliest use of it was by a Roman poet who said that a good person is as rare as a Black Swan. And it was used for something, you know, rare but not completely impossible.
Naval: Yeah and now we see them everywhere, now that you kind of popularized it I think it’s very –
Nassim: Because now we use as a logical problem, that no matter how many white swans you’ve seen you cannot rule out a Black Swan.
Nassim: But there’s an asymmetry, if you’ve seen one Black Swan then you can say that there are black swans.
Naval: It’s kind of like how science works too, where you can never completely prove anything you can only make it falsifiable, you can only disprove, disprove, disprove. Right, so anytime somebody says this is proven by science, they usually don’t understand science.
Nassim: They don’t understand science, or they work for Monsanto.
Nassim: Or the ex-Monsanto. When they say it’s proven by science. Science is not about proving, science is about disproving and having something that has not been producing a result that has not yet been disproved or superseded by something else. So it’s a process, not a result.
Naval: There are whole branches –
Nassim: But science is a minority rule by the way.
Nassim: Yeah. Science, when someone tells you 300 Nobel Prize winner said this, okay. That doesn’t count, because one counterexample can destroy the whole argument.
Naval: Right. Consensus doesn’t matter.
Nassim: Consensus doesn’t matter, it works by minority, but the system is there to protect that minority that is right against the majority, except in economics, of course.
Naval: Right. Like was it Galileo who said “but yet it moves” when he was –
Nassim: Yeah, yeah “E pur si muove”.
Naval: Right. Very interesting related concept that you’ve tried to bring into the mainstream, which I don’t think has quite gotten mainstream yet, is Ergodicity. I don’t think most people understand it, I think it’s one of your more complicated concepts, I think I finally do understand it, but I’d love to have you explain it and see if we can spread the meme a little bit.
Nassim: I’m gonna explain one thing, one thing that if, called path dependence, if you wash your clothes first and then iron them, say you wash your pants and then iron, you get different results from if you ironed your pants first then wash them, okay. So the sequence matters, no? Okay, so it’s trivial, but you need to analyze things dynamically to get that point. So, Skin in the Game really is organized around two concepts, things seen statically that when you view them dynamically have completely different properties. And you can only get that if you’re either super smart mathematically, which nobody is, or have skin in the game because you realize that. So, if you go to a casino and you have a small probability blowing up, no matter what your edge is, you will blow up. That’s it. So no matter what your – because you cannot say okay I’m gonna blow up and then get rich, you can’t, you’ve got to get rich then blow up. So the sequence matters. So that is the path dependence, we detect it. This is the reason why we’re paranoid.
And I noticed that there’s a guy who got a Nobel, Thaler? A pseudo-Nobel, in economics, it shouldn’t count, should count as a negative, alright. So and then all his work is based on showing how we are irrational statically, okay. He, for example, in one of his – the example where he shows we’re irrational – if you go to a casino and play with house money in the sense that you bet small and that you win big, if you win big then you risk big, but if you lose you don’t take risk. So in other words, your initial endowment you try to preserve it, but you risk everything you make from the casino, okay. He found it irrational, but if you look at it dynamically, that’s what every trader does. You play with the house money. If you don’t follow such a strategy you’re eventually going to go bust one day.
Nassim: Because you can’t say I can look at the average return, because if you’re bust on day 28 there is no day 29, you see. Whereas if you take an average of people’s returns, if number 28 goes bust, number 29, you know, can operate freely. You see, so that concept of path dependence was not incorporated into the psychology of decision-making and therefore they found that we’re irrational in many places where in reality we’re not. Because if you look at things in sequence, you see, so you gotta always look at things in sequence not look at things statically.
Naval: Right, so like a lot of behavioral psych studies and economic studies will say that if I offered you a billion dollars to play a Russian Roulette, right, and six people play Russian roulette well five out of the six make a billion dollars each. So assuming that your value of your life is lower than a billion dollars, you’ll play Russian roulette once. But would you, one person, play Russian roulette six times? Alright, no. So confusing those two, the probability of a group going once each versus an individual taking all of the risks in sequence gives you completely different answers. And there’s this concept, which I’m sure you’ve all heard, of loss aversion where, you know, people are irrationally loss averse. No, they’re not irrationally loss averse, they’re rationing loss averse because if you go bust you can never recover. So like, for example, in your crypto asset accumulation and trading if you go super short and you sell everything and you lose everything you’ll never get to get back in the game. You have to stay in the game. And it’s kind of an obvious concept once it’s explained and described, but there are entire books written on it. Like the Kelly Criterion, and Fortune’s Formula, that book and so on. But uh –
Nassim: Yeah, only traders and mathematicians will do information theory or computer science get the point like Kelly, Shannon and Shannon entropy, they get the point that you got to look at things dynamically. But psychologists are so naive and they keep getting Nobels, you know, they’re naive by saying we’re irrational to be paranoid, they don’t understand that, you know, dynamically if we were not paranoid we wouldn’t be here.
Okay, so you cannot analyze one event, you got to see how that event is going to shorten your life expectancy, so there are some classes of risk you should never be taking. And effectively when you take Goldman Sachs, been around 159 years, you may hate them – I hate them – but you gotta admire how they stayed alive. Why? They never take risk of ruin, and that’s the same thing as a lesson I had as a trader by an old trader who came and told me “listen take all the risk you can but make sure you’re in tomorrow”. So make sure you survive. So it tells you that you gotta gear your risk taking first toward survival, and that entails you take more risk as you’re making more money, with the casino money and that, called mental accounting, is deemed irrational and being paranoid is deemed irrational because they only look at the single event, not series of events.
And something has been happening now with psychologists, we’re in the middle of a replication crisis and their papers don’t replicate, and those that replicate don’t really have the same effect, so, which tells us that whatever they call science is vastly outperformed by your grandmother. So, if you go ask your grandmother, particularly if she has Mediterranean wisdom – I’m biased, right, so Mediterranean or some kind of Russian, particularly, but the babushkas are, they’re very – ask grandmothers, alright, so, or grandparents or grandfathers as well, they will whatever they will tell you will be Lindy, will have survived the test of time. And if psychologists agree with your grandparents, okay, means they’re right, if they bring something new that your grandparents didn’t know, odds are it’s going to be suspicious.
Naval: Yeah any field where you need to add the word science to the end to make it seem legit probably is not.
Nassim: Exactly. So this, just if we were to summarize, because time’s up –
Naval: Yeah they’re flashing “time’s up” at us.
Nassim: They’re flashing time’s up, but possession is nine-tenths of the law, so –
Naval: Yeah, exactly; until the audience leaves, we’re here.
Nassim: So, to wrap things up here, what I was saying in Antifragile and in Skin in the Game is there are two things that are wrong when you analyze naively, is scale; a large country is not like small cities that you blow up, Singapore is not like a small China, and likewise a group of people acts differently, that’s complexity. And the second one is with time, if you, under repeated behavior you have to have complete different strategies from the static ones. And that was detected by practically every grandparent and people who have skin in the game. So that’s sort of the local message from Skin in the Game, and the overall message is, my message before you conclude, is the idea of the Incerto is that there’s a lot of uncertainty out there, there’s a lot of stuff we don’t know. But the good news is that there’s only one, and one way to go about it, okay, and this is quite interesting to see that the more uncertainty there is – take global warming, there’s a lot of uncertainty because there’s a high probability that the IPCC they’re full of a full of crap, okay, and there’s a probability that their, you know, that their opponents are full of crap, alright – but the more uncertainty there is a system the less you want to pollute because you don’t know what’s going on.
Naval: You don’t know what’s happening.
Nassim: Right, so interestingly the more uncertainty there exists in the system, okay, the more you gotta follow a certain paranoid route; try to position yourself to have more upside than downside and effectively your decisions become much easier, so let’s not waste time trying to argue about the niceties of the future because the more uncertainty there is the more we know how to act. So that’s sort of the idea of the Incerto in general.
Naval: Well I recommend everybody just devour all of Nassim’s books; it’ll improve your decision-making in life, in crypto, in –
Nassim: Yeah, put pressure on me.
Naval: Yeah, figuring out even like which doctor you should go to, which restaurant you should eat at, how you should conduct yourself honorably and morally, I think it’s an amazing work and I hope he keeps putting them out. It’s not the last one I hope?
Nassim: I don’t know, if you if you keep talking like this I’ll stop.
Naval: Alright, thank you everyone.