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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