More red-pill-Taleb: Skin in the game

[Blaster]

Excerpts adapted from new book he's working on (Skin in the Game): How To Legally Own Another Person: The Domestication of Employees

People you find in employment love the regularity of the payroll, with the special envelop on their desk the last day of the month, and without which they would act as a baby deprived of mother’s milk. Then you realize that had Bob been an employee rather than what appeared to be cheaper, that contractor thing, then you wouldn’t be having so much trouble.

But employees are expensive… You got to pay them even when you’ve got nothing to do for them. You lose your flexibility. Talent for talent, they cost a lot more. Lovers of paychecks are lazy … but they would never let you down at times like these.

So employees exist because they have significant skin in the game –and the risk is shared with them, enough risk for it to be a deterrent and a penalty for acts of undependability, such as failing to show up on time. You are buying dependability.

Evidence of submission is displayed by having gone through years of the ritual of depriving himself of his personal freedom for nine hours every day, punctual arrival at an office, denying himself his own schedule, and not having beaten up anyone.

Coase was the first to shed lights on why firms exist. For him contracts can be too costly to negotiate, they entail some amount of transaction costs, so you incorporate your business and hire employees with clear job description because you don’t feel like running legal and organizational bills every transaction. A free market is a place where forces act to determine specialization and information travels via price point; but within a firm these market forces are lifted because they cost more to run than the benefits they bring. So the firm will be at the optimal ratio of employees and outside contractors, where having a certain number of employees, even when directly inefficient, is better than having to spend much resources negotiating contracts.

As we can see, Coase stopped one or two inches short of the notion of skin in the game. He never thought in risk terms to realize that an employee is a risk management strategy.

He also gives two examples of non-slave employees: salespeople who have personal relationships directly with the firm's customers; and traders who are profit centers. He discusses the risks associated with being an elected head of state and contrasts heads of Western governments with Putin.

It's many of the same themes of fragility that Taleb has discussed before but I still enjoyed reading the whole thing.

 

[Saweeep]

http://fooledbyrandomness.com/SITG.html

More pre-pub chapters of his new book.

Taleb is a super cool dude; the first time I read Antifragile it made my head spin as it rewired my thought processes.