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. The principal is also important for learning, skill building and human development. Because those that want to learn without taking the risks of failure, don’t receive the feedback necessary to experience what it means to make mistakes. They can study their entire lives, but actually don’t learn anything.
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the full story
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 a 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 to profit and the man who risks the cost of construction, living inside the house, are aligned.
Nassim taleb’s skin in the game
Nassim Taleb, 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.
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.
example from modern world
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.
SKIN in the game learning principle
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.
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.
what do you think?
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 besides 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.
Sources
- Watch Prof. Taleb talk about Skin in the Game at Google (2018) – Youtube
- Code of Hammurabi (c. 1700 B.C.E.) – Wright.edu
- Skin in the Game the book by Taleb – Wikipedia
- Skin in the Game (phrase) – Wikipedia
- Ancient Babylon – Ancient.eu
Dig deeper!
- Should risk-takers be required to have ‘skin in the game’? – the Financial Times discusses
Classroom Exercise
Do you have “skin in the game”? Reflect with your students on how this concept applies to real life situations and ask them for ideas on how to put their skin in the game for their own learning.
In addition you can ask your students to rate the effectiveness of your teaching on a scale of 1-5 after every class. Start the next session with publishing the results and continue to do so for the entire course. Like that the students learn that you put your skin in the game and as a result might realize how the classroom experience changes.
