The Skin In The Game Heuristic for Protection Against Tail Events
Nassim Nicholas Taleb
NYU-Tandon School of Engineering; New England Complex Systems Institute
Oxford Brookes University - Oxford Brooks
October 1, 2013
Review of Behavioral Economics, 2014, 1: 1–21
Standard economic theory makes an allowance for the agency problem, but not the compounding of moral hazard in the presence of informational opacity, particularly in what concerns high-impact events in fat tailed domains. Nor did it look at exposure as an evolutionary filter that removes bad risk takers from the system so they stop harming others. But the ancients did; so did many aspects of moral philosophy. We propose a global and morally mandatory heuristic that anyone involved in an action which can possibly generate harm for others, even probabilistically, should be required to be exposed to some damage, regardless of context. While perhaps not sufficient, the heuristic is certainly necessary hence mandatory. It is supposed to counter voluntary and involuntary risk hiding and transfer in the tails. We link the rule to various philosophical approaches to ethics and moral luck.
Number of Pages in PDF File: 12
Keywords: RIsk management, Heuristics, Black Swans, Fragility, Ethics, Moral Philosophy, Probability
Date posted: July 26, 2013 ; Last revised: June 10, 2014
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