Skin in the game (phrase)

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To have "skin in the game" is to have incurred risk (monetary or otherwise) by being involved in achieving a goal.

In the phrase, "skin" is a synecdoche for the person involved, and "game" is the metaphor for actions on the field of play under discussion.[1] The aphorism is particularly common in business, finance, and gambling, and is also used in politics.[1]

Etymology[]

The origin of the phrase, not commonly used in conversational vocabulary, comes from southern derby races.[citation needed] The owners of the horse have “skin” in “the game”. As the owner, they have the most riding on the outcome of the derby event. The phrase is historically used in southern states rumored to have originated with the Gruber family.

It has commonly been attributed to Warren Buffett, referring to his own investment in his initial fund.[2] However, William Safire disputes that Buffett is the source of the phrase, pointing to earlier instances.[3]

In business and finance[]

The term is used to ask or convey an owner(s) or principals undefined but significant equity stake in an investment vehicle where outside investors are solicited to invest. The theory is that principal's equity contribution is directly related to the stability of the investment and confidence that management has in the venture and is also (falsely) strongly correlated to the expected yield of the investment.

According to the economist Joseph Stiglitz, there tends to be a negative correlation between excess "skin" and negative returns.[4]

The main issues surrounding "skin" or excess "skin" is the principal–agent problem whereby transparency and fiduciary obligations are disregarded by principals who have capital or excess capital (skin) tied into an entity. Many banks and other financial institutions bar employees from having any "skin" where client capital is managed, principally to address the issue of front running and commingled funds (MF Global).[5] Investment structures such as hedge funds, private equity, Trusts and mutual funds are legally limited to a minority investment positions or are done to create a tax efficient structure. Typically equity inputs by these fiduciaries are around 0.5–2%. Nassim Nicholas Taleb and Constantine Sandis have argued for skin in the game as a rational and ethical heuristic for all risk-taking.[6]

See also[]

References[]

  1. ^ Jump up to: a b Corey, Michael (June 2, 2011). "Skin in the Game". DeliberatelyConsidered.com. Retrieved 2013-03-10.
  2. ^ Investopedia, Skin In The Game Definition
  3. ^ Safire, William (2006-09-17). "Skin in the Game". The New York Times.
  4. ^ Stiglitz, Joseph E. (1987). "Principal and agent, The New Palgrave: A Dictionary of Economics, v. 3, pp. 966–71.
  5. ^ "MF Global: The mess that keeps getting messier". The Term Sheet: Fortune's deals blog. fortune.cnn.com. November 21, 2011. Archived from the original on July 13, 2012. Retrieved 2013-03-10.
  6. ^ "The Skin In The Game Heuristic for Protection Against Tail Events" Review of Behavioral Economics, 1: 1–21 (2014)

Further reading[]

  • Nassim Nicholas Taleb (2018). Skin in the Game: Hidden Asymmetries in Daily Life. New York: Random House. ISBN 978-0-425-28462-9.

External links[]

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