Who pays when the decision is wrong?

My professional insights · Lyudmil Karaulanov · 9 min read

Published: 15 August 2026 · Version 1.0

In 2013, Nassim Nicholas Taleb and philosopher Constantine Sandis published their joint article The Skin in the Game Heuristic for Protection Against Tail Events. The title sounds like a text about risk management, but the real question is broader: can we trust a decision when the person proposing it will not bear the consequences of their mistake?

This is a question about fairness, but also about the quality of knowledge. Taleb and Sandis argue that personal exposure to risk not only aligns incentives. It changes the way a person observes reality.

The asymmetry behind the decision

The classic problem between owner and manager arises when one makes decisions with the resources of the other. But Taleb and Sandis draw attention to a more dangerous combination: informational opacity, hard‑to‑predict events, and separation of benefit from loss.

In success, the decision‑maker receives reward, recognition, or professional prestige. In failure, the loss remains with the owner, creditors, employees, customers, or society.

This creates more than moral hazard. It creates a different way of thinking.

A person who participates only in the positive outcome has reason to emphasize the opportunity and downplay the danger. They may appear successful for a long time if the unfavorable event is rare but destructive. Profits are visible annually. Hidden risk manifests only once.

Why some risks remain invisible

The article examines so‑called tail risks - events with low visible probability but very severe consequences. It is precisely with them that past results can create deceptive calm.

A strategy may produce small and steady profits for years, then generate a loss greater than everything accumulated. Until the moment of collapse, its author appears competent. If they receive bonuses but do not participate in the loss, the system rewards the concealment or misunderstanding of risk.

The problem is not always fraud. A person may sincerely believe in their recommendation. But lack of personal exposure allows them to remain in the game even after a series of mistakes, because the consequences are borne by others.

That is why "skin in the game" is not only a mechanism for deterring the unscrupulous. It is also a mechanism for checking confidence.

Say what's in your portfolio

One of the strongest formulations in the article is:

"Don't tell me what you think; tell me what's in your portfolio."

The meaning is not that every opinion must be backed by a financial investment. The question is whether the person's actions confirm their confidence.

A forecast is cheap when the mistake has no cost. Advice is easy when the advisor leaves before execution. A strategy looks convincing when its negative consequences fall outside the period in which its author will be evaluated.

That is why the declaration "I believe in this decision" carries less information than the question: "What do you risk if the decision turns out wrong?"

A reading for the owner

For the owner, this idea does not mean trusting only people who invest their own capital in the business. It requires a more precise map of consequences.

For every important decision it must be clear:

• who receives the benefit in success; • who bears the immediate loss; • who will carry responsibility if the problem appears years later; • can the author of the decision leave before the risk becomes visible; • is there an incentive for unfavorable information to be delayed or concealed.

Legal and managerial architecture offers various means to reduce this asymmetry: deferred compensation, guarantees, retention of part of the price, clawback mechanisms, professional liability, co‑investment, and periodic review of decisions made.

None of these tools is universal. The general principle is that part of the consequences should follow the person who had the authority or influence to create the risk.

And what about the advisor?

Here arises the particularly important question of advisory boards and external experts. Their value comes precisely from distance: they can see what daily involvement hides.

To require every advisor to participate financially in every decision would be unreasonable. It could destroy the independence that justifies their presence.

But the advisor should not be completely separated from consequences. Their "skin in the game" may be the risk to their professional reputation, documenting assumptions, continued involvement in execution, and the obligation to return to the recommendation once results become visible.

A useful advisor is not the one who is always right. It is the one whose previous recommendations can be traced and evaluated.

The boundary of the principle

"Skin in the game" does not make a person automatically right. An owner who has invested all their assets may be more biased than an external observer. Excessive personal exposure can lead to fear, defense of an already made investment, and refusal of necessary risk.

The principle can also produce excessive caution. If every mistake leads to personal sanction, managers will choose the decisions that best protect themselves, not those that create the greatest value for the organization.

Consequences do not need to be identical in type. An architect does not need to live in every building they design, and a doctor does not need to suffer from the patient's illness. What is needed is sufficient professional, financial, or reputational responsibility to make others' harm meaningful for the decision‑maker.

The authors themselves present "skin in the game" as necessary but not sufficient. Exposure to risk does not replace competence, verification, or good procedure.

What often remains unnoticed

In business it is usually asked whether the manager has enough incentive to achieve success. It is less often asked whether they have enough reason to avoid hidden loss.

The bonus rewards the visible result. But if there is no negative consequence in failure, it may encourage decisions with good short‑term returns and heavy deferred risk.

The same applies to the owner. Limited liability, the ability to extract value, or shifting consequences to creditors and employees can also separate them from part of the risk. "Skin in the game" is not a title that automatically belongs to the holder of capital. It must be sought in the actual distribution of benefits and losses.

The point of instability

What this concept means →

An organization reaches the point of instability when the people who choose the risk systematically differ from the people who will pay for it.

As long as favorable results accumulate, this asymmetry may remain invisible. Managers receive bonuses, advisors present successful projects, and owners see rising indicators. No one has a strong interest in seeking the loss that has not yet appeared.

When it does appear, the decision‑makers may no longer be in the organization. What remains is the structure that must bear the consequences of decisions for which no one feels responsible anymore.

Sustainability does not require every mistake to be punished. It requires authority, knowledge, and consequences not to be completely separated.

Because advice becomes managerially meaningful only when after the question "What do you recommend?" the second can be asked: "What will remain for you if you are wrong?"

This material is of a general analytical nature and does not constitute individual legal, tax, financial or investment advice.