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skin in the game is an economic and
ethical principle whereby those who seek
to gain from their activity should also
lose when things go wrong
in other words the idea aims to create
symmetry of risk and return
king hammurabi of babylon already used
the principle when he established one of
history's first laws
to ensure high construction quality
inside the empire one set of laws was
for the builders
law 229 stated that if a builder builds
a house for our client and does not
construct it properly and the house
which he built collapses and causes the
death of the owner that the builder
shall be put to death
as a result builders who were not able
to construct properly or tried to cheat
left the trade one way or another
soon those who were planning to build a
house had less to worry about
the law's harsh consequences and its
simplicity made sure that the incentive
of the builder who gains the profit and
the man who risks the cost of
construction living inside the house are
aligned
nasim teleb who wrote extensively about
skin in the game argued that having a
measurable risk when making a major
decision was necessary for fairness and
commercial efficiency he also linked the
principle to learning
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in particular he argued that brains of
smart people who work in positions where
there are high returns but low risks
don't receive the necessary feedback to
learn from their mistakes
over time this will produce inferior
ideas and risk turning smart people into
idiots intellectuals yet idiots
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take for example an intelligent ceo
today who leads a public company and
builds huge construction projects using
other people's money
unlike a babylonian our constructor sits
comfortably in his chair instructing
those who actually take the risk
to protect himself further he hires
third party engineers who sign off on
the construction plans and have
insurance policies to protect them
against any imaginable misfortune
when important clients complain they are
welcomed by account executives and if a
house actually collapses our constructor
just reads about it in an annual report
because the man who lost his family
inside will only get to see the
constructor's legal team
as a result and over time the
constructor becomes disconnected from
reality stops learning from his mistakes
and becomes bad at his job
the consequences are frustrated
customers and poorly built homes
to keep learning and achieve excellence
it is therefore important to work in a
position where risk taking is part of
the daily routines
not only because we get feedback from
people who share a risk working with us
but also because only if we have a stake
in the outcome do we give our best
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one of the best ways to learn faster
therefore is to have a stake in the
outcome
to learn how to cook cook for friends to
learn about an idea publish a video
about it to learn about shares and
companies invest in the stock market
with your own money
almost 4 000 years after hammurabi the
beautiful ruins of the ancient city of
dara are testimony to the quality of the
builders of babylon but what do you
think about the principle are there
other possible downsides beside the
horrendous consequences of law 229
please share your thoughts in the
comments below to improve the quality of
your argument put your skin in the game
and add your name and where you are from
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