Skin in the game

David Bahnsen reviews Skin in the game, by Nassim Nicholas Taleb:

When operators are forced to adopt the negative implications of their decisions, poor decision-makers do not survive, asymmetries are eliminated, and the result is a system that is devoid of poor decision-makers. In other words, skin in the game does not just cause better decision-making because of disincentives; its evolutionary forces eliminate those fools or shysters who are the source of great systemic damage. Risk and business, David L Bahnsen, 'Nationial Review', 26 April

The pity is that operators in the public sector are rarely 'forced to adopt the negative implications of their decisions'. This is partly because effect is genuinely difficult to trace back to cause when looking at the consequences of, say, this or that health intervention or infrastructure investment decision: there are too many confounding variables and time lags. But it's also because nobody within our policymaking system has any incentive to evaluate. That's no basis for an efficient bureaucracy.

 [G]overnment bureaucracies non-self-evaluate. At a minimum, agencies with evaluative responsibilities are not invited to evaluate - they are kept out of the loop, their opinions unsought. At a maximum, government agencies actively suppress their own internal evaluative units and are discouraged from evaluating the beliefs and policies of other agencies. Why States Believe Foolish Ideas: Non-Self-Evaluation By States And Societies (pdf), Stephen Van Evera, Massachusetts Institute of Technology Political Science Department and Security Studies Program, 2002

We need to be reminded that around 40 per cent of the rich world's income is spent by organisations that resist, almost to the death, the idea of examining their policy blunders and learning from them. I mean, of course, governments who, in Taleb's words, have no skin in the game.Van Evera says that even in the world wars of the 20th century, when policy mistakes could have grievous consequences: 'the belligerents made large errors without carefully assessing their options. Even rudimentary analysis often would have exposed these errors but was omitted.'

In my experience, it is often the smallest decisions in government that receive most scrutiny: whom to offer a three-month contract; which brand of computer printer to buy; that sort of thing. The larger decisions often escape detailed analysis. Sometimes this is unavoidable but what is inexcusable is that lessons from policymaking disasters are never learned. One grievous example: it's now estimated that the US intervention in in Iraq will cost about ten times more than the White House projected. This calculation was done by a non-governmental body and it's a safe bet that it will never be referred to when similar enterprises are considered in the future.

Social Policy Bonds would change this. They would give investors in the bonds incentives to look at which projects help achieve society's goals, and which are a waste of resources. They would do this on a continuous basis; that is, throughout the lifetime of the bond. Currently, the way governments tackle long-term goals is to build on existing ideas with, perhaps, some funding for research. Incremental improvements are possible, but there are few financial incentives to come up with innovative ideas that might undermine existing institutions. Social Policy Bonds, in contrast, would subordinate institutional survival, and all their activities, to the efficient achievement of transparent, meaningful outcomes. At every stage of every approach that will be needed to solve our most complex social problems, bondholders (and would-be bondholders) would have powerful incentives to explore, investigate and implement only the most promising projects and, crucially, to terminate those that are failing or inefficient. They will have so much 'skin in the game' that they would optimise returns on their investment to the benefit not only of themselves but of all members of society.