Adonis Diaries

Posts Tagged ‘SKIN IN THE GAME

FRAUD DETECTOR:  SKIN IN THE GAME

John Peter shared this link of Nassim Nicholas Taleb
July 22 , 2015

SKIN IN THE GAME and OUR FRAUD DETECTOR
+ Have you ever wondered why people are upset by CEO compensation, sometimes >200x that of the average employee, but not if an entrepreneur makes the same amount of money; nor are they upset with singers, authors, or performers?
+ The economist Thomas Sowell found this an aberration.

His argument is that a CEO is not harming you; he is not sponsored by the taxpayer (or let us grant him that for this argument). But Sowell and the others apologists of CEO pay are missing the fact that our naturalistic fraud detector may be picking up something quite severe.

A CEO has inverse skin in the game; his losses are transferred to the shareholder (as he keeps the upside with stock options and stick others with the downside).

As I said in Antifragile, he is no entrepreneur (or artist where thousands are sacrificing their lives, so entering the profession cannot be done rationally on economic grounds).


+ We also detect that a CEO is largely an actor. Just look at one on TV for a split second.
+ So our ecological instinct is effective there in smelling something unfair; it is more powerful than that of regular economists who need a more sophisticated understanding of contract theory/asymmetry to get the point.


+ Note that in some countries where wealth has a bad name, it is often because it is associated with rent seeking. In the US, perception is different because wealth is traditionally associated with risk taking. (From your own pocket?)
+ Correct me if I am wrong, but it seems that societies give respect to people who have skin in the game (but not exclusively), and have a moral repulsion towards those who have inverse skin in the game.

Is SKIN In The GAME on Wealth Inequality?

A well functioning society isn’t one in which people are equal but one in which people have equal *probability*.  (Opportunity in all facilities offered to all?)
So measuring static inequality is severely flawed.
Take the United States. Less than 10% of the people in the 1982 list of richest 500 were there in 2012.
Compare to France where 60% on the rich list today have inherited their wealth.
And there are other more robust metrics: 56% of Americans will spent at least a year in the top 10%. Not in Europe.

So a good society is one in which people at the top have *skin in the game* hence can lose their money.
Wealth generation should not lead to protected position at the top.
Social mobility isn’t in elevating people, it requires the top to open a position.

So in Europe a civil servant from the “mandarin class” is safe for life as they extract rent from the system, while a good entrepreneur will run a chance of getting poor, leaving room for others.
PS- Let me explain to those who don’t get it. SITG means the rich needs to remain exposed to losing back his money rather than shielded.

PPS- 39% of Americans will spend a year in the top 5 % of the income distribution, 56 % will find themselves in the top 10%, and 73% percent will spend a year in the top 20 %.

adonis49

adonis49

adonis49

September 2020
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