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Nassim Taleb on Simplicity and Skin in the Game


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I was able to attend a conference in Mexico City where Nassim Taleb offered his views on antifragility among other topics. Certainly, Taleb has a different way of seeing things as you may have been able to hear and read. One of the ideas that left me thinking during his presentation was the concept of "skin in the game" and how it relates to simplicity.



Taleb mentioned that generally theorists and professors prefer complex models because they have no "skin in the game," that is they prefer complicated equations and theories to justify their work and hours invested into it. However, Taleb argued that when one has "skin in the game," that is, when we have positions backing up our beliefs, we prefer simplicity over complexity, enabling us to operate more fluidly as we follow our convictions.


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This idea has resonated with me and links right to Einstein's simple yet powerful ideas from 1905. In a simple, yet revolutionary paper that included at the most senior high school math, Einstein shared his views on relativity by providing a solution based primarily on the concept of time. It is to him that the phrase "If you can't explain it simply, you don't understand it well enough" is attributed.



In finance, it is very common to believe that complex models and ideas are better: People still calculate betas and the optimal portfolio weights according to the ideas of Harry Markowitz. However, as we step away from the academic world and become practicioners, often times a simple idea, like margin of safety, has more power and provides more guidance than complex models.



The market is always complex, with many variables pulling in different directions at the same time. It is my view that to navigate during turbulent times, nothing is better than to observe fundamentals, both at the macro and micro levels. One of the most costly mistakes that we can make at the moment is to listen to opinions and become victims of our emotions.



Focusing on what Taleb mentioned, these three basic steps could make us arrive at better conclusions and even benefit from the panic:




  1. What are the macro and micro fundmentals telling us at the moment?

  2. Is your specific investment dependent on whether the U.K. remains in the European Union? And if so, to what extent?

  3. Many quality companies have suffered downturns. If you have been waiting for a good entry price, this could be a right time to start building up a position.



This model is very simple; however, it can provide us certainty to operate. Instead of building a complicated algorithm, the Pareto law, that 80% of results stem from the initial 20% effort, can lead to what behavioral finance callsAA satisfice, which provides sufficient and satisfying results to maximize our time and reduce our opportunity costs.



What do you think?



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This article first appeared on GuruFocus .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.



This article appears in: Investing , Stocks
Referenced Symbols: AXP , JPM , BA , MSFT



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