The world seems to always give us advice. Friends tell us which Netflix shows to watch, families tell us what job to take, self-help books tell us how to spend our mornings. We get given so much advice that we have to somehow figure out which advice is worth taking.
The main question to ask yourself is: “Does the person advising me have skin in the game?” That is, what kind of losses are exposed to the advisor if this goes wrong? If your friend is telling you to buy bitcoin, you should find out how much money they would lose if bitcoin lost its value – if the answer is zero, you should run in the other direction.
This is precisely what happened on Wall Street, where fund managers got bonuses for wins but paid no penalty if they lost. In turn, they ended up taking high risks with other people’s money, knowing that they had no skin in the game and that taxpayers could rescue any bad decisions.
In contrast, Warren Buffett owns about 16% of the multi-billion dollar fund he manages, so if the fund loses, he loses in a big way.
Nassim Nicholas Taleb, the author of Skin in the Game, suggests we should take note of people who stick up for a truth that makes them unpopular, or people who act in a way that risks ostracism. He writes simply, “Avoid taking advice from someone who gives advice for a living, unless there is a penalty for their advice.”
Want to know another stance on advice-taking? Click here.