Quote of the Day: The Difference between Businesspersons and Speculators relative to Forecasters

I've see rich businesspersons; I've see rich speculators; but I've never seen a rich forecaster.

Another splendid aphoristic gem from my favorite iconoclast author and mathematician Nassim Nicolas Taleb at his Facebook page*.

 

The bottom line is ‘skin in the game’.

While all three apply prognosis on the future, businesspersons and speculators implement demonstrated or revealed preferences: they take on risks by betting with their own resources (hence they get rich when their prognosis are validated). 

Or said differently, they put on personal stakes to profit from a (probabilistic) tradeoff in a given reward-risk environment.

On the other hand, while vociferous in public, the forecaster, hardly parlay their predictions with their own resources. Instead, they are usually paid shills for interest groups or they serve as mouthpieces to indoctrinate and or to confirm the biases of the gullible public. In other words, the forecaster's concerns have mostly been the filling up of the pockets of their sponsors/employers and have been mostly plagued by the principal agent dilemma (conflict of interest). 

Because they have little or no personal stakes, being wrong on their predictions hardly signifies an issue. That's because they will just most likely invoke Keynes' 'smart banker' escape clause of citing ignorance while taking cover with the crowd.

Basically, financial 'skin in the game' means the difference between action (investment and speculation) and (no stakeholdings based) cheap talk which usually have been garbed with technical gibberish (to sound and look sophisticated 'experts').

* I hardly open facebook (or tweeter), but I don’t need to open these to read pages or tweets of my favorite or followed authors.

Quote of the Day: The Difference between a Politican and a Private sector CEO

Some of the president’s most central and important claims about Obamacare are revealed now – and widely admitted – to be wrong.  If he were the CEO of a private company he would be sued, publicly lambasted by all the major media, perhaps hauled before an admittedly grandstanding Congressional committee, and possibly prosecuted, convicted, fined, or even imprisoned for fraudulent misrepresentation.  But because Obama is a politician, his misrepresentations are excused as simplifying descriptions aimed at persuading the doofus public to fall for legislation that they would not have fallen for had the president described that legislation honestly and accurately.

This is from Café Hayek Blogger and Professor Don Boudreaux on the unraveling Obamacare. 

Politicians typically use noble sounding rhetoric (e.g. "change", "equality") to push for political agendas that serves their interests. Yet they rarely have been accountable for their actions, even in the face of flagrant failures. This gambling away of society's civil liberties, financial and economic resources and social order has largely been a product of the lack of skin in the game. 

And in the face of failures, politicians would usually resort to propaganda blitz by shifting the blame elsewhere, hoping that fickle voters will forget. And for as long as politicians can get away with this, they will keep on gambling away society's treasures.

Marc Faber: A Corrupt System that Rewards Stupidity

Today’s political economic system has increasingly evolved to what Nassim Taleb calls as the lack of the "skin in the game" (or a syndrome combining principal agent problem and the moral hazard) or the stakeholders dilemma where political agents and their apologists hardly feel the consequences of their proposals or edicts.

These agents promote policies that pushes people to take reckless risk taking activities at the cost of the economy and freedom.

Dr. Marc Faber at the Daily Reckoning explains. (bold original)

For the greater part of human history, leaders who were in a position to exercise power were accountable for their actions. If they waged wars or had to defend their territories from invading hostile forces, they frequently lost their lives, territories, armies, power and crowns. I don’t deny that some leaders were irresponsible, but in general, they were fully aware that they were responsible for their acts and, therefore, they acted responsibly.

The problem we are faced with today is that our political and (frequently) business leaders are not being held responsible for their actions. Thomas Sowell sums it up well:

…we have today a system where leaders are not only not punished for their failures, but are actually rewarded…

“It is hard to imagine a more stupid or more dangerous way of making decisions than by putting those decisions in the hands of people who pay no price for being wrong.”

When political leaders or economic policymakers are seen to fail, the worst that will happen to them is that they won’t be re-elected or reappointed. They then become a lobbyist or an adviser or consultant, and give speeches, earning in the process a high income on top of their pension.

Similarly, many corporate executives and fund managers who have no personal stake in the business that employs them will receive generous pensions even if they fail to do their job properly and are dismissed. (This doesn’t apply to hedge fund managers, most of whose wealth is invested in their funds.) In other words, probably for the first time in history, we have today a system where leaders are not only not punished for their failures, but are actually rewarded…

Recently, Warren Buffett said that the Fed was the world’s largest hedge fund. He is wrong. The world’s largest hedge funds are owned by people who are risk takers with their own money, since they are usually the largest investors in their funds. The academics at the Fed are playing with other people’s money.

Read the rest here

Quote of the Day: The Intelligencia pay no price for being wrong

Well, if you come up with a lot of wrong ideas and pay a price for it, you’re forced to think about it and to change your ways or else get eliminated. But there is no such test. The only test for most intellectuals is whether other intellectuals go along with them. And if they all have a wrong idea, then it becomes invincible.

This is from economic professor, author and political philosopher Thomas Sowell expounding a passage “The Intelligencia pay no price for being wrong” from his latest book Intellectuals and Race in a video interview with Wall Street Journal’s Peter Robinson. (hat tip Mises Blog)

Paying no price for being wrong can be seen in the same light as Nassim Taleb's “skin in the game”, the stakeholder’s dilemma or the principal agent problem—conflict of interests shaped by diverse incentives

This is very relevant not only to the participants of the financial markets but especially pronounced in public opinion arena where social policies are shaped. The crux: Bad ideas have consequences. And people with little “skin in the game” or “pay no price for being wrong” are the most notorious promoters of ‘noble sounding’ deceptive ideas.