On Having Skin in the Game

When I first read Nassim Taleb’s The Black Swan, the chapter on skin in the game more or less passed me by. The idea seemed obvious: if a person is personally on the hook, they behave differently. Back then I didn’t make much of it.

Years went by — and now I think that if you’re looking for the single simplest yet most important criterion for sorting people in business and in life, this is the one: personal stake through risk — money, reputation, career, values.

This split isn’t about “good” or “bad” — each side has its pluses and minuses. But the difference between these positions turns critical in the moments when we’re weighing advice and making decisions.

I regularly meet people, including some in senior management, who risk nothing financially. Their responsibility is smeared across departments; their failures never reach their own wallet. On a shared project, whether we make money or lose it is, at best, an abstraction to them. It’s a good sign if reputation or firm personal principles are still in play.

At times this distance is useful: it gives a cold, dispassionate view, free of emotion and panic.

But thinking shifts radically the moment a person starts risking something of their own. The primal machinery switches on: defense, alertness, resourcefulness, a sharper business instinct. Risks stop being words and become, quite literally, something you feel in your body.

It’s no accident that American culture leans so heavily on stock options and other forms of employee ownership. It’s an attempt to tie personal success to the company’s success. Though it’s worth remembering: a bonus you miss out on in a failure is only forgone gain, not a realized loss. That still isn’t the real “skin.”

I’ve come to believe that when you’re building teams, the experience of real loss matters enormously. Once a person has lost a meaningful chunk of their own capital — money, reputation, years of their life — their relationship with risk changes on a physiological level. The wound turns into experience. People like that ask different questions, see “opportunities” differently, and sense the edge of what’s acceptable far more precisely.

Every time we’re handed a “solid piece of advice” or offered a decision our well-being hangs on, it’s worth asking ourselves: what does this person risk if it all goes wrong? What does the financial adviser risk, the asset manager, the doctor?

If the answer is “nothing,” then we’re the only ones at risk. At times that’s acceptable. Sometimes it’s even necessary. But only when it’s a conscious choice, and not an illusion spun out of someone else’s confidence.

May we all, in any situation, see clearly where the skin in the game really lies — ours and everyone else’s. It sobers you up, and it saves both money and nerves! 😎