Nassim Taleb & Naval Ravikant at BlockCon 2018 – Transcript

http://www.mrsideproject.com/2018/11/15/nassim-taleb-naval-ravikant-blockcon-2018/

Thank you BlockCon for organizing this event and making the recording
available. Link to the official video.

Thank you Nassim and Naval for the interesting conversation. Thank you Reese
Jones for uploading your recording so soon after the event, I was impatient to listen.
Thank you jnaanarthi for cleaning up the audio of Reese’s recording before the
official video was released.

Check out Nassim’s book Skin in the Game on Amazon, or borrow it from your local
library as I have. You can also get the first 4 books of the Incertofor a steal of a deal,
definitely Christmas wishlist material (or the newest Incerto package with all 5
books). Naval recommends Nassim’s books very strongly:

“Nassim has written books that I think people will be reading a thousand years
from now. His new book Skin In The Game is fantastic, it’s part five in his Incerto
series which includes Fooled by Randomness, Black Swan, Antifragile, The Bed of
Procrustes. It’s written in a very timeless way, the concepts are very simple, there’s
not a lot of math to it although there is a huge math backing to the Incerto if you
want to get into it, and I would rather reread his work than anything on the
bestseller lists, and I have. Many of his books I’ve reread.”

“I think the books are absolutely worth reading, if you haven’t read all 5 of his
books I wouldn’t read anything else this year I would literally just absorb them.
And I don’t say that lightly. That’s true for me; like I’m going through Skin in the
Game again a second time.”

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“…Well I recommend everybody just devour all of Nassim’s books; it’ll improve
your decision-making in life, in crypto … how you should conduct yourself
honorably and morally, I think it’s an amazing work and I hope he keeps putting
them out.”
The images credited to BlockCon are from screenshots during the BlockCon YouTube
video when they displayed Nassim Taleb’s slides fullscreen. The other images
credited to Reese Jones are from the YouTube video he uploaded.

I’ve done my best to transcribe and format this conversation as accurately as

possible, though I am not a professional transcriptionist. Stutters and needless
repetitions of words have been removed, as well as certain times when someone
misspeaks and immediately corrects themselves I only kept the intended
word. During the presentation section, I’ve done my best to insert the slide images at
the time where Nassim changed slides. Feel free to leave a comment if you notice
any errors.

Word count: 14,325

Reading time: 72 minutes (approx.)

Enjoy!

Presentation

[start of Reese Jones upload]

Source: Reese Jones

Page 2 of 45
Nassim: So, I’m honored to be here. Hopefully, this will fail because the best way to
illustrate the problem with technical devices is by having a failure. Oh, it failed, it’s
not working. What do you think? Ah, unfortunately, it didn’t fully fail.

Source: Reese Jones

So, Naval. We’re going to do a mono for a little bit and then we’ll have a conversation.
And tell me during my mono, stop me if I’m covering points that you want to cover
yourself.

Naval: Sure.

Nassim: It’s much easier. That’s the whole idea of having someone to rely upon
when you forget your own ideas.

Naval: We’re going to keep it interactive and informal.

[start of official BlockCon video]

Page 3 of 45
Source: BlockCon, Nassim Taleb
Nassim: So, this is the German version of Skin In The Game. Given that I don’t read
German I don’t know what it means. But they use the English words “skin in the
game”. So let me talk about the concept, but it’s not as straightforward as you think.
So I’m going to start with a counterintuitive aspect of skin in the game before I even
define it. It’s about how you acquire knowledge, how you do things.

Source: BlockCon, Nassim Taleb

So, my origin, my natural origin is Trader. A lot of people have a natural origin as
mathematician or scientist or something like that and then they become traders, I
started as a trader. This means I stood with these people at some point and, you
know, they spit on you and you acquire all the germs. Particularly if they have

Page 4 of 45
children, go to schools, so on, and in a couple of years, it can practically cover every
possible airborne disease that the planet can have in staying with these people in the
pit. And it’s not always crazy but when it’s crazy it’s even crazier than it seems here.

So, you spend your time as a trader, I was working with mathematical products, I
was also trading from a desk as well which is less romantic as this kind of wild jungle
atmosphere, so when you do mathematical trading you quickly realize that
theoreticians are full of baloney, to be polite. There’s something wrong about theory
and their view of the world clashes with, you know, with that of every trader. We do
things – like people who ride bicycles or say a prostitute being lectured by nuns
about, you know, about how to do their business. It’s the kind of thing that,
academics for us were people really outside the practical world who’ve never done
anything and their models – it’s not that they’re imprecise, it’s a different world.

Source: Reese Jones

Okay, so that’s how the idea of skin the game came to me. Because, eventually, you
retire from trading. You lose hair, I had hair when I started, I lost my hair. You want
to do something else with your life. Twenty-one years of trading, you know, you sort
of miss it but you want to grow up and become a real person. So what do you do? I
kept looking for professions, but I wasn’t good at anything else. Then I tried the
retirement activities; tennis, do you play tennis?

Naval: No. That’s why I don’t, though. Terrible.

Nassim: Okay. I can’t concentrate, you know, playing tennis. So you lose
concentration and particularly when you play – when you have partners they get
angry at you. Okay, couldn’t play tennis, couldn’t play chess for the same reason. You
have an idea to start meditating or playing chess and you forget you’re playing chess.
So I realized I wasn’t good at anything. So I said okay, I’m going to give a little
academia a try, so I tried – I started an academic career, working on modeling. And

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telling academics they’re full of baloney, alright. And I’m being polite; the Bologna
replaced with the usual things that are clipped on the radio, okay.

So this is the idea, this is my bio: so in other words instead of going from theory to
practice, I went from practice to theory. I saw something completely different. So,
and let me explain something, I developed something called the Ludic Fallacy. The
Ludic Fallacy is that the randomness – and I deal with probability – the randomness
that you encounter in real life has absolutely nothing to do with the randomness you
find in textbooks or in games. And I used the word “ludic” because ludic means
“games” in Latin.

Source: BlockCon, Nassim Taleb

Now, sure enough, someone has a painting for sale at Saatchi you know, or I think
exhibited at a Saatchi museum, called the Ludic Fallacy. And I, you know, can’t make
heads or tails of what it means, alright, but it’s nice to have your concept – someone
painting something after your concept. He’s probably on drugs and painted
something and then read the Ludic Fallacy and decide to name what he painted the
Ludic Fallacy. Whatever it is I’m just showing it to you in case you can figure it out
because I couldn’t figure it out.

Page 6 of 45
Source: BlockCon, Nassim Taleb
Now comes the Expert Problem. Still, I haven’t defined Skin In The Game, have you
noticed, okay, I may leave it to you. But see my bio, started practice to theory,
realized that things in practice are much more complicated than theory and that of
course in theory there’s no difference between theory and practice, in practice there
is. And then that concept of Ludic Fallacy because my specialty was randomness and
probability, and give it a name as we can see in the painting. So, with this I’m going
to explain the Expert Problem because there’s two kinds of professions. In The Black
Swan I define there’s a profession in which the professionals aren’t really
professionals, and they don’t know what the hell is going on yet nobody knows that
they don’t know or at least, you know, those who pay them don’t know that they don’t
know what’s going on – and the professions where people know what’s going on.

But how can we make the difference between these two? So in The Black Swan I said
okay, in domains like what I call Black Swan fraught – like climate studies, they have
no clue. But weather forecaster over next week has a lot of clue, otherwise they can’t
survive.

Page 7 of 45
Source: Reese Jones
So I came up with this idea of Expert Problem, but I can illustrate it best with a story
of a friend of mine who’s also a trader and had the brilliant idea to go lose his money
in the restaurant business. And when you retire, he, you know, he, and it was very
nice because he lost his money and prevented me from losing mine in that business.
Now, what did he learn in the restaurant business? Something quite central that can
illustrate what’s going on with our society. All the ills of society summarized in one,
as well as the Ludic Fallacy.

In the restaurant business they have awards, granted by newspapers, and of course
by other restaurateurs; “the best wood-paneled restaurant in the eastern United
States”, “the best tuna sushi in Western Canada”, okay and then you have all these
awards.

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Source: Reese Jones
So my friend noticed that there was a gala dinner at every year, you know, say every
year and during that dinner, the awards are given. So guess what? Most restaurants
that got awards were out of business by the time they had the gala dinner. So what’s
the lesson there? Very simple lesson: whenever you’re judged by peers you don’t
want to impress your peers and that’s one thing I learned as a trader.

As a trader there’s a rule, and I remember when I was very very young as a trader I
had a lot of hair and the badge said “new trader”, “new member” it’s called. There’s
an old fellow, you know bald typically, old trader, grouchy and bored, alright, so he
said “hey come in here kiddo”, he said “stand up here” okay, he said “if people like
you over here, you got to be doing something wrong. Okay kiddo, now you can go
now”. Right, so the lesson I learned from when you’re judged by reality; it’s a
complete different dynamics than when you’re judged by your peers. So businesses
were you’re charged by peers, are businesses – like the restaurant business – will rot,
okay, and businesses where you’re d by reality, by your P&L, by your accountant; the
only person you want to impress at the end of the day is your accountant. Now, true,
you don’t want to be hated by your peers but they’re not the ones whose approval you
need to seek.

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Source: Reese Jones
Now, academia, it’s a business where people are entirely judged by peers. Entirely.
This is what causes all the problems we have; bureaucrats – who judges bureaucrats?
Other bureaucrats. The boss, this, it doesn’t work. There starts to have meetings, you
see, and when a firm becomes very large you start – you cannot associate the P&L
attributed directly to a certain person. That you start having meetings, busy, fly to
Omaha, come back, you know, do things, you know, talk to you on the phone for two
hours, write long emails, stuff like that, that’s the problem.

Naval: Yeah we see this in the tech industry too. There’s a lot of tracking of inputs
instead of tracking outputs.

Nassim: Exactly.

Naval: A great engineer can create a billion dollars worth of value, look at Satoshi
Nakamoto, and a bad engineer can cost you value. It has nothing to do with the
amount of time they put in, yet they’re still managers who want the engineers in at
8:00 a.m., they want them working 40-50 hour weeks and it’s just complete
nonsense.

Nassim: Exactly, and trading basically you’re just judged by your P&L; if you lose
money, no matter how nice you are, it’s not gonna work and if you make money, no
matter how nasty you are, it doesn’t make a difference. So, here, plumbers; a
plumber has got to be judged not by other plumbers. You don’t, like, you know, their
compensation isn’t determined by like our government calls up other plumbers “how
much should we give them in bonus”, alright it doesn’t work that way, okay, it’s
judged by you. Same with a dentist; if you show up to the dentist office with your
teeth intact and leave the dentist’s office with half of them missing, visibly, there’s a
problem, okay. You can catch incompetence very quickly. So there’s a judgment
either by metrics, as in mathematics or physics, or in hard science, or engineering, or

Page 10 of 45
by some – or because they have laws – or by some the clients, by reality, just like
restaurants.

Source: BlockCon, Nassim Taleb

So, but, you have businesses where people are judged entirely by other people. So the
minute – this is why you can figure out if journalism is going to die, because
journalists try to impress other journalists, that’s their business. They’re not, you
know, they’re not trying working on the reader. So you can have monoculture and
become very vulnerable. So this to me explains what I call the expert problem; is that
they don’t get it, the New Yorker doesn’t get it because they are part of the expert
problem. There’s that 1% of people that you’re gonna call the IYI (intellectual yet
idiots) and that class of people, they have no accountability to reality they just
account to one another and of course they’re gonna have, it’s gonna degrade as a
business. And this is where, what do experts do when they want, when you catch
them with their pants down? Basically macroeconomists have never forecast
anything; a guy like Paul Krugman – I hope I’m recorded, please make sure I’m
recorded – Paul Krugman, he knows, it’s like worse than random, okay. Why do we
keep – why don’t we replace him with Miss Bri, she’s an astrologist in the Lower East
Side, and has a much better track record. Why don’t we … Miss Bri?

Naval: I think the equivalent with this crowd is someone like a Nouriel Roubini or
all the people who are recently criticizing crypto.

Nassim: I don’t want to comment on my friends. Okay, let me comment on-

Naval: Well, this is a crypto conference, and with a crypto crowd, right, it’s become
popular to say like “Bitcoin is rat poison” or “it’s a ponzi” and so on. And every time
one of these experts has called it out as being a failure it goes up, you know, 10x in
the next year.

Page 11 of 45
Nassim: I see, okay, yeah. I know, but if these guys had a P&L, there we go, if Paul
Krugman had a P&L; he’d be bust long before Bitcoin.

Naval: Exactly.

Nassim: He’d have been bust with the election. Because when you have a P&L you
can’t really bullshit your way through life.

Naval: And the funny thing is, there’s no point in bullshitting financial assets
because you can just go short it, just put your money where your mouth is.

Nassim: Exactly.

Naval: But people get into arguments about, online, whether bitcoin is going to hit a
certain price by a certain date. You don’t have to argue online, you can go to LedgerX,
or you can go to your favorite exchange and short it or just take a position.

Nassim: Exactly, so yeah, I have an aphorism that “you don’t want to win an
argument, you just want to win”. It’s very different.

Naval: Yeah.

Nassim: So, and here, of course, what do the pseudo-experts do? They compare
themselves to pilots, and we know that a pilot is an expert because a pilot has skin in
the game. Bad pilots; where are the bad pilots?

Naval: Underwater.

Nassim: Underwater, right, because they have skin in the game, okay. It’s even
worse – it’s not just like a restaurant that can fold, they’re gone. So there is a
selection mechanism that doesn’t depend on judgment of other pilots. At least you
know, in the later phases of life.

Page 12 of 45
Source: Reese Jones
So that’s the problem, so you end up having fields like economics. This is a mind,
pick any economist, this is how they think. You know, they have that clarity of mind,
that’s on a good day, after a cup of coffee, two espresso. That’s how they think, and
it’s just to tell you how their mind works, okay, and they don’t realize what’s going
on. So phase one –

Source: Reese Jones

Naval: I made the mistake of getting an economics degree alongside my computer
science degree and I can tell you that in 20 years of venture investing in startups,
macro has been completely worthless. If anything it’s been distraction,
entertainment, arguing about things that don’t matter. It’s just another branch of
politics. Micro has been very –

Page 13 of 45
Nassim: Yeah, they’re not judged – even micro – they’re not judged by any contact
with reality, basically. They don’t have a P&L; if you don’t have a P&L; you pretty
much, can, because they can get what I call a “circular citation ring”, they can get into
any kind of game, grant one another Nobels and nobody would know the difference.

Source: Reese Jones

So now I’m going to define Skin In The Game with a notion of symmetry. Okay, so
before I was introducing Skin In The Game from the back door, you know, my own
experience with it. This is in the Louvre in Paris, and this is Hammurabi’s code. It’s
the earliest code we have found so far 3,800 years ago. This was in a public place in
Babylon, most people couldn’t read, so there were people who would read it for you,
tell them “hey reader, come over tell me what it says”, and it says the following: if the
architect builds a house, and the house collapses, the architect shall be put to death.

Okay, now, of course, it’s quite harsh, it was Hammurabi remember. it’s not like,
we’re not talking about Jimmy Carter or someone, this was much earlier, okay. So
how was Hammurabi’s law – what does Hammurabi’s law aim at? It prevents you
from hiding risk. You cannot hide risk and then walk away from it. The architect will
always know more about where the risk is located then you, so they can hide it in the
basement, in somewhere, they can hide it in a foundation, where they can cut corners
and then walk away and go to another city and let the building collapse and say “oh
it’s no longer my problem, you bought it”, ok, you can’t, you cannot walk away from
the risk you’ve hidden. That’s the core of Hammurabi’s law.

Page 14 of 45
Source: Reese Jones
And let me show how I encountered it in my life as a trader with something I call the
Bob Rubin trade that people still don’t understand. It’s as follows; Robert Rubin
collected 120 million dollars in compensation at CitiBank for over a decade and, of
course, stuffing Citibank – he was a vice chairman – and Citibank was in a, you
know, taking some classes of hidden risks in like industrial proportion. And sure
enough, there was absolutely no edge to these trades, they just blow up infrequently.
And in 2008 Citibank was insolvent. And who paid for Citibank? Who stopped it out?

Naval: We did.

Nassim: Taxpayers; we did. Taxpayers, Maybe not you because…

Naval: I’m a taxpayer.

Nassim: You’re a taxpayer, but I’m sure you know how to, uh, “defer taxes”.

Naval: Trust me, there are no loopholes if there were they would let me know.

Nassim: Okay, but so included in that class of people is your dentist, your bus
driver, the uber drivers – they pay taxes, you know. That’s because anything online,
anything electronic, you know…

Naval: Well the worst part is after these kinds of collapses, they say “never again” so
then they put in place tax and policies that actually suppress entrepreneurship who
are actually the people who would create the upside black swans.

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Nassim: They put more regulation, and then they call it “some very unfortunate
highly unexpected event, often called ‘Black Swan’ for which we apologize profusely
but we are excused as nobody can predict these things”.

Naval: We’re actually all gathered here as a direct consequence of the Bob Rubin
trade, because the Bob Rubins of the world lost enormous amounts of money. It was
a generational theft of trillions of dollars, both through printing money and through
taxes and hidden risk, we all paid for it, but in 2009 an unknown character named
Satoshi Nakamoto released Bitcoin and in the genesis block of Bitcoin he cited bank
bailouts as the reason why –

Nassim: Why you can’t trust the Fed.

Naval: – why he created Bitcoin.

Nassim: Ah really, really, alright.

Naval: I think he was inspired, at least a dedication to Bitcoin in the Genesis block is
revenge for the Bob Rubin trade.

Nassim: That’s even more impressive, about that story. So, and of course, needless
to say, that this has happened many times in history; in ‘93 there’s something called
the Resolution Trust Corporation mint 600 billion dollars at a time to bail out a
category called savings and loans, they all got rich, one of them went to jail, one
single person went to jail, the rest they all got rich and retired, and of course nobody
showed up with a checkbook. Like Bob Rubin didn’t show up on that day with his
checkbook, he just resigned and say it’s a black swan. 1982, banks lost more money
than they ever made in history, (inaudible), so banks virtually have never made any
money they’ve just been living off of the taxpayer but yet bankers are very rich.

Naval: They just know how to socialize losses-

Nassim: Exactly, they know how to hide their losses. So that’s the Skin In The
Game: “thou shalt not have the upside without bearing the downside yourself”, you
need to own your own risk. So that’s the whole idea. After Hammurabi of course, we
have had a little more, let’s say more, what should we call them, more human, you
know, softer rules, okay, like don’t do to others – no more of this killing architects or
something. It became the notion of symmetry, society became based on notion of
symmetry, okay. You don’t want to punish someone too much you want to punish too
little, you don’t want to have you know someone victimize others with impunity.

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Source: Reese Jones
So there’s a bunch of rules, of which the better-known one is the Golden Rule: “do to
others as you want them to do to you”, and I of course in Skin In The Game don’t like
the Golden Rule because the Golden Rule is a positive rule. If I, you know, I can force
you to eat Lebanese Kibbeh, alright, because that’s what I’d like to do. So, and it also
can invite busybodies, governmental people –

Naval: Yeah.

Nassim: – who make you do things because they like it. So, much more robust is the
Silver Rule: “don’t do to others what you don’t want them to do to you”, or the
“negative Golden Rule” – vastly more robust.

Naval: It’s like all the people who are talking about censorship mechanisms of social
media, I think the intellectually honest way is you build the censorship mechanism
then you hand it over to your enemy to run it and if you’re not willing to do that then
what you’re basically just saying is “I want to be in charge” but you’re trying to do it
in an intellectually dishonest way, you’re trying to do it a face-saving way where
people will give it to you but it’s just a naked exercise of power again.

Page 17 of 45
Source: BlockCon, Nassim Taleb
Nassim: I see. So, and, but the Greeks and the ancients were aware of it. Basically
that the captain of the ship needs to be, you get off last, not like the, you don’t sneak
out first like the captain of the Titanic. And then you had rules one of which was that
you eat your own cooking. Mercury was walking by one day and a bunch of fishermen
had a lot of, I think it was tortoises right?

Naval: Tortoises, yeah.

Nassim: So yeah a bunch of tortoises, in Libya it was or somewhere, and they didn’t
like him so they invited him to eat the tortoises. So Mercury looked at them and said
“do you think I’m an idiot?” okay, like with a New Jersey accent. Mercury, he said
okay you guys are gonna eat all these tortoises, right, first, and then I’ll eat the rest.
So he forced them to eat their own cooking.

Page 18 of 45
Source: BlockCon, Nassim Taleb
So that has been present in, pretty much, in commercial law forever, as a guiding
principle, ethical principle, and you even see entire sections of the Talmud are based
on the symmetry. In other words in transactions where there’s consideration in the
contract, in Anglo-Saxon contract based on consideration; that’s where that comes
from. Whether someone is taking too much risk for others, like for example in
Rodian law, that comes from Phoenician law, for example, if a boat sinks, if you know
pirates say take the merchandise or something, who loses the money? How do you
share it? Okay, all parties who can benefit from the transaction are obligated to pay
the cost, so you have to have complete, you know, equity there.

And there are other concepts like how much information should you disclose to the
buyer, say how much should you disclose to the buyer when you have a transaction?
There’s an ethical – there are series of ethical rules, yes if the buyer is someone from
your community you’re obligated to divulge everything, but if he’s a stranger? How
much do you divulge? A lot of ethical rules that have, I mean from that you can see in
the Talmud, you can see in Islamic law, and you can see it of course in Roman ethics.

Page 19 of 45
Source: Reese Jones
Naval: There’s also the phenomenon when you have like long caravans of people
crossing the desert or going through a difficult situation like the exodus from
Pakistan to India, during that separation. If you were in the last few carts you were
most likely to get picked off by brigands and robbers and if you’d lost something
there then the rest of the caravan was supposed to make it up to you, they’re
supposed to repay you because you were taking the most dangerous position in the
back.

Nassim: Yeah so this risk sharing, is actually, this was a part of Islamic caravans as
well because in a desert it’s the same story as robbers will attack those who are
isolated in the back, they won’t kill you but will take your merchandise and the other
people are forced to compensate them or take turns on who’s gonna be in the back.

Naval: Right.

Nassim: So this is not new but there are a lot of nuances and as we will see in a
conversation, basically, modern life has lost some of these considerations and we’ll
see how.

Page 20 of 45
Source: BlockCon, Nassim Taleb
At no point in time in history, I’m saying at no point in time with few exceptions; one
exception was India another was I think like Egypt at some point, ancient Egypt, and
one of them was modern-day France, I mean modern day like hundred years ago
France. Except for these situations, at no time in history did you have leaders who
took less physical risk than the common person, at no time. The whole idea being a
Lord is you’ve got to protect; you’re trading status for obligation to protect, so now
you’ve got to take more risk. And in the Falkland Wars, or sorry it’s called the
Malvinas in some countries, you know the Falkland Wars they had to find someone
from the royal family to fly, you know, take the most dangerous mission in helicopter
simply to, you know, confirm that role.

So and of course, we lost that. So you can have some schmuck in Washington,
warmonger, okay, you can have warmongers who never take risks.

Naval: Yeah, generals now lead from the rear, not from the front.

Nassim: Exactly, and no, but warmongers, civilian warmongers, whereas in the past
warmongers had to be in battle. And what does this symmetry do, is that if you want
to cause people to die you got to be exposed to it. It brings some kind of natural
balance to society and let me explain how. If you get on the freeway, okay, you can
easily kill 30 or 40 people, okay. All you have to do is go in reverse, okay. If you have
a Tesla, a car that accelerates very well even better. Alright, how come you don’t see
these freak accidents anymore?

Naval: Obvious, skin in the game.

Nassim: Skin in the game. Because the driver, bad drivers, are dead. Just like bad
pilots. Okay, there is – so that is a regulator. It’s the same thing with wars. Hannibal

Page 21 of 45
was first in battle, Napoleon first in battle; Napoleon was actually, they complained,
he was way too overexposed in battle, okay, on his horse going around the battlefield,
okay, Napoleon. Roman emperors, this is Valerian, a Roman emperor, who was
captured by the Persians. Why? because he had to be on the frontline, he wanted to
be on the frontline, he’s an emperor, you gotta be, you know, you gotta have a little
bit of dignity – come on. Julian, my hero, Julian the apostate and the Roman
Emperor, died with a spear lodged in his chest. Why? He didn’t have a shield. So, you
know, you had to take more risk because that’s your business.

Naval: Yeah, this guy, actually he ended up being used as a footstool by the Persians.

Nassim: Yeah, footstool. Valerian was used as a footstool by the Persian Emperor.

Naval: That’s risk. Holding crypto isn’t risk, this is risk.

Nassim: Only one-third of emperors died in their bed, and we’re not even sure they
died of natural causes, okay.

Source: BlockCon, Nassim Taleb

So we never had that situation, but people aren’t fools. You can tell that a person, a
warmonger in Washington, working for a think-tank wants to destroy Syria like the
way we destroyed Iraq and Libya in the name of democracy, so we destroy because
for them democracy is very important. So, they cannot learn from experiences. You
can -, never learn from experiences. So these people, but we know they’re full of crap,
we know Thomas Friedman is just a hack full of crap, okay. It’s just unfortunate that
people listen to him in Washington, but the general population detects that because
the general population can detect if a person has scars or not, takes more risks or not.

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This is what’s called Zahavian Signaling, in the sense that when you’re a risk-taker
you have scars, no? And you produce these scars as an ornament. Zahavian Signaling
is a concept that we discovered, why do peacocks have these fancy tails? These tails,
in fact, are a handicap, it’s just to show their genetic superiority that they can
function in spite of having these large burdening tails that bring predators because
they’re good and strong. And they use this – I took this in Jaipur India, this picture of
the, in front of me, of the peacock – so there’s a concept of Zahavian Signaling, in
other words, it’s called costly signaling. It’s not cheap signaling, it’s costly signaling.
You see, there’re a lot of virtues, we’re going to talk about virtues, that are fake
because anybody can signal these virtues. But risk-taking is real, you cannot fake
risk-taking, you cannot fake risk; you can fake virtue. Or what we call, regularly,
virtue.

Source: BlockCon, Nassim Taleb

So this explained to me, fundamentally, why we spend so much time haggling, I
mean in theology, over the nature of the Christ – I come from that part of the world
where if these discussions taking place, the Greek Orthodox Church, if you had I
mean if you had to, if you had a library, you would have probably – you’d fill in a
stadium with documents about the discussions of you know, and the arguments of
whether the Christ was God or was not God but something like a God.

What’s the big difference? And why did they always revert to the notion that the
Christ could not be full God, why? Because think about it, if you’re God, you don’t
have skin in the game, it’s like in a Superman thing, alright, you have to have some
vulnerability somewhere, alright, you have to suffer. So you suffer because you have
skin in the game; that’s the whole concept. And in Christology people didn’t think of
that, effectively, let’s think about it; if you go to a circus and see an acrobat with a
parachute, or instead of an acrobat with a parachute they show you a movie, alright,
of an acrobat. You want the person in front of you to take risks, that’s what you want,
that’s what you paid for, okay, you want real risk because, otherwise, you’re not

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signaling any virtue unless you take these risks. And this is, that was the story of the
Christ.

Source: BlockCon, Nassim Taleb

And this is something that people don’t get, is that any virtue that doesn’t entail some
kind of sacrifice or cost is not virtue. The gods in the old days did not let you, you
know, just, you know, claim to be their subject or something without paying a price,
without having something to lose for it.

Source: BlockCon, Nassim Taleb

And now, in our society, we have fake virtue. What’s fake virtue? This is in a hotel
room, they tell you “save the planet, dear guest, save the planet”. What am I doing
here, saving the planet or saving their bottom line? Okay, so they’re using the planet

Page 24 of 45
as an excuse, alright, that’s what I call virtue signaling. A virtue that doesn’t cost you
anything, doesn’t entail any risk-taking, there’s no risk in what they’re doing and you
cannot have virtue that way.

Source: BlockCon, Nassim Taleb

So, here when young kids ask me “what should I be doing?”, okay, in life. Start a
business. Don’t try to get a salary, don’t join an NGO because all they do is virtue
signaling. Maybe initially the founders really mean well, but then you end up with
people trying to game the system. People I call rent seekers. Like the UN office in
Lebanon, for example, they talk about deforestation so they can have the staff and
they can have the funds so they can fly first-class and get a nice apartment, but when
you look at the numbers there’s no deforestation, you see. So you have all these, all
this industry, of NGOs, so the first thing you tell a young person: do not join an NGO
if you want to do well. Start a business and fail, alright. Because, basically, we need
people – we can’t live off of, if everybody is a seller, you need to fail. To take risks.
Just like a fallen soldier, okay, remains more honorable than someone who has never
been a soldier. You see, is there such a thing as a dishonorable fallen soldier? No,
that soldier is very honorable. Why a dead entrepreneur, or a failed entrepreneur –
why should a failed entrepreneur be not something very honorable? More honorable
than some who’ve never been an entrepreneur.

Naval: Come back with your shield or on it.

Nassim: Exactly, come back with your shield or on it. So this is the
recommendation, you know, I make: is to start a business. And then one thing I
noticed – some people won’t like this – but I didn’t think that Trump had any chance
until I saw him standing with the 11 in the primary, with 11 or 12 Republican
opponents. And at a time there was a campaign to explain to us that Trump was an
incompetent businessman because he lost a billion dollars, of his own money. The
American public is no fool. There’s something real about losing a billion dollars, if it’s

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only, if it’s your own money. So, although, it makes a professor at a university would
think “oh it’s horrible to lose a billion dollars”, like failing an exam. Life is not an
exam. Losing a billion dollars makes you real, and that helped him get elected, at
least helped him in that stage of the election in the primary.

Source: BlockCon, Nassim Taleb

So, inequality. A lot of people talk about inequality. First of all there’s an error in the
way we measure inequality; we measure static inequality. Static inequality in the U.S.
we don’t do very well compared to say Italy or France. But dynamic inequality, you
realize, that if you take 1982, the 1982 Forbes 500 richest people compare them to
the 2012, you realize that only 10% of the families cross the list, okay. Whereas in
Italy if you do Florence 1620, and Florence 2015, you will notice that the same names
will be on the list, alright. You won’t find an outsider, on the list. So, you got to look
at it dynamically, basically, in America, I think 60% of Americans spend 10 years,
sorry, 1 year in the 10 percent. And something like more than 12 percent of
Americans spend at least one year in the 1%. So we have the dynamic vs static.

That’s the thing, there’s something fundamental about inequality. People are willing
to accept inequality if the person who is richer is taking risks, you see. You don’t
accept inequality if it’s a rent-seeking CEO making fifty times a worker makes, and
people got upset about it. But people are never upset about Steve Jobs being richer
than others. And actually the Swiss were trying to pass a law, the Swiss could see the
difference, the public who was trying to pass a law, I mean it didn’t pass but, you
know, it was not close but it was like 30 or 40 percent of people wanted to limit the
salary of CEOs, but not entrepreneurs. There’s a difference between entrepreneur,
because entrepreneurs have skin in the game, to limit, because society doesn’t like
rich people who made their wealth without skin in the game. You can detect it, that’s
what’s unpopular.

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Naval: Yeah, people with a political agenda will conflate equality of opportunity with
equality of outcome. Equality of outcome is communism, it’s a terrible thing, it
requires coercion.

Nassim: Exactly, yes.

Naval: But equality of opportunity is what you strive for, not that you can ever really
have it – we all get dealt a different DNA hand, and where we were born, and how we
grow up, and what we learn, and what our temperaments are, but you can kind of at
least narrow it down through education.

Nassim: But you can measure, you can also measure this inequality, the equality of
opportunity with a negative metric. Most people look at the opportunity of people to
rise, well if you rise someone else has got to come down, no?

Naval: Right.

Nassim: So you got to take someone else’s spot. So, it’s not quite a zero-sum game
but still, you don’t want dinosaurs to stick around, so the best metric is how many
large corporations fail.

Naval: Yeah.

Nassim: Today, in the United States, the company’s average life in the S&P 500 is 11
years, today, and dropping. It used to be 60.

Naval: But the average price to earnings ratio is much higher than that. But that’s
because of extremistan, there are a few huge outliers.

Nassim: Yeah, extremistan, exactly. So there’s nothing wrong, provided Google has
– is exposed to going bust one day, you see. The same with the other firms, some of
the firm’s in which you’ve invested.

Page 27 of 45
Source: BlockCon, Nassim TalebNaval: Oh, the failure rate for small startups or for
small cryptocurrencies, as we all know, is very very high.

Source: BlockCon, Nassim Taleb

Nassim: So I’m gonna finish with a – and then we start the conversation – with one
more point, that again is a trader’s story, there’s something I call the Green Lumber
Fallacy, is after the following metaphor. There’s a trader who is a fellow who wrote a
book on “how I lost a million dollars”, which at the time when he wrote it is very
respectable, a million dollars was a lot of money, okay. Now, you know, they didn’t
have the Obama years and Greenspan, printing.

Page 28 of 45
Okay, so how did he lose that million dollars. He traded green lumber, and he knew
everything about green lumber. He knew the statistics, physics, chemistry,
everything, the supply, the demand, the geography, the consumption – he knew
everything about green lumber, read every magazine, every book he could find on
lumber. And yet, he lost all his money. Turned out there was in the pit a fellow, an
old trader, who was very very wealthy, and always made money trading green
lumber, he traded nothing else. And one day the narrator discovered that that fellow
thought that green lumber was not freshly cut lumber, that it was lumber that they
took lumber and painted it green, right, and yet he made a fortune using green
lumber.

So what does it tell us, it tells us that from the outside, like an academic approaching
a problem, what you need to know it’s not that, what the fellow who made a lot of
money his name is I think Siegel, like Jerry Siegel or something like that, was that
what he knew was not like it’s not like he didn’t know anything, he knew a lot of stuff,
but that stuff you can only detect from the inside, you can never know from the
outside what it is, you see.

Naval: You have to play the game to understand it.

Nassim: You have to play the game to know what you need to know. Okay, from the
inside not from the outside.

Naval: People are always asking me to recommend a game theory textbook, and the
reality is I never read a game theory textbook, when I was young I just played a lot of
games.

Naval: Okay, there you go. So you, from being in that game you see things
differently. Which is why education, I think, in Antifragile – and hopefully we’ll
discuss that – in Antifragile, I rail against education.

Page 29 of 45
Source: BlockCon, Nassim Taleb
And then finally, my final slide, and we’re going to start a conversation, is about the
following quiz. Which applies to any business where there is skin in the game. Say
you go to a hospital and, for your brain surgery, you need to have a brain surgery,
which probably will enhance your mathematical skills, there’s a special surgery,
alright, you go and you can do integrals after that surgery. So you show up to the
hospital and you have the choice between two doctors; the first one looks like what
Hollywood here would put in a movie, you know; measured, clear English, Harvard
degree on the wall, someone who really looked like a Hollywood doctor, Hollywood
version of a doctor, a brain surgeon. And the other person, same rank in the hospital,
looks like a butcher; thick fingers, no diploma on the wall, and speak with a thick
New York accent, okay, like you can put him in a mafia movie if you’re going to put
him somewhere, alright. So, and no diploma on the wall means he’s embarrassed by
his background.

Which doctor should you rationally pick? Who would pick the butcher? Who would
pick the slick Hollywood doctor? Okay, there you go. So the point is; unconditionally
you should pick the Hollywood doctor, right, but here they’re the same rank in the
University so think about it; the person who looks the least like a doctor has got to
have the most skills because he had to overcome the perception bias against him.

Naval: There’s a similar learning in early-stage investing, where you tend to avoid
teams that look incredibly polished.

Nassim: Exactly.

Naval: They have good powerpoints, they’re well dressed, they present well. What
you want is the person who’s been busy in front of the computer, flustered, gets up in

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front of a whiteboard, explains things a little too complicated but has the genuine
substance.

Nassim: Exactly.

Naval: But the form alone lets you avoid it, so you get business plans that are too
well written and they use too many buzzwords and you reject them just on that basis,
you know.

Nassim: I would take it one step further and argue against a business plan; anybody
who’s capable of writing a business plan, you don’t want to invest with them.

Naval: Yeah.

Nassim: So okay, so now let’s start the conversation, based on these things-

Discussion

Naval: Yeah before we get into it, I want to give Nassim a proper introduction
because I should have done that at the beginning but I didn’t know I was going to be
part of the presentation. I normally have a rule that I don’t travel for conferences,
and neither probably should you because they fall very much on this whole side of
signaling, right, where you’re kind of like looking busy for your boss rather than
actually doing work. Now there can be huge benefits, you can network with the right
people, when they’re small you can meet the right people, but you know sitting in an
audience doesn’t have that much value for you, you could sit at home and watch it on
YouTube.

So I normally don’t travel for conferences, but when I got the opportunity to speak
with Nassim, I had to come down from San Francisco. To me, he is one of the very
very few living natural philosophers; which is someone who practices science, does
real work in science, but outside of a scientific institution, outside of the credentialed
system and I think his work is the kind of work that will last for a thousand years. I
don’t say that lightly. But I think people will be reading, you know, there are books
that Nassim has written and I won’t insult him by calling him Dr. Taleb, is that ok –
I’ll just call you Nassim?

Nassim: Yeah, it is an insult typically.

Naval: Yeah, so I won’t insult you by calling you Dr. Taleb, but Nassim has written
books that I think people will be reading a thousand years from now. His new book
Skin In The Game is fantastic, it’s part five in his Incerto series which includes
Fooled by Randomness, Black Swan, Antifragile, The Bed of Procrustes. It’s written
in a very timeless way, the concepts are very simple, there’s not a lot of math to it
although there is a huge math backing to the Incerto if you want to get into it, and I

Page 31 of 45
would rather reread his work than anything on the bestseller lists, and I have. Many
of his books I’ve reread. Now the interesting thing is that I I do get push-back when I
say I’m talking to Nassim because people say “well, he’s so angry”, “he’s so mean”,
“he’s so rude”, because they can’t they can’t fight him on the math and they can’t
fight him on the principles so they go after just the-

Nassim: Also I think it’s that I derive a huge amount of pleasure from Twitter fights.

Naval: Yes, and he does.

Nassim: Yeah, so and why do I derive pleasure from Twitter fights? So think about
it, if you’re bored it wakes you up. And at the gym, you see, I’m into weightlifting and
you have to take 15-minute breaks between sets – perfect time.

Naval: Yeah and I think, you say that you do it for fun, but I think it’s also it’s having
skin in the game in your principles, right, because as you say courage is the only
virtue that cannot be faked. I can fake any virtue on Twitter, but the one that I can’t
fake is courage, and that means going up under your name, not under some troll
account name, and taking on somebody that you think has unfairly benefited from
exploiting the system like the Bob Rubin trade for example, or the IYI’s, the
intellectual idiots, that you call out and name, or when you call out Monsanto.

Nassim: Yeah, but he’s giving me too much credit, alright. I just, I don’t do it
because of these principles.

Naval: He just likes to fight.

Nassim: I do it because I get bored, alright, and sometimes waiting in line or in

traffic, when you’re stuck in traffic, that’s the best time for a Twitter fight. So, really
it’s not as lofty a goal, but it so happened that, okay, it, you know, can impress
people.

Naval: I mean there’s not a lot of people that’ll take on Saudi Arabia on Twitter and
call them Saudi Barbaria on a regular basis. But anyways, so I’m very happy to be
here with Nassim. I think the books are absolutely worth reading, if you haven’t read
all 5 of his books I wouldn’t read anything else this year I would literally just absorb
them. And I don’t say that lightly. That’s true for me; like I’m going through Skin in
the Game again a second time.

Nassim: He’s gonna convince me to try to read my books now.

Naval: Yeah, they’re amazing.

Nassim: The first one was finished 20 years ago, so you gotta understand that I’m –

Page 32 of 45
Naval: Well there is some redundancy in there, as you would expect, and I think a
common theme that Nassim pointed out to me when we talked earlier running
through the whole thing is this concept of symmetry and asymmetry. Skin in the
Game is about symmetry between your consequences of your actions and learning
and feedback loops, and asymmetry is about extreme outcomes, so you know Black
Swan and those kinds of principles. So I think we can just dive into it.

Nassim: You want me to explain to them of the symmetry thing?

Naval: I’m sorry?

Nassim: I didn’t put slides on symmetry, hoping – you want me to explain it to

them?

Naval: Yeah, I think – yeah, let’s go ahead, why don’t you explain symmetry and
asymmetry in your words.

Nassim: Okay so, in other words, you don’t understand random events, you can’t
predict what’s going to happen. But you can pretty much tell how the random event
would hit you, no? You know whether you’re gonna make from it, lose from it, make
a lot, lose a lot, okay. So you try to position yourself in a way to benefit more than you
would lose from a random event, okay, or to lose less than your neighbor from a
random event. That’s the idea of asymmetry. It’s pretty much like an option, when I
call an option. An option you make more on the upside than you would on the
downside. And if you, in general make more from a random event than you lose from
it, then you’re gonna do very well in the long run provided you make sure you’re
going to survive. That’s the asymmetry that’s present in contracts, and options, stuff
like that. Asymmetry becomes bad when you make the upside, like Bob Rubin, and
transfer the downside to someone else, and the easiest thing to transfer to, a person
to transfer to is the taxpayer, anonymous taxpayer, you see. That is an asymmetry,
okay, a bad asymmetry. But tinkering, trial and error, it is – has a really positive
asymmetry. So, a simple, you know, example I give is if we wanted – what’s your
favorite dish?

Naval: It’s pizza, but I shouldn’t be eating it.

Nassim: Pizza, okay, so pizza. Okay, so let’s say we decide to make the best pizza, we
would call it the Santa Monica flying pizza, alright, here. So you rent a bus, you go to
the local university and bring every chemist, run up every chemist you can find, okay.
And then you take another bus and round up every overweight person you can find in
LA who’s well dressed, this is my metric when you go to a restaurant is look at for
overweight people who are well-dressed. That’s sort of like, you know, my thing. So,
and then, so we have two crowds now, okay. So if we ask the chemist, that’s the top-
down, okay, to invent that pizza, you ask the chemists, you have about 150 chemists
all looking boring and poorly fed and visibly not well dressed, and then you ask the
well-dressed people, whatever, and overweight, you tell them listen, let’s make the
best pizza. So the way you do it is you take an existing recipe, and you start adding

Page 33 of 45
ingredients to it, no? And you taste, if it’s good you ratchet it up, okay, so you have
the upside. If it’s good, you discovered something that really has good taste, you go
up, or ratchet it up, in other words you lock up your gain, okay. Now, if it’s bad you
give it to the chemists; very little to lose, alright. So that is trial and error, a lot of trial
and error, and I showed in Antifragile – and that’s the main argument – that trial
and error will always outperform design, simply because of that property. That we’re
vastly more intelligent, we have an IQ of a thousand when we do trial and error.

Naval: Yeah these basic concepts, by the way, are cropping up all over in
cryptocurrencies like Bitcoin, that it is literally a lot of your principles realized. Like
Bitcoin, for example, is an asymmetric bet; if you lose, you just lose your money, if
you win – if it becomes digital gold – you can make 50 times or 100 times your
money, so it has that option –

Nassim: Obviously depends on what price you buy it at, if you buy it at $100,000
maybe not, if you buy it for here, maybe.

Naval: For sure, yeah. But it’s also antifragile in the sense that every time it survives
a hack or an attack or a failure of some part of the ecosystem, the developers improve
the code, they improve the system, and then it gets better at surviving future shocks.

Nassim: I see, so that’s Antifragile, yeah. So this idea of symmetry, you say
convexity because a convex function is very simply makes – you make more when
you go up than you lose when you go down, okay. And it links to fragility, it’s
antifragile, because fragility has the exact opposite attribute, you see, if I jump from
10 meters I’m harmed more than twice that if I jump from 5 meters, and more than
10 times if I jumped 1 meter, and more than a hundred times… so that’s concave, it
means you don’t like volatility, and if you’re convex during that range you like
volatility. You’d rather have volatility, you’d rather have shocks, you’d rather have
turmoil. So this is the idea of antifragile, which applies to both the physical system
and anthropology.

Naval: It’s like people who are shorting cryptocurrencies, they’re on the wrong side
of that. They’re doing concave trades.

Nassim: Concave trade, yeah. Because you have a lot more downside, I mean, think
of Paul Krugman bearish at what, 40?

Naval: Sorry?

Nassim: He was bearish at 40? He was short –

Naval: Bearish 40, yeah.

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Nassim: Imagine his P&L, if you went short at 40, okay, think about it. First of all,
you would never hear of him.

Naval: He would have lost 100x, yeah.

Nassim: He would have disappeared if he had a P&L, so this is why, you know, I’m
glad he didn’t because we want to just have someone to make fun of, alright. So,
surprisingly he doesn’t engage me in Twitter fights. Because, simply he doesn’t, for
some reason. He attacks other people, but not, for some reason, he doesn’t.

Naval: It’s easier to attack people from behind the shield of the New York
Times than it is to go out and battle by yourself.

Nassim: Yeah, that’s true. But even the New York Times, they don’t. By the way, I
saw a copy of it, Skin in the Game was open as a best-seller, two on a best-seller list,
without a single book review. Not a single book review in America, in the United
States, zero, okay. Just to tell you that we don’t really need the New York Times. Ok,
it’s becoming…

Naval: Yeah, even in my industry what’s funny is that people give out awards like VC
of the year or Angel of the year and so on, and they’re all nonsense because the
reward is in investing and making the money, you know. Like, who wants to win the
award for a Bitcoiner of the year? You just want to own the bitcoin, right?

Nassim: Okay, so there are a couple of things we’re going to talk about, the Lindy
effect, linked to fragility, like the test of time.

Naval: Yeah.

Nassim: You present the Lindy, but let me first say one property of the news that
was – that’s not, you know, never existed before in history. Before 1940, or 1946 I
think when families had a television set, so you have a small family now watching
television, getting one-way information, reading the New York Times, you don’t go to
the square, you don’t get – okay, before that period in time, people did not get the
news from one source, they, it was like Facebook or Twitter. People traditionally were
both conveyors and recipients of the news, so we’re all involved in the news making,
you see. So you go to the barber, you get the news, you go you transmit it, you tell the
fisherman, they counter, then tell your barber you bring back information to the
barber that was – so, news were something that was organically spread in society and
it was nobody could control it as a source before the 1940s propaganda, New York
Times, all that era of television, and we broke out of it with Twitter and social media.
So and there’s a concept called Lindy and the news, the way, you know, it was
organized during that period from 1946 to the election of 2016 was not Lindy, can
you explain to them what Lindy is?

Page 35 of 45
Naval: Yeah, Lindy just means sort of stands the test of time, which is like any book
that’s been around for thousands of years is likely to be around for thousands of
more years. The best predictor of the survivability of something is how long it has
survived.

Nassim: For some-thing or all things?

Naval: For certain things, for things in the intellectual domain for things in the
social domain.

Nassim: Exactly, so it was discovered Lindy is a restaurant in New York that has
cheesecake, it was a horrible cheesecake, and I spoke about it and discussed it in Skin
in the Game and it had the great idea to go bust on the Tuesday the very the same day
Skin in the Game was published, alright, after 60-70 years. So Lindy was a restaurant
were actors used to meet, and they discovered that plays that survived 200 days had
200 more days, a thousand days? A thousand more days. They discovered that rule.
So you can classify things on whether they’re Lindy or not. Now Lindy tells you that
technology, okay, it’s gonna be, old technology will outlive new technologies. Not
because new technologies are bad, but they will be more vulnerable, new
technologies, to other newer technologies whereas old ones are not.

Naval: Take the fork, for example, it is a piece of technology that’s become invisible
to us but it is technology, something that helps you eat things, and the fork is going
to be around forever – it’s a tried-and-true model. And the fact it’s been around
thousands of years means it’ll be around for thousands of years.

Nassim: There’s something in blockchain, the concept of transaction coupled with,

a commercial transaction, coupled with a financial transaction that’s entirely Lindy.

Naval: Yeah.

Nassim: And that’s the letter credit, which itself was replicating something used in
maritime commerce. In other words, banking they devised this system by which you
can – you trigger a currency the minute you deliver the merchandise. Now you own –
you go there with merchandise, you come back with a currency. So mixing the
physical transaction with the financial one, all in one, it’s the same transaction,
coupling them, is an old very old thing.

Naval: Yeah and in crypto, like, Bitcoin is the Lindy currency. It survived a long
time, survived the longest, and it won’t be digital gold until it’s survived long enough,
but the longer it survives the longer it will survive, the more faith people can put in it
and the more money they can put into it,

Nassim: Exactly and government-issued currencies has never been Lindy. People
don’t realize, and you can you get a clear idea if you read history, okay. You know the
story of the, remember the story of the Christ in the temple? Why did he fight the

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money changers? Why were there money changers in the temple? Because God of the
temple did not like all these currencies, he didn’t trust these currencies, he wanted
the shekel of Tyre and now current day in Phoenicia, okay, because they’re the only
reputable ones. So he forced cities to, you know, to compete on who’s gonna have the
most solid currency for the god to take it, and then money changers would change
into that shekel of Tyre.

Naval: God’s practical.

Nassim: So, currencies have always – I mean the governments have always debased
their currency.

Naval: Yeah.

Nassim: And but yet citizens had the choice between currencies, what currencies to
use and what would God want? He would select the one that was the least debased.

Naval: You pointed out that one of the big things in history was separating the state
from church, and some religions have done that and some haven’t, where they still
combine them. But that was a major revolution; you render unto Caesar what is
Caesar’s. And the interesting thing with crypto is we’re trying to separate money
from the state and that transition, if it successfully happens, will probably be just as
impactful and take quite a while to play out.

Nassim: I see, and it is interesting because if you start having competition between
cryptocurrencies, it would be the same competition as the one that prevailed in
ancient times between issuers. Because, you know, the was a Sater of Asia Minor,
each King produced his or her, Queen her own currency, and then you’d go by the
one that was the least prone to debasement, the one you can have faith in.

Naval: Right, in my opinion it’s good to have the competition though because it
makes them antifragile, it exposes them to randomness and variation and makes
them evolve.

Nassim: Exactly, exactly. It’s not until recently, where you’re forced, you know, you
can only conduct transactions in peso, dollar, and this and that. In the past, people
picked the currency that was the most reliable for transactions.

Naval: Yeah, another point in asymmetry that you brought up which I thought was
very counterintuitive, at least for me, and completely changed the way I think about
many important things in the world, is the Minority Rule. I don’t think that one’s
obvious at all. It’s one of the things that maybe it’s obvious in hindsight, once you
fully understand it, but I think the repercussions aren’t obvious and the fact that even
it is a very stable outcome isn’t very obvious, so I’d love for you to just go to the
Minority Rule.

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Nassim: Okay, I discovered the Minority Rule one day, ironically, I was trying to
explain what a complex system was at a barbecue of a complex system Institute,
okay. And that complex systems have one attribute, that at different scales things
behave differently, okay. So in other words, a collection of individuals don’t behave
like separate individuals, they behave as separate animals, a very separate animal.
Which is something that a lot of people don’t understand in government today, is
that if I understood the psychology of each person in this room I can’t predict the
collective, how they will behave collectively, okay. But nurses know that, people know
that from children, alright, you know you could predict each child independently put
them together it’s unpredictable, okay, it’s a different animal. So that’s the concept of
complex systems.

Trying to explain it, okay, I was hit with the best example of a complex system
because at that barbecue there was, there’s, you know, it had food, alright, and drinks
and a delegation came from Jerusalem and they’re all Orthodox. Bunch of people. So
a fellow showed up, you know, to say hello and I felt embarrassed, I said “oh I’m so
sorry we don’t have kosher drinks”. He looked at me, he said “all drinks are kosher
here” I said “what?” he said “yeah, where’d you buy the drinks?” “here in Boston”
“okay, they’re going to be kosher”. What? I googled the proportion of kosher eaters
and drinkers in America, less than 0.3%, that’s on a good day, alright, a religious
holiday; 0.3%. Yet close to a hundred percent of drinks in America are kosher, why is
that so?

Naval: Because the Jews run the world. [laughter] Don’t quote me on that!

Nassim: No, no. You’re being filmed, you’re being filmed. It’s because of this very
simple concept, if let’s say I’m coca-cola what are you going to have: kosher coca-
cola, nonkosher coca-cola? Alright, you’re gonna have different departments,
different things, different trucks so they don’t get mixed? And then supermarkets will
have a different, you know, ailes? This is kosher ailes? What you’re going to do is just
make them all kosher, okay. Those who, like me, don’t know the difference, okay, will
drink coca-cola – I don’t drink coca-cola – but so it so happened that when we looked
at the bottom of the lemonade bottle there was a sign saying it was kosher, that only
the kosher people know how to identify, okay. So that’s the Minority Rule. So if a
martian came from space and sampled food preferences, okay, he would say that
America’s 100% kosher in drinks, okay, not 0.3%, so why? There’s an asymmetry, the
kosher person will never drink not kosher, but the nonkosher you see can drink
kosher.

Naval: Yeah, that’s the key, that for the minority to control the majority, the
minority has to be intransigent. They have to be absolutely unwilling to go along.

Nassim: So, for example, people didn’t notice one thing about the preferences,
marketing preferences, they don’t understand, they look at marketing preference of
individuals and they make cars accordingly. Most Americans at a time when where
cars were, you know, still had stick shift preferred stick shift – the majority, seventy-
five percent. But most of them had a family member who didn’t like stick shift, so
you’re a family of five and one family member, at the time that people didn’t have a

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lot of cars per household, one household member can’t drive, so what do you do, this
is gonna go automatic.

Naval: Yeah. Also, I think if someone in the house has a peanut allergy or gluten
allergy their whole house ends up with no gluten or no peanuts.

Nassim: Exactly, same thing. So there’s nothing wrong with accommodating the
minority, so long as you know it. Now the interesting thing about the Minority Rule
is that seems to me that it’s a norm rather than the exception in society, and about
anything. The reason we have non-smoking spaces – I joked with a friend of mine,
one day I had a French visitor. When I was a student and he came, you know, he met
me, I said meet me in front of this restaurant and book a table, He couldn’t find a
non-smoking table. I told him did you try the smoking one, he said yeah, I said okay
go buy pack of cigarettes and we’ll go to smoking section. He believed he thought
that, you know, you’re forced to smoke in a smoking section. So, and we smoked in
the smoking section, to be there, play the game. So, but, really we have these
asymmetries actually running our lives. The formation of ethics.

Naval: Yeah and actually, so, this is very interesting for me because like on Twitter,
for example, if you go on there you will always find somebody who’s outraged about
something, right. There’s someone in the extreme left or the extreme right in politics,
or in cryptoland, and they’re just really angry about something. And for a while I
thought they were just being super ineffective, and that’s what I was hoping, I was
hoping that the most outraged, most angry people are actually very ineffective and
they’re just misguided and they’re kind of on the corner. But the sad thing is the
minority rule kind of shows that if these people are intransigent enough they actually
run and control society, they establish the laws for the rest of us. And we kind of
intuitively know this, like from revolutions, like revolutionaries tend to be small
bands, small groups that won’t put up with the status quo that overthrow the entire
system. Because most people in the center just kind of don’t care, they just kind of
want to get along, and they want to go along.

So this comes back to, like, if you’re willing to tolerate intolerance then you’re gonna
live with the consequences. If you look at for example elections, there is a belief in
politics and political science that it’s the voter in the center, the median voter, who
everybody competes for and decides how the election runs. But that’s not true when
you have third parties with intransigent minorities. So, for example, if the Bernie
voters absolutely will not vote for the mainstream Democrat, the Clinton, or if the
extreme, you know, right voters won’t vote for the Jeb Bush, then they’ll actually stay
home or they’ll vote for a third party. Then you actually have to appeal to them, you
have to go with their preferences. As long as there’s enough of them, it doesn’t have
to be a large number, it’s just a few percentage points and they’re enough to control
the entire outcome. So we live in a world that is actually structured around the
preferences of radicals who won’t compromise, it’s not built around the will of the
majority, the will of the majority does apply in some cases but in many more cases
it’s the minority rule and there are all kinds of other implications –

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Nassim: Ethics – I mean ethics, for example, people have the illusion that society is
getting more ethical because the majority is becoming more ethical. No, no, it’s
minority rule. Another mistake made by Monsanto is that when introducing GMOs
they thought that all it took was convincing 51% of consumers to have GMOs, okay,
they did not think it through properly because think about it; all you need is 3
percent of people who are absolutely against eating GMOs, alright, and then you’re
gonna have a party here to celebrate the collapse of, say, Saudi Barbaria, say, okay,
we have a party, alright, what do you do? You send a list saying GMO / non-GMO?
We make everything non-GMO. You make everything organic. And the difference in
price, when the difference in price is small everybody switches to the one that the
minority wants, to the choice of the minority. When difference in price is large, then
you may have two varieties. Like, for example, for meat; kosher meat and kosher
stuff is much more cumbersome to have everything kosher, because it’s more costly
and it’s complicated.

Naval: Right, so there’s the evidence the Jews don’t run the world.

Nassim: But believe it or not, 100 percent of the meat you get, imported meat,
imported lamb, in the United States about a hundred percent is halal. Because New
Zealand exports, ok, they’re the main exporter, what’re they gonna do, what if put in
a ship to Malaysia what if Malaysia doesn’t want – there’s less demand – we’re gonna
de-halal it to send it to the United States? So they made everything halal, so all their
meat is, all their exports are halal. So, at Christmas, I saw this at Christmas, halal was
– because I can detect, I read Arabic – it was all halal, yeah so it was probably, you
know, they produce it and then we don’t have to worry about merchandising, about
perishability, and stuff like that, to make it make everything halal it’s much simpler.

Naval: So the minority rule applies when the minority is not willing to compromise,
when it’s relatively distributed amongst the whole population. Like if they’re off by
themselves in a corner, then maybe you can service them just as a minority and leave
the majority.

Nassim: Exactly, if you have a geographic diversity, ok, then you don’t have
minority rules, alright, if you say the people who eat halal live in the neighborhood,
people who eat kosher live in the neighborhood – have their own ecosystem – then
you’d have, you won’t have minority rules. As you open up the country, then the
minority rule would prevail about anything.

Naval: Yeah.

Nassim: And conditional on the majority not being ticked off by it.

Naval: That’s right.

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Nassim: In Europe, for example, now pretty much schools have to have halal meat,
and you have reaction. People didn’t know, I mean, you should have done it in a
more –

Naval: Quiet way.

Nassim: – surreptitious way. Yeah. But because parents say no I refuse, you know,
that my child eats halal, okay. Now we have a counter-reaction. Just like the
Christians, in a Roman world, halal meat resembles all sacrificed meat in the near
East, actually. You have to, you know, sacrifice the cow or the lamb, the sheep in a
certain way. And Christians would never eat sacrificial meat, you know, in the old
times pagans would have sacrificial meat and then a lot of people would die of
hunger in front of a table full of meat just to show that they were Christian and they
would not eat sacrificial meat. Because for them it’s polluted. So you may have a
counter minority rule coming from somewhere, you see.

Naval: Yeah, I think for, there are cases where the minorities themselves are – and a
minority here obviously you know what it means, it means a small group of people
who are intransigent – themselves are very intolerant of maybe even the existence of
the majority or the way the majority likes to function, so it does create a counter-
reaction, so it’s not that all revolutionaries, you know, necessarily control the world,
very often they just get lynched or stamped out.

Nassim: Exactly, so we have a thin balance here between majority rule and minority
rule. And Tocqueville wanted to protect the minority from the majority, alright, and
now we may have to do an inverse Tocqueville as well to bring symmetry, protect the
majority from the minority.

Naval: Yeah, it applies in crypto, for example, if imagine that you know something
like, I don’t know, if I had to make up a number like call it like ten or twenty percent
of the good developers in Silicon Valley are now working on crypto related projects,
or at least dabbling on it. And if they all announce tomorrow that they are only gonna
work for companies that pay them in crypto then pretty soon you would see every
payroll system switch to also offering crypto payments.

Nassim: That’s true, if you’re unconditional about getting or paying or receiving in

crypto, you install the minority rule.

Naval: Minority rule is a very powerful concept, it’s one of the ones in Skin in the
Game, I highly encourage you to go through it. Let’s talk a little bit about black
swans, which is an old concept, you’re very famous for it, did you coin the term?

Nassim: No, Black Swan term was, the earliest use of it was by a Roman poet who
said that a good person is as rare as a Black Swan. And it was used for something,
you know, rare but not completely impossible.

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Naval: Yeah and now we see them everywhere, now that you kind of popularized it I
think it’s very –

Nassim: Because now we use as a logical problem, that no matter how many white
swans you’ve seen you cannot rule out a Black Swan.

Naval: Right.

Nassim: But there’s an asymmetry, if you’ve seen one Black Swan then you can say
that there are black swans.

Naval: It’s kind of like how science works too, where you can never completely prove
anything you can only make it falsifiable, you can only disprove, disprove, disprove.
Right, so anytime somebody says this is proven by science, they usually don’t
understand science.

Nassim: They don’t understand science, or they work for Monsanto.

Naval: Yeah.

Nassim: Or the ex-Monsanto. When they say it’s proven by science. Science is not
about proving, science is about disproving and having something that has not been
producing a result that has not yet been disproved or superseded by something else.
So it’s a process, not a result.

Naval: There are whole branches –

Nassim: But science is a minority rule by the way.

Naval: Yeah?

Nassim: Yeah. Science, when someone tells you 300 Nobel Prize winner said this,
okay. That doesn’t count, because one counterexample can destroy the whole
argument.

Naval: Right. Consensus doesn’t matter.

Nassim: Consensus doesn’t matter, it works by minority, but the system is there to
protect that minority that is right against the majority, except in economics, of
course.

Naval: Right. Like was it Galileo who said “but yet it moves” when he was –

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Nassim: Yeah, yeah “E pur si muove”.

Naval: Right. Very interesting related concept that you’ve tried to bring into the
mainstream, which I don’t think has quite gotten mainstream yet, is Ergodicity. I
don’t think most people understand it, I think it’s one of your more complicated
concepts, I think I finally do understand it, but I’d love to have you explain it and see
if we can spread the meme a little bit.

Nassim: I’m gonna explain one thing, one thing that if, called path dependence, if
you wash your clothes first and then iron them, say you wash your pants and then
iron, you get different results from if you ironed your pants first then wash them,
okay. So the sequence matters, no? Okay, so it’s trivial, but you need to analyze
things dynamically to get that point. So, Skin in the Game really is organized around
two concepts, things seen statically that when you view them dynamically have
completely different properties. And you can only get that if you’re either super smart
mathematically, which nobody is, or have skin in the game because you realize that.
So, if you go to a casino and you have a small probability blowing up, no matter what
your edge is, you will blow up. That’s it. So no matter what your – because you
cannot say okay I’m gonna blow up and then get rich, you can’t, you’ve got to get rich
then blow up. So the sequence matters. So that is the path dependence, we detect it.
This is the reason why we’re paranoid.

And I noticed that there’s a guy who got a Nobel, Thaler? A pseudo-Nobel, in
economics, it shouldn’t count, should count as a negative, alright. So and then all his
work is based on showing how we are irrational statically, okay. He, for example, in
one of his – the example where he shows we’re irrational – if you go to a casino and
play with house money in the sense that you bet small and that you win big, if you
win big then you risk big, but if you lose you don’t take risk. So in other words, your
initial endowment you try to preserve it, but you risk everything you make from the
casino, okay. He found it irrational, but if you look at it dynamically, that’s what
every trader does. You play with the house money. If you don’t follow such a strategy
you’re eventually going to go bust one day.

Naval: Right.

Nassim: Because you can’t say I can look at the average return, because if you’re
bust on day 28 there is no day 29, you see. Whereas if you take an average of people’s
returns, if number 28 goes bust, number 29, you know, can operate freely. You see,
so that concept of path dependence was not incorporated into the psychology of
decision-making and therefore they found that we’re irrational in many places where
in reality we’re not. Because if you look at things in sequence, you see, so you gotta
always look at things in sequence not look at things statically.

Naval: Right, so like a lot of behavioral psych studies and economic studies will say
that if I offered you a billion dollars to play a Russian Roulette, right, and six people
play Russian roulette well five out of the six make a billion dollars each. So assuming
that your value of your life is lower than a billion dollars, you’ll play Russian roulette

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once. But would you, one person, play Russian roulette six times? Alright, no. So
confusing those two, the probability of a group going once each versus an individual
taking all of the risks in sequence gives you completely different answers. And there’s
this concept, which I’m sure you’ve all heard, of loss aversion where, you know,
people are irrationally loss averse. No, they’re not irrationally loss averse, they’re
rationing loss averse because if you go bust you can never recover. So like, for
example, in your crypto asset accumulation and trading if you go super short and you
sell everything and you lose everything you’ll never get to get back in the game. You
have to stay in the game. And it’s kind of an obvious concept once it’s explained and
described, but there are entire books written on it. Like the Kelly Criterion, and
Fortune’s Formula, that book and so on. But uh –

Nassim: Yeah, only traders and mathematicians will do information theory or

computer science get the point like Kelly, Shannon and Shannon entropy, they get
the point that you got to look at things dynamically. But psychologists are so naive
and they keep getting Nobels, you know, they’re naive by saying we’re irrational to be
paranoid, they don’t understand that, you know, dynamically if we were not paranoid
we wouldn’t be here.

Okay, so you cannot analyze one event, you got to see how that event is going to
shorten your life expectancy, so there are some classes of risk you should never be
taking. And effectively when you take Goldman Sachs, been around 159 years, you
may hate them – I hate them – but you gotta admire how they stayed alive. Why?
They never take risk of ruin, and that’s the same thing as a lesson I had as a trader by
an old trader who came and told me “listen take all the risk you can but make sure
you’re in tomorrow”. So make sure you survive. So it tells you that you gotta gear
your risk taking first toward survival, and that entails you take more risk as you’re
making more money, with the casino money and that, called mental accounting, is
deemed irrational and being paranoid is deemed irrational because they only look at
the single event, not series of events.

And something has been happening now with psychologists, we’re in the middle of a
replication crisis and their papers don’t replicate, and those that replicate don’t really
have the same effect, so, which tells us that whatever they call science is vastly
outperformed by your grandmother. So, if you go ask your grandmother, particularly
if she has Mediterranean wisdom – I’m biased, right, so Mediterranean or some kind
of Russian, particularly, but the babushkas are, they’re very – ask grandmothers,
alright, so, or grandparents or grandfathers as well, they will whatever they will tell
you will be Lindy, will have survived the test of time. And if psychologists agree with
your grandparents, okay, means they’re right, if they bring something new that your
grandparents didn’t know, odds are it’s going to be suspicious.

Naval: Yeah any field where you need to add the word science to the end to make it
seem legit probably is not.

Nassim: Exactly. So this, just if we were to summarize, because time’s up –

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Naval: Yeah they’re flashing “time’s up” at us.

Nassim: They’re flashing time’s up, but possession is nine-tenths of the law, so –

Naval: Yeah, exactly; until the audience leaves, we’re here.

Nassim: So, to wrap things up here, what I was saying in Antifragile and in Skin in
the Game is there are two things that are wrong when you analyze naively, is scale; a
large country is not like small cities that you blow up, Singapore is not like a small
China, and likewise a group of people acts differently, that’s complexity. And the
second one is with time, if you, under repeated behavior you have to have complete
different strategies from the static ones. And that was detected by practically every
grandparent and people who have skin in the game. So that’s sort of the local
message from Skin in the Game, and the overall message is, my message before you
conclude, is the idea of the Incerto is that there’s a lot of uncertainty out there,
there’s a lot of stuff we don’t know. But the good news is that there’s only one, and
one way to go about it, okay, and this is quite interesting to see that the more
uncertainty there is – take global warming, there’s a lot of uncertainty because
there’s a high probability that the IPCC they’re full of a full of crap, okay, and there’s
a probability that their, you know, that their opponents are full of crap, alright – but
the more uncertainty there is a system the less you want to pollute because you don’t
know what’s going on.

Naval: You don’t know what’s happening.

Nassim: Right, so interestingly the more uncertainty there exists in the system,
okay, the more you gotta follow a certain paranoid route; try to position yourself to
have more upside than downside and effectively your decisions become much easier,
so let’s not waste time trying to argue about the niceties of the future because the
more uncertainty there is the more we know how to act. So that’s sort of the idea of
the Incerto in general.

Naval: Well I recommend everybody just devour all of Nassim’s books; it’ll improve
your decision-making in life, in crypto, in –

Nassim: Yeah, put pressure on me.

Naval: Yeah, figuring out even like which doctor you should go to, which restaurant
you should eat at, how you should conduct yourself honorably and morally, I think
it’s an amazing work and I hope he keeps putting them out. It’s not the last one I
hope?

Nassim: I don’t know, if you if you keep talking like this I’ll stop.

Naval: Alright, thank you everyone.

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