I just finished listening to Antifragile, by Nassim Taleb. It advocates for systems (economic, government, institutional, and personal) that gain from disorder.
I started the audiobook a few weeks back while I was at an airport. About 2 hours in , I thought "I am definitely going to reread or re-listen to this book."
A complex read, I plan on addressing this in a series of posts.
There is a famous anecdote told by Charlie Munger about the night shift at a FedEx logistics center. The crew working there was responsable for receiving inventory and placing it on trucks to their respective destinations.
They were all sorts of problems, particularly with getting things done on time and done right. The compensation system was an hourly wage. As soon as they changed the payment structure to pay per shift compensation, all the problems disappeared...
What changed? The incentives. The sooner they got things done, the sooner they could leave and their salary would not be affected. In fact, the faster they finished, the higher their effective hourly rate.
Incentives - Skin vs. No Skin
Let's address the idea of having skin in the game.
A top corporate executive can make big claims, sign a contract for a long window of guaranteed incentives, be completely wrong, get a bailout from the Gov't (from our tax money), and still come out with a very large bonus.
On the other hand, if a merchant who bets on a undervalued commodity and advocates for it (buying it with an intent to less) is wrong, he suffers. There is self-interest to get it right.
This doesn't mean that merchants/traders are always right. But their incentives are aligned. They can't afford to be wrong, so they will need to put more thought into it.
At the very least, be very, very skeptical opinion/prediction of someone who doesn't suffer a huge downside if they are wrong.
No Skin - No Accountability
Other common "no skin" parties include academics, journalists, and politicians. A hidden danger is not just the lack of downside but the lack of accountability.
In hindsight, they can cherry pick their correct predictions to show their worth in their respective field while ignoring all of the false ones.
1. Paraphrased from Charlie Munger: "When you are trying to figure out the cause of a problematic situation, start with the incentives of the parties involved."
2. Lower your value of the opinions coming from those with no skin in the game.
3. It is more difficult to discern the predictive success of a no-skin academic, journalist, or economist who is able to pick and choose their past predictions according to what favors the present. Their incorrect predictions are tucked away.
3. Try to seek opinions of those who would lose something if they are wrong.
4. "Too big to fail" financial solutions should limit salaries on a pay scale like the Government or the military. If they can make huge mistakes that are covered by tax payers money, why should they have gigantic upside bonuses without accountability?