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Nassim Nicholas Taleb | The age of black swans – Livemint

The highlight of 2012 for me was when, during a difficult moment, I received a message of encouragement from a firefighter.

His point was that he found my ideas on tail risk extremely easy to understand. His question was: How come risk gurus, academics, and financial modellers don’t get it?

Well, the answer is right there, staring at me, in the message itself. The fellow is a firefighter; he cannot afford to misunderstand risk. He is the one who would be directly harmed by his error. In other words, he has skin in the game. And, in addition, he is honourable, risking his life for no bonus.

This idea of skin in the game is central to the proper functioning of a complex world. In an opaque system, alas, there is an incentive for operators to hide risk, taking upside without downside. And there is no possible risk-management method that can replace skin in the game—particularly when informational opacity is compounded by informational asymmetry, along with what economists call the principal-agent problem.

via Nassim Nicholas Taleb | The age of black swans – Livemint.

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