Skin in the game + free templates on how to think
Hey all, this week I’m offering everyone ‘The Decisive Mind 🧠” – my decision-making templates and processes for free (usually $15). All you need to do is head to my medley, and complete a couple of activities to unlock it!
P.S, medley is my own startup, and this is the first time we are testing it in the wild, if you have any issues or suggestions for improvements please drop me an email at tom@medey.gg 💪
They say your twenties are characterized by the books you read, and the rest of your life by those you re-read. Having just turned 30 I can’t vouch for this statement, but my early experience is it makes sense. When you read a book for the second or third time the book may not have changed, but you have and the insights you gleam may be completely different.
I found this when re-reading one of my favourites – skin in the game, by the maestro Nassim Taleb.
Skin in the game
To summarise Skin in the Game is not just a phrase. It’s a philosophical principle that once grasped becomes obvious in daily life. I’d argue it’s one of the most practical principles that explains cause and effect in our world
The 2009 financial crisis stands as a glaring example of the absence of skin in the game. Bankers and financial engineers created complex products they themselves barely grasped and marketed these to unsuspecting customers, all while ensuring their bonuses and protections. They gambled with others' fortunes. And, when the dominoes fell, they were shielded from the blowback. Taleb highlighted this with the example of the ‘The Bob Rubin Trade’, a banker who lined his pockets with $120m in fees through purchasing financial products with tail-risk at Citibank. When the tail-risk came knocking, Citibank was bailed out but Bob Rubin experienced none of the downside.
To put it plainly – Heads, I win; tails, someone else loses."
After my first read of Skin in the Game a decade or so ago, I came away perhaps a little more libertarian. The standout message to me was that regulation (and more broadly interventionism) was, in many ways bad – perhaps counterintuitively the more regulation the more you decouple risk from the individual to the state, it’s highly regulated industries that are more susceptible to blow-ups from lack of skin in the game.
However, revisiting Taleb’s ideas, I found a whole set of new lessons, that weren’t to do with the macro effects of skin in the game at all. These were lessons that were focused on the personal impacts and benefits of having skin in the game.
Skin in the Game and Intelligence
The more I live, the more I see so-called ‘intelligence’ play out, and the more I see it as a charade. We are raised to think of intelligence as to some degree being fixed. Smart kids are put in the top sets, score the best IQ results and get the best grades.
One particular quote that stood out to me was ‘I am dumb when I don't have skin in the game’. This is coming from Taleb, a genius.
Nothing could summarise my direct experience with the effect of skin in the game on intelligence as this, let’s take a few examples.
I used to live with someone who was studying to become a qualified accountant. This was not someone who was naturally particularly strong at maths or got particularly good grades at school. But their career future was dependent on them passing these insane tests that required a huge degree of financial literacy and knowledge recall. They’d have folders of information they’d need to commit to memory. The content got memorised and the tests got passed. Skin in the game.
I have another friend who at school was fairly dim, I don’t think anyone expected much from him. Last year he made millions trading his own book at a highly profitable trading firm. Skin in the game.
Personally, I’ve never felt that smart until the last couple of years. I was a fairly average student and a fairly average employee. I don’t feel average at the moment. My company's survival depends on my ability to pull rabbits out of a hat, so the rabbits get pulled (to what effect time will tell!). Skin in the game.
While there are of course exceptions, I notice that people in my life who don’t have skin in the game are self-admittedly, not operating at their potential. When you have a stake, when there’s something personal to lose, work becomes about real-world outcomes, not just theoretical postulations. You are operating closer to the truth and you are punished harder for being wrong. You are living in a rapid feedback loop that I think can’t help but make you smarter.
Skin in the Game and Craftmanship
Crafting without understanding is like painting without seeing. True innovation and design come from personal insight. Taleb illustrates this with the below anecdote
“Another small example of top-down progress: Metro North, the railroad between New York City and its northern suburbs, renovated its trains, in a total overhaul. Trains look more modern, neater, have brighter colors, and even have such amenities as power plugs for your computer (that nobody uses). But on the edge, by the wall, there used to be a flat ledge where one can put the morning cup of coffee: it is hard to read a book while holding a coffee cup. The designer (who either doesn’t ride trains or rides trains but doesn’t drink coffee while reading), thinking it is an aesthetic improvement, made the ledge slightly tilted, so it is impossible to put the cup on it.”
I didn’t pick up on this lesson on the first read because I’d truly never created something purely for myself. The jobs I’d been hired to do were to solve problems for customers (who weren’t me). If you are working to design an app for small business owners to hire their staff, sure you can put yourself in their shoes, you can look at data and speak to them, to try and understand their problems, but you will never truly live their problems. The solution will always be worse than if you did.
I never even thought building a product that you yourself use was that important for entrepreneurship, you just find a big enough problem someone has, and then build something to solve it.
In the most recent iteration of my startup, we’re building a product to help creators build their audience and make more cash. I’m a creator who wants to build my following and make more money. This process is just easier. I don’t need to try and understand the customer. I am the customer.
If you look across the history of inventions and great businesses you’ll see a similar pattern. Steve Jobs created products he’d want to use, the same with Chesky at Airbnb and the Collison brothers at Stripe. They all solved a problem for themselves. I don’t think I’ll ever start a startup again where I’m not going to be a power user of the product I create.
The unfortunate reality is many of us operate at a level of abstraction away from the product. This is not only boring and unfulfilling it’s also bad business. I’d make a bet that nearly every poorly designed product, service or process was poorly designed because the creator and the customer were not the same. This is even true within organisations. I’ve just finished the new Elon biography (first 2/3rd are very good). He was maniacal about the engineers sitting right next to and assisting the factory hands in manufacturing. He wanted them to see and feel the pain of complex and poorly designed parts.
Skin in the Game and Meaning
Perhaps the deepest personal dimension of this principle is in our quest for meaning. “The risk a person takes is directly proportional to the soulfulness of their pursuit.” Sometimes life can feel meaningless (perhaps because it is), but when we commit, when we inject our own skin into the equation, whether in relationships, passions, or aspirations, a deeper significance emerges. Work is no longer a mundane activity. The ordinary transforms into the extraordinary. You won’t find many nihilists with skin in the game.
WAGMI,
Tom x