“Don’t tell me what you think; show me your portfolio.” That is something worth saying to anyone offering investment advice. Many advisors, therapists, and consultants face little direct downside when their advice fails. It is worth asking how much skin they have in the game.
Skin in the game means sharing a real risk, financial or otherwise, in the outcome of a decision. Nassim Taleb wrote a book about this topic. He argues that people should not expose others to risks they would not share themselves.
The absence of skin in the game can create a conflict of interest. Be wary of advice that benefits the adviser while leaving you to bear any loss.
- Stock traders take their cut when your investments make a profit. But when you lose, they may face little direct consequence.
- Dietitians charge for advising a diet. But when it doesn't work, it doesn't affect them (and you might even come back).
- General practitioners get paid for helping patients, not based on results. When they give wrong advice, it doesn't affect them (and you might even come back).
- Consultants can charge large sums to give advice, but when it turns out it didn't work they may face little direct consequence.
Under the legal code of ancient Mesopotamia, a builder could be sentenced to death if a house collapsed and killed its owner. That gave the builder a strong incentive to take structural risks seriously. That's skin in the game.
In earlier times rulers often fought in their own wars. A Roman emperor risked being killed by a spear on the battlefield. A stark contrast to today's banking CEOs, who have nothing to lose while collecting their bonuses.
Pay attention to what people do as well as what they say, and ask how much they stand to lose before you follow their advice.