Skin in the Game
"People should bear the consequences of their decisions - those who take risks should face the downside, not just enjoy the upside"
Origin: Ancient concept, formalized by Nassim Taleb
The Key Insight
Skin in the game is about maintaining selection pressure on decisions. Without it, organizations evolve toward dysfunction because bad decisions don't die. But the mechanism must match the system - individual accountability in systems with socialized risk doesn't work.
What People Think
Accountability requires exposure to consequences. Executives should own stock. Architects should live in buildings they design. Advisors should invest in their recommendations.
The Deeper Truth
This is evolutionary selection pressure applied to decision-making. In biology, organisms that make poor survival decisions die and don't reproduce - they face the ultimate 'skin in the game.' Systems without selection pressure accumulate dysfunction because bad decisions don't get filtered out. Organizations without skin in the game for decision-makers accumulate bad decisions.
Biological Parallel
Evolution is the original skin-in-the-game mechanism. Every organism's ancestors survived and reproduced - they had skin in the game. Organisms that didn't, by definition, aren't ancestors. This is why evolved systems tend toward functionality. Designed systems without selection pressure (like many corporate initiatives) can persist despite dysfunction because there's no mechanism to kill them.
Business Application
Apply skin in the game to: equity compensation (align incentives with outcomes), portfolio allocation (invest in what you recommend), forecasting (track and publish prediction accuracy), and organizational design (those who make decisions should face consequences). The absence of skin in the game explains: analyst conflicts of interest, consultant recommendations without accountability, and bureaucratic decisions without consequences.
When It Breaks Down
Skin in the game can be excessive: (1) in highly uncertain environments, penalizing failed experiments kills innovation, (2) individual skin-in-the-game can create perverse group incentives (banks where individuals were incentivized but systemic risk was socialized), (3) time horizons matter - immediate skin-in-the-game can create short-termism. The question is: whose skin, in what game, over what time horizon?