4 ms·

I wrote a blog article about requiring skin-in-the-game the other day. My food for thought is: Small transactional costs stop things from existing at the fetal

by lhnz 13y ago

I wrote a blog article about requiring skin-in-the-game the other day. My food for thought is: Small transactional costs stop things from existing at the fetal/growth stage. Evolution destroys them long before the long-term benefits demonstrate themselves as it supports short-term adaptive traits over long-term adaptive traits. If you require skin-in-the-game transactional costs then your transactions will happen far less often, and in the short-term you will get out-competed for resources by those that protect themselves with top-down regulations. It is often difficult for third-parties to evaluate the authenticity of a cost or regulation, which is why institutional costs exist - they factor out hundreds of checks of hundreds of transactions into a single check of the institution that regulates hundreds of transactions (which itself is often proxied by the social proofing of this institution.) This lowers the transaction cost which causes high growth. Fetal is really a good analogy here. The womb exists for good reason; scaffolds exist for good reason; decorum on first dates exists for good reason. Without these things early transactional costs defeat growth. In short, skin-in-the-game evolves out of artificial systems as it is bad for early-growth. However this does not mean that it should; in well-designed/natural systems the entity first exists in a protective bubble during its gestation period and then slowly has its skin placed in the game.

neilk 13y ago
I don't think your analogies apply. We do not demand that a fetus bear the cost of its bad decisions, because it is incapable of making decisions. (But we might start exposing a child to consequences of its bad actions, in proportion, quite early.) Similarly, a building under construction is incapable of advising someone to buy stocks. And first dates do not usually result in land wars in Afghanistan. Can you give an example of a process or profession which can be said to willfully expose others to risk, which does deserve this sort of protection when it's just starting out? It seems to me that such responsibilities are nearly the definition of maturity.
- eclipxe 13y ago
  >And first dates do not usually result in land wars in Afghanistan. Keyword: usually.
  - mdt 13y ago
    Goddamn butterflies
- lhnz 13y ago
  I think that's the wrong level of abstraction. Everything has a cost of existence. I do not think that it is useful to discuss the "cost of acting under uncertainty" when you can discuss the "cost of existence". The former is just a special case of the latter - the existence of conscious actions. When understood in this way, the foetus has a cost of existence, the analogy holds and as it grows older we have more and more cases of its protection against the outside world through its location, tribe, mother, etc (all later forms of gestation period) as we pass through the traditional coming-of-age story arc. Skin-in-the-game hurts fragility but helps resilience (individual or systemic) become antifragility. At growth stages, resilience is the exception to fragility. At maturity, fragility is the exception to resilience. The concrete cases that validate this level of abstraction are: (a) entrepreneurs building profitable companies in which many need angel investing in order to survive their operational costs [1]; similarly (b) early-stage deals are extremely fragile to transactional costs, so placing a skin-in-the-game cost on one deal while not on another is extremely likely to cause the other deal to be preferable. I agree with both yourself and Taleb that in cases in which an actor has the potential to be harmful to others they should be responsible for their actions and have skin-in-the-game. However my point is that no entity is just born like this, they have to slowly place their skin-in-the-game. Lawmakers have the tendency to add regulatory costs to a system that through the process that I've just described stop new entrants from joining and create the perfect opportunity for monopolies to form (which eventually learn to manipulate the presentation of their up-sides and down-sides while avoiding the regulatory down-sides anyway.) [1] Entrepreneurs are ultra-fragile and therefore the whole startup system that emerges around them helps to offset the operational risks at early stages. Helping individuals to bear risk is how systemic antifragility is grown.
mdt 13y ago
>In short, skin-in-the-game evolves out of artificial systems "Skin-in-the-____"

by lhnz 13y ago

neilk 13y ago

I don't think your analogies apply. We do not demand that a fetus bear the cost of its bad decisions, because it is incapable of making decisions. (But we might start exposing a child to consequences of its bad actions, in proportion, quite early.) Similarly, a building under construction is incapable of advising someone to buy stocks. And first dates do not usually result in land wars in Afghanistan. Can you give an example of a process or profession which can be said to willfully expose others to risk, which does deserve this sort of protection when it's just starting out? It seems to me that such responsibilities are nearly the definition of maturity.

eclipxe 13y ago
>And first dates do not usually result in land wars in Afghanistan. Keyword: usually.
- mdt 13y ago
  Goddamn butterflies
lhnz 13y ago
I think that's the wrong level of abstraction. Everything has a cost of existence. I do not think that it is useful to discuss the "cost of acting under uncertainty" when you can discuss the "cost of existence". The former is just a special case of the latter - the existence of conscious actions. When understood in this way, the foetus has a cost of existence, the analogy holds and as it grows older we have more and more cases of its protection against the outside world through its location, tribe, mother, etc (all later forms of gestation period) as we pass through the traditional coming-of-age story arc. Skin-in-the-game hurts fragility but helps resilience (individual or systemic) become antifragility. At growth stages, resilience is the exception to fragility. At maturity, fragility is the exception to resilience. The concrete cases that validate this level of abstraction are: (a) entrepreneurs building profitable companies in which many need angel investing in order to survive their operational costs [1]; similarly (b) early-stage deals are extremely fragile to transactional costs, so placing a skin-in-the-game cost on one deal while not on another is extremely likely to cause the other deal to be preferable. I agree with both yourself and Taleb that in cases in which an actor has the potential to be harmful to others they should be responsible for their actions and have skin-in-the-game. However my point is that no entity is just born like this, they have to slowly place their skin-in-the-game. Lawmakers have the tendency to add regulatory costs to a system that through the process that I've just described stop new entrants from joining and create the perfect opportunity for monopolies to form (which eventually learn to manipulate the presentation of their up-sides and down-sides while avoiding the regulatory down-sides anyway.) [1] Entrepreneurs are ultra-fragile and therefore the whole startup system that emerges around them helps to offset the operational risks at early stages. Helping individuals to bear risk is how systemic antifragility is grown.

mdt 13y ago

>In short, skin-in-the-game evolves out of artificial systems "Skin-in-the-____"