Widely read:
Anand Kumar
Someone who advises people on a particular subject. That's the dictionary definition of the word consultant. In keeping with the spirit of the times, I also asked ChatGPT the question, "What is a consultant?" The reply was, "A consultant is a professional who provides expert advice, guidance, and solutions to individuals, organisations, or businesses in a specific field or industry. They offer their knowledge, expertise, and experience to assist clients in solving problems, making improvements, or achieving their goals."
Sounds good. Consultants are a useful, even crucial, part of how the world functions. Except, that isn't the experience of people who have been subject to the experience of working with consultants, especially the general management consultant types. Recently, I read a fascinating book named 'The Big Con: How the Consulting Industry Weakens our Businesses, Infantilizes our Governments and Warps our Economies' by Mariana Mazzucato and Rosie Collington. The authors argue that the reliance that large businesses and even governments have placed on external experts weakens and undermines their competence and ability to accomplish their goals. The hired experts have no stake in real outcomes and go through a highly practised performance and make their money. Essentially, the problem is that they have no real stake in the outcomes, no skin in the game.
'Skin in the game' is a concept often used to emphasise that those who have some stake in an outcome are more committed to it. This is intuitively true, but how exactly does it work? The sinking of that submarine which was taking tourists down to the Titanic, has drawn some unexpected attention to this question. As the submersibles community has clearly shown, the design and construction of the submarine took some horrendous shortcuts, which more or less doomed the submarine and its passengers.
However, Stockton Rush, the Chief Architect of the submarine and the company's CEO perished with his clients. He had as much skin in the game as anyone else. More, actually, because he had dived in it repeatedly, ignoring warnings that the fibreglass hull must be weakening with every dive. So how does the skin-in-the-game principle work here? Why did this man take the risk himself? In his case, the answer is a mix of incompetence, arrogance and hubris. He thought he knew best, and that was that.
The crypto bros are exactly this sort. They ruined others, but many (though not most) had skin in the game and got ruined themselves too. As Nassim Nicholas Taleb has pointed out, skin in the game does not work by magically increasing the competence of those who are themselves exposed to risks. Incentives improve behaviour, but a strong mechanism is that the incompetent get eliminated - Stockton Rush will not be designing any more submarines.
In the context of deep-sea diving, this seems like an outcome that nature brought about, but the mechanism for eliminating the incompetent works differently in savings and investments. We see this happening around us. Badly-run companies fall by the wayside, as do badly-run mutual funds, but how does this work with the people who advise you? When someone gives you financial advice, how does the skin-in-the-game principle work?
In his book 'Skin in the Game', Taleb has some interesting advice for investment advisors. "Don't tell me what to do. Just show me your portfolio," he says to those trying to advise others about what to invest in. A literal implementation for would-be investment advisors who maintain a public record of their own portfolio. Does it sound workable? Well, it sounds like a rhetorical point. There is no straightforward solution to this except that as someone seeking advice, if an investment advisor showed me this kind of an authentic track record, I would take the advice quite seriously.
For all financial intermediaries like fund distributors, advisors, and even high officials of banks and their 'relationship managers' who chase you day and night to invest, it would be a good idea for investors to know if they put their money where their mouth is. Next time you interact with someone advising you, don't hesitate to ask. The answer will tell you a lot.
Suggested read: Too many gyanis, not enough gyan
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