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The Skin in the Game as a Risk Filter

In: Future Perspectives in Risk Models and Finance

Author

Listed:
  • Nassim N. Taleb

    (Department of Finance and Risk Engineering)

  • Constantine Sandis

    (Oxford Brooks University)

Abstract

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 (under slow convergence for the law of large numbers). Nor did it look at exposure as a filter that removes nefarious risk takers from the system so they stop harming others. red (In the language of probability, skin in the game creates an absorbing state for the agent, not just the principal). 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 redvoluntary and involuntary risk hiding - and risk transfer - in the tails.

Suggested Citation

  • Nassim N. Taleb & Constantine Sandis, 2015. "The Skin in the Game as a Risk Filter," International Series in Operations Research & Management Science, in: Alain Bensoussan & Dominique Guegan & Charles S. Tapiero (ed.), Future Perspectives in Risk Models and Finance, edition 127, pages 125-136, Springer.
    • Handle: RePEc:spr:isochp:978-3-319-07524-2_4
    DOI: 10.1007/978-3-319-07524-2_4
    as

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