So, this is an idea whose time has come, again.
It is only half right.
It is right, somewhat, when it comes to suffering harm if something fails. One of the reasons for the 2008 financial collapse is that most of the actors were rich, and knew that even if their companies failed and were not bailed out, they would be fine.
OTOH, taking massive risks was making them rich. So given the upside was theirs, and the downside wasn’t, there *was* no risk for them, so why not?
And this is before they knew for sure that the government would bail out almost all of the companies.
So, had they had relatively small amounts of money, and thus needed their ongoing salaries, and for their companies not to collapse, the financial collapse might well have not happened.
However to do that meant making sure that they were not reaping so much of the upside of the housing and MBS (mortage backed securities) market.
The less upside they had, the poorer they were, and the more they needed their companies to continue, the more they would have been risk averse.
Alternatively, the credible threat of losing everything they had could have worked, but it had to be credible, and as we see, for most, it did not exist. Threats of future losses don’t work well unless they are near certain: This is well established in criminology, where it is known that how likely one is to be caught and convicted of a crime is far more important than how harsh the punishment will be.
People who think they’ll get away with it, in other words, aren’t scared by “having skin in the game.”
Skin in the game has to be a near certainty to work.
The core issues of making skin in the game work are responsibility, power, and externalities.
A person’s responsibility (consequences/skin) must be equal to their power.
You should only take a hit equal to your responsibility, and your responsibility is NEVER more than how much power you have.
But the hit you take must be equal to all the losses for which you are responsible.
And that is, often and effectively, impossible. The key people behind the financial crisis were responsible for losses far greater than the amount of money they personally possessed. This is particularly true of central bankers like Alan Greenspan and Ben Bernanke, but is also true of Wall Street execs and so on.
Even in an ideal world, they could not take hits equal to the damage they did. The closest one could come would either be lifetime imprisonment, or death. (Understand, very clearly, that many people died because of the financial crisis and its aftershocks. People who lose their jobs and housing die a lot.)
To make “skin in the game” work requires two things:
1) No one must be in a position to “quit the game” if they win. If the upside is so large that it doesn’t matter if the game continues, people will destroy the game. Understand that if it takes seven years to make enough money to never work again and live a life of luxury, those people WILL do that no matter the consequences after they leave.
2) No one must be isolated from the social consequences of their actions. Money or power must NEVER be able to buy anything that matters: health care, a good education for your kids, skipping security theater, avoiding endemic social violence, or anything else. If the decision will cause bad things to happen to people in society, decision makers must suffer the consequences with those people.
(This means no private schools. No public schools that are better than other public schools. No private jets. No skipping security lines for first class travel. No buying healthcare poor people can’t have. No polluting and not having to suffer the pollution yourself.)
But even if you put this in place, “skin in the game” has sharp limits to its usefulness.
Skin in the Game Doesn’t Beat the Death Bet or IBG, YBG.
The death bet is a bet that you’ll be dead before the consequences of your decisions occur. Climate change was understood and taught in school as early as the late 70s, but adults in the late 70s bet that they would be dead before it mattered. They were right to make that bet. They didn’t have skin in the game and they never would.
During the 2000s, in the run-up to the financial crisis, the saying when a shitty deal was being cut was “I’ll be gone, you’ll be gone.” Anyone who has worked in a big firm is familiar with how a new executive will change things one way (“Let’s outsource!”) then the next one will change them back (“Let’s bring it in-house, for control!”). They are familiar with how salesmen get almost all their commissions up front, and multi-year sales deals then blow up a few years down the line.
Real skin in the game requires a commitment to go after people who did shitty things in the past and then disappeared. When the Sepoy rebellion happened in India in the 19th century, the British didn’t just blame the current Viceroy, they went after the Viceroy before him, because he had to have screwed up too.
But, at the end of the day, skin in the game only goes so far. People do die (which is why harsher regimes than ours would hit our entire families). People do leave.
And then, there is fact that skin in the game can actually be bad when…
Detachment is needed.
Doctors make better decisions when they have no financial incentives. Those who make more money the more surgeries they do, do more surgeries, needed or not. Those who make more money the more drugs they prescribe, prescribe those drugs.
Those who have no incentive tend to do the right thing by the patient, because, why not? Flat fee suffering person, help them. But they aren’t required to die if the patient dies, the normal human mechanisms of empathy and social bonding work quite fine IF they aren’t overwhelmed by incentives.
This is true also of analysts. The best analysts are generally people who have no skin in the game; no dog in the fight. They may be interested, but they don’t actually care.
Detachment, lack of concern–these things make it possible to see things as they actually are.
Skin in the game works best when it is identical with the largest group that makes sense. Aligning workers with overly precise incentives leads them to ignore possibilities outside those that confer incentives. Whatever the bottom line for them is, they see to it (even by cheating) and they ignore everything else.
The survival and prosperity of a country, a company, a team, or a marriage must be the responsibility of everyone involved, and they must suffer the consequences if it fails equal to their power in that group.
When they don’t, societies fail.
But even this rule is not enough, because we are finite beings. We die. This is the reason for the Iroquois maxim that decisions must be made with the next seven generations in mind. It is why the Ancient Greeks said that a society is great when old men plant trees in whose shade they will never sit.
And to get there requires something more than Skin In The Game.
Or rather, it requires an extended sense of self which our society does not embrace and which it cannot embrace as long as its core moral sentiments and identity are based on individualistic liberalism and the selfish, self-concern that is mandated by capitalist ideology.
Self-interest can only walk so far.
More on that another time.
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Willy
The few top players I’ve ever met didn’t like me very much. Of course I obviously wasn’t one of them. But they seemed to instinctively know that I didn’t believe in their game. I wasn’t fawning over their greatness or kissing their golden ass like so many others were. They might have sensed that I don’t automatically believe that they’re great just because they say so, or have a position, or because others say so. I prefer to make up my own mind, to find out for myself why somebody is ‘great’.
Still, I was always polite. You never know what anybody may have to teach. But I think skepticism has a certain smell. Maybe it smells like the better qualified victims they stepped on to make it to their position, a smell they know well. And maybe no player wants it to become common knowledge that gamesmanship is far more important than real qualities, in today’s political-corporate world, that the CEO is making a hundred times more than you because he plays the game better than you, and that any ‘wizardry’ is coming from elsewhere.
Do the wrong, worst people succeed best at the game or does the game make people wrong and worst? Both, I’d think.
Emma
Uh. Nah. This seems like advocacy of Alimony Forever, and unipolar mommy-based parenting structures in divorce. (Or the opposite.) I think that’s a really bad idea. I think marriages should be as painless to dissolve as possible — or, ideally, not entered into in the first place. The fabric of society shouldn’t be woven out of the materials of conditional human emotion. Nobody should be impoverished, denied the right to parent their kids, rendered homeless/jobless, or helplessly emotionally destroyed by a divorce.
Source: All the people I have ever known who have gotten divorced, a group which tracks 1:1 with all the people I have ever known who have gotten married.
The rest of it, I can cosign for enthusiastically.
Hugh
As nihil obstet said at the end of the last thread, it is about solidarity. Our societies and their resources are finite. We need to set limits on how many of those resources any one person or family controls. We need to decide at what point giving to one represents a taking from all. But more than this we need to keep people from amassing so much that they don’t have skin in our game, which is the present case, where the rich and connected face no consequences for their actions, where it is always heads they win, tails you lose. In a society whose members commit to providing to and for each other the basics of a decent and meaningful life, how much beyond this is needed or can be justified? And finally we need to teach why those limits are necessary, that we have commitments to each other. It is our solidarity with each other that makes our society a society. We need to learn the meaning of we, and that this applies not just to some but to all, and not just sometimes but always.
realitychecker
Is it reasonable to assume that the bigger the group we get to interact with, the less sense of communal responsibility we feel?
If so, just another reason to oppose runaway globalism? Not to mention the Internet?
nihil obstet
Down with meritocracy! That basic philosophy convinces many people that it’s not only fine, but a good thing to reward merit with external incentives, despite over a century of practice and research showing that external incentives on any but the most basic tasks are counterproductive. While we believe that rich people earned their riches, that setting teachers in competition with each other for merit-based pay, that companies deserve tax abatements for “job creation”, we find it difficult to accept the limitations on any such practices undergirded by the “merit deserves reward” argument.
Tom
Speaking of marriage. Get the state out of it. All the stat should track is who parents are of kids for health and accountability. Otherwise marriage should be a personal issue between consenting adults.
Bill H
@Tom
Can’t be done. Ownership and inheritance of property, and inherent power of attorney are intrinsically a matter of the state.
Religious objection of gay marriage can be taken out of it however, by clarifying the difference between marriage in a church as a religious ceremony, which carries no force of law whatever, and registration of marriage with the state, which is what creates property and legal representation rights.
The state has assigned religious leaders agency to perform the civil registration, and it is that which has led to this whole mess about “rights.”
No, I’m not talking about the license, which is done by a civil service person before the marriage occurs and accomplishes nothing other than allowing a marriage to occur if the couple chooses to carry it out. If they don’t, then the marriage license is a meaningless piece of paper that eventually expires and means nothing.
I’m talking about registering the fact of making the civil union. It can be done by a civil service person in the court house, or it can be done by a religious leader in the church right after the religious union is performed. And there lies the rub. It blurs the line between what a church means by “marriage” and what the law means by “marriage.”
Bill H
I hit “submit” too early.
My point is that when a couple gets married in a church there are two separate and very different events which take place. One is the religious event of marriage, which means whatever that religion defines it to mean and in which the officiant is acting as a representative of the religious body. The other is the registration of a civil marriage, which confers property and representation rights and in which that same officiant is acting as a representative of the state.
Ruth
Marriage is not just a piece of paper, it affects the reality of people’s lives profoundly.
Marriage, as registered by the state, allows two people from different countries to spend their lives together (my marriage is only possible because of this), or allows them to stay together should one be offered a position abroad. It confers next-of-kin status, which becomes important in case of accident, illness, loss of consciousness, death or absence of a spouse, and other circumstances where a person is unable to make a decision for themselves temporarily or permanently. It affects inheritance, especially when there is no legally recognized will. It obliges others to recognize and respect the relationship, even if they disapprove of it. It often affects visitation rights in hospitals and prisons. It allows joint filing of tax returns. In some cases, depending on where you live, it may also allow you to claim allowances and other rights that cohabiting couples would not be entitled to; and this is reasonable, because only marriage indicates an intention of permanence.
This point was made recently in an episode of The Good Doctor, where the hospital was treating a busload of people that crashed on their way to a wedding. The groom was unconscious and his parents and the bride had opposing views on what he would want, and the comment was made, “The parents are his next of kin and so legally they should be making the decision, but if this crash had happened one hour later, we’d have to do what the bride says.” Of course, this being TV, it was a life-and-death decision, but such determinations are a regular occurrence and have to be made by the right person.
This is why couples who are serious about each other and about staying together need to register a marriage with the state, even if they can’t afford a wedding celebration.
To Emma: are you really saying you don’t know anyone who is currently married? I agree that divorce settlements are often unfair, but that is the fault of the courts’ current attitudes: however, the alternative would be for the bigger, stronger partner, or the one with more resources/relatives, to take what they (usually he) could by force, which would probably be, well, everything. By the way, I think it should be harder to get married in the first place but easier to divorce. I speak as one who has been through the divorce mill twice but have now been married for 16 years, and we still want to spend as much time together as possible.
A1
The structural problem with skin in the game is that it causes parties to not see the big picture and play together when that is what is needed.
Skin in the game is a rougher way of talking about risk and reward. I think right now the top of our society does not take enough risk and gets too much reward for the limited risks they take. Those of us at the bottom seem to get too much risk and too little reward.
Mongo
It’s interesting to consider whether people in a culture conceptualize risk and reward in relation to themselves personally, first — and only incidentally as having a collective dimension.
Self-centered persons, acting in favor of their own interests at the expense of others, or taking risks for perceived gains that can harm others, don’t see the world they inhabit as having any validity beyond their selves, their own ‘skin in the game.’
It doesn’t automatically follow that having a broader perception means people won’t behave badly. But how surprising is it that cultures promoting the individual are focused on aggressive domination, competition, acquisitive materialism? Rather than collective experience and responsibilities? As a person thinketh…
tony
The chinese apparently paid their doctors a retainer to keep the family healthy. The doctor would not get paid if the patients got sick, and of course the dead do not pay. This provided the doctor an incentive to keep the patients healthy. Of course the irresponsible probably would not manage to hire a doctor and the acute injuries and pre-existing conditions would require arrangements.
I also strongly disagree about private schools. Truth is not something that can be determined by a vote, and even less by state bureacrats. In a well arranged society the kids who have a very good education, as opposed to the mind killing schooling typically forced on children, will be the greatest contributors to society. There is no reason to believe that the average person, having suffered through ten to twenty years of obedience training could be convinced that independent thought is of value, so the state schools will always be harmful.
realitychecker
@ tony
You don’t think the public school system that told me I’d be safe from nuclear attack by Russia if I would just get under my wooden desk can be trusted to tell me everything I need to know? 🙂
realitychecker
@ tony
You don’t think the public school system that told me I’d be safe from nuclear attack by Russia if I would just get under my wooden desk can be trusted to tell me everything I need to know? I can’t imagine why. 🙂
realitychecker
Oops, sorry for the dupe comment.
will_f
In a well arranged society the kids who have a very good education, as opposed to the mind killing schooling typically forced on children, will be the greatest contributors to society.
Does this seem like a “well arranged society”?
In a truly “well arranged society”, all children would receive a good education to help them be good citizens. The children of those with less money would not be forced to become mindless consumers by the wealthy and other grifters who have no “skin in the game” beyond next quarter’s profits.
Peter
@Will
People who were born poor can escape that trap and add to our consumer economy but the people who drive that economy are the more affluent consumers.
Education doesn’t guarantee success or good citizenship, it’s how they use the training or higher education they get that makes the difference.
Businesses who don’t do long range planning don’t survive. Publicly traded companies are also required to constantly push for higher quarterly profite to inform nervous investors of their immediate condition.
capelin
we can assume you meant domestically, lately?
–
to the larger point regarding skin in the game; while part of the toolkit for sure, it seems to me that the much more important tools are by the populace (if it’s bad, just shouldn’t be allowed/able to do it), and how healthy the society is overall.
ultimately, we all coast on a huge array of social norms, learned behaviours, basic goodness, and fear of social ostracisation. it’s like air, so we forget how powerful, and important it is.
skin in the game could also be looked at in the context of reward feedback applications vs cost feedback applications. cost feedback probably cuts through crap quicker.
thanks
Tom
@Bill H. I disagree.
Given the large number of illegitimate children, inheritance is a mess and people really should not be inheriting wealth and status, IE Trump.
All a state must know is who parents of children are. That is all. If people are too stupid to write a will, the State should confiscate the estate and put it to use. If a person is brain dead with no advance directive, the State should finish off the job and harvest the organs and cremate the body.
Which is another thing. No more burials in grave sites no one even bothers to visit the majority of the time. Cremation should be mandatory.
tony
“Does this seem like a “well arranged society”?
In a truly “well arranged society”, all children would receive a good education to help them be good citizens. The children of those with less money would not be forced to become mindless consumers by the wealthy and other grifters who have no “skin in the game” beyond next quarter’s profits.”
Yes. Less so recently but the place is still safe and rich, relative to few centuries ago, the likely future and most other countries.
Well arranged in this context means people are rewarded for valuable contribution to society. And the ones that harm society are pushed to the margins.
And if you argue that your society is messed, how can you defend putting kids to a school where they learn reflexive obedience to state and later corporate assigned authorities. Where unaccoountable authorities tell them who their peers are, when to sit, speak and play. Where they are told what questions they must ask, how they must think about these question and what the right answer is. And that the right answer is determined by your assinged authority figure.
And should you not want to sit down and fill you head with worthless trivia you will forget anyway, it is pathology and they give amphetamines to make you easy to control and after a childhood drugged up you will never formulate a coherent challenge to the system. Those who fail to brownose and fill their heads with trivia are of course shamed as losers, and that often becomes a self-fulfilling profecy.
Many argue that their country is sick, the government is authoritarian, even fascist, and yet they desire that the children be given to the government to be molded for a decade of more.
realitychecker
@ tony
Bravo, good sir. 🙂