A real estate agent just told me about someone selling their house because they have terminal cancer. They're in a financial bind. Despite having lived in their home for forty years, they have a million dollar mortgage - significantly more than they first paid for the house. When I exclaimed in shock, the agent explained it was due to "business decisions gone wrong."
The man has no life or income protection insurance, and no way to pay his family's living expenses after his death. He's hoping to net some cash from the sale, but the market is gloomy and slow.
It was framed as a sob story, but instead of compassion, I found myself livid with this dying stranger. A middle-aged self-employed person with a family had no insurance, gambled the family home, and is leaving them with nothing - and I'm supposed to feel sorry for this guy?!
(This is not the reaction the agent expected. We shifted topics after that.)
I re-read Nassim Nicholas Taleb's Skin in the Game: Hidden Asymmetries in Daily Life recently. It's a great book about risk (though Taleb always comes off as kind of a jerk). Taleb argues that for systems to be just, responsible parties should have a personal stake in the outcome. Systems are dangerous, Taleb argues, if people can enjoy an upside, with no stake in the downside.
The book, at its heart, is about accountability - which as I've written before is a higher bar than responsibility. Responsibility is moral, but accountability is structural. Responsibility is personal and values-based. Accountability is external and consequence-based. Accountability puts you on the hook for the outcomes of your choices, even, or especially, if they don't go well. Without accountability, incentives are asymmetric, enabling people in positions of power to make choices that benefit them in the short term while transferring long-term risk to others.
Taleb explains how risk accumulates and hides in asymmetric systems. He targets CEOs of major banks that collapsed or were bailed out in the 2008 financial crisis. These leaders collected millions in bonuses in the lead-up but had no personal liability when the bubble burst. They kept their millions, while ordinary people lost their homes and jobs, and taxpayers footed the bill. Banking executives with no share in the downside are incentivised to maximise short-term profits (and collect an annual bonus) even if it might lead to long-term ruin for customers and the economy.
A friend bought a house last month, and I went with them to sign the loan documents. With my Taleb lens on, I was mesmerised by the contract's asymmetry. These are documents I've signed plenty of times myself, with little thought to their fairness.
Standard loan documents in NZ typically specify a "priority amount" of around 1.5x the actual loan. This has the benefit of making future mortgage top-ups easier to approve. It also creates a high ceiling for the bank to cover any enforcement costs and penalties in the event of a default. The priority amount gives the bank first pick over your assets. Often framed as a customer convenience, this is robust protection for the lender.
Consider, however, that if you don't default, and instead, pay off your fixed-rate loan early, they'll charge you for that too. The bank was, they reason, counting on your money to pay their own creditors. If you put a dent in their income security or projected earnings, that's on you.
Curious, I combed through my own bank's Master Facility Agreement and discovered a treasure trove of similar provisions. Here are a few:
- If you owe the bank money, they can take money from any of your accounts, exercising their "rights of set-off." You are required to waive your rights of set-off in return.
- For customers with revolving credit facilities the bank can cancel or reduce your credit limit, or demand payment of the outstanding amount "at any time, for any reason." You carry the risk of change.
- They can cancel or reduce the limits on fixed-rate loans, or demand full repayment if you fail to make payments on any other agreements you have with them, if they think the value of your house has gone down too much, or if you withhold your private information (which they reserve the right to use and distribute to third parties as they please.) They can also take action if your circumstances change, or if they "reasonably believe that our ability to continue making the facility available to you has been negatively affected" - whatever the hell that means.
- The bank can force the sale of your house if you default - and the cost of that enforcement and sale process will be paid by you. Any losses the bank incurs because of you, including those outside of your control, are your liability. The bank will not be liable for any loss you incur as a result of the loan.
- The bank can require you to take out lender repayment insurance to guard against their potential loss. This insurance payment, if disbursed, will be paid directly to them. You will pay the premiums.
- You cannot assign or transfer any of your rights or obligations for your loan to anyone else - the bank will not even promise to accept a power of attorney. They, however, can assign or transfer all or any part of their rights or obligations to another person at any time, and do not need your consent to do this. They can ignore any instructions you provide if they consider them unclear, or think they're suspicious. But anything they tell you is binding, and you are considered to have read and agreed to all correspondence three business days after they send it to you.
They also include this banger:
"We can choose if and when we exercise our rights under any facility document and at law. Any delay by us does not affect our right to choose when or if we exercise any of our rights. Our rights and remedies under each facility document are additional to any of the rights and remedies we have at law or under any other agreement with you."
Banks go to extraordinary lengths to guarantee their upside and eliminate risk of a downside. The customer has no guaranteed upside (as people who bought houses in Wellington during the COVID boom and are now underwater have discovered) and carries practically all of the risk and uncertainty.
This is a design choice, not a default. Taleb points to a principle in Islamic law called gharar, which prohibits transactions where one party has certainty about the outcome and the other doesn't. Islamic finance also prohibits riba (interest), so Shariah-compliant mortgages tend toward co-ownership: the lender and borrower share the upside and downside of the purchase, at least in principle.
There's plenty more insight from the book I scribbled down, but I'm particularly taken by Taleb's comments on freedom. Freedom is a core value of mine and has been since I was young. I'm obsessed with charting my own course and making my own decisions, possibly due to an early (and earned) skepticism of authority. I've lived independently since I was 15 years old and been self-employed since 25, which means freedom is structurally embedded into my life. It is my operating principle. Freedom is power. But like power, freedom goes hand in hand with accountability.
"Freedom is always associated with risk-taking, whether it leads to it or comes from it." - Nassim Nicholas Taleb, Skin in the Game
Living independently means accepting the personal consequences for paying bills, maintaining a house, and keeping a schedule. Entrepreneurship requires accepting the personal consequences of earning an unguaranteed income.
Contrast this with employment, which involves responsibility, especially as you become more senior, but buffers against personal liability. Even if you don't perform, you'll still get paid - for as long as you have your job. (Read more about the differences between employees and entrepreneurs here.)
When I take a punt in my business, the downside is mine. My family look on with mild amusement as I try things and occasionally fall flat on my face. But they didn't choose my risks, so it's on me to make sure my failures don't become theirs.
Accountability changes the game. It raises the stakes, increases the need for caution, and shifts the protections necessary to make risk viable. In my work, as in my personal life, I'm most interested in situations where there is a disconnect between power and accountability. What happens when people with the freedom to decide, and/or the power to execute, are absolved from the downside? How does this skew decision-making? Most importantly: what guardrails, capabilities, and structures are needed to manage the risk of ruin?
Taleb draws a hard line between risk and ruin. You can recover from a loss, but not from ruin - and ruin tends to affect many more people. Accountability requires us to build scaffolding that stops a bad bet from turning into catastrophe.
Banks show us what that protective scaffolding looks like. They set a ceiling on what they can lose, insure against the worst case scenario, and maintain their right to exit. Unfortunately, they do those things on their own behalf, and offer none of that protection to the most vulnerable person in the transaction.
Our dying vendor had none of this protection. His family home was on the table, he had no life insurance, and there was no exit plan. He might have felt responsible for his family, and almost definitely feels terrible now. But his feelings won't keep his wife in her home. Structures might have. He had skin in the game, no doubt - but most of it was his family's. The consequences of his decisions will now be absorbed by the family he leaves behind.
Accountability is a high bar, a much higher bar than we often require in political or corporate settings. As decision authority shifts into automated systems and customer service goes down the toilet, it is more difficult to find someone who shares your risk. We live in the age of what Dan Davies calls the accountability sink.
Leaders who make significant decisions they won't personally have to live with - from corporate restructures to social policy - should, in Taleb's framework, be more than responsible. They need structural accountability and appropriate guardrails. When decision-making is divorced from accountability, incentives skew, and short-term upsides may triumph over hidden downsides - downsides often borne by people least able to bear them.
With power literacy, the disconnect becomes more legible. In appraising our organisations, relationships, or responsibilities through this lens, we might ask: Who stands to benefit if things go well? And who will carry the consequences if they don't? The gaps tell the story.
Guardrails will differ from one setting to another, but ones worth considering include:
- Boundaries. What is never on the table? The family home? Essential services?
- Buffer. What absorbs the hit if it goes wrong: insurance, reserves, or runway?
- Liability. How is the upside balanced by a downside? Are there clawbacks that tie bonuses to long-term outcomes, not just short-term results? Is there a named human who will go down for this choice if required?
- Protection. Do the people who will carry the downside get a say before the decision is made? What does meaningful input look like in your policy, restructure or infrastructure plan? How will the most vulnerable be protected?
- Exit strategy. What is the plan B? How can you stop, reverse or wind down without taking everyone down with you?
As far as what you can do with this, well, the answer is simple - though rarely easy. Design your own guardrails... and demand them of anyone who makes decisions on your behalf.
Til next week,
A