Skin in the game, Hammurabi's code
This is documented history rather than a laboratory result. The events are well recorded. What they teach is an argument, and the entry makes it openly.
Nearly four thousand years ago, one of the first written legal codes in history was carved into stone in Babylon under King Hammurabi. Among its laws was a startling one about builders. If a builder constructed a house and the house collapsed and killed its owner, the builder was put to death. If it killed the owner's son, the builder's son was put to death. Harsh beyond anything we would accept now, but look at the logic underneath it. The person who made the decision, who cut the corner or did the honest work, personally bore the consequence of that decision. There was no way to profit from a shoddy house while someone else paid the price for it. Risk and reward sat on the same shoulders.
The mechanism is symmetry. The builder faced the ultimate downside, and he also owned the enterprise, kept the profit, and built his name on every house that stood. Both tails in the same hands. That is what disciplines the decision, and it breaks in two directions rather than one.
Upside without downside produces a gambler playing with someone else's money. The executive with the guaranteed package, the adviser paid on the deal closing rather than the deal working, the banker whose bonus survives the loss. Downside without upside produces something quieter and just as costly. Accountability handed to someone with no ownership buys you fear, then resentment, then departure, because people eventually notice they are holding a losing trade.
Both halves show up in hiring. The people who advise, screen and interview usually lose nothing when the hire fails, which is the first break. The manager told to own the outcome of a headcount decision they did not get to make is the second. Two questions locate it in any role, deal or partnership: who holds the upside, and who eats the downside. Wherever the answers are different people, that is where behaviour will bend, and no amount of good intent inside the arrangement will hold it straight.
Skin in the game says the person deciding should carry the consequences, and hiring fails because the advisers and interviewers lose nothing when the hire fails. Defensive decision-making says that when the decider does carry the consequences and the organisation goes looking for who is responsible, they stop picking the best option and pick the one that protects them. Both are true, and the second is what the first produces when the downside is blame rather than ownership. What separates them is whether the person carrying the downside also holds the upside. The builder under Hammurabi owned the house. The manager who picks the larger vendor owns only the blame.
Moral hazard says that when someone else carries the loss, spending rises, and nobody has to be dishonest for it to happen. Skin in the game says the cure is to put both tails in the same hands, as Hammurabi did with the builder. The RAND experiment is where the cure shows its cost. Families made to pay their own way spent a third less, and they cut the care they needed alongside the care they did not, because they could not tell which was which. So making people feel the cost fixes the arithmetic and damages the judgement. What separates the two is whether the person made to carry the downside can actually tell good spending from bad. Where they can, skin in the game disciplines the decision. Where they cannot, it produces a different kind of waste, arriving later and attributed to something else.
Source: The Code of Hammurabi, circa 1750 BC. The modern framing: Taleb, Skin in the Game, 2018.
Nassim Nicholas Taleb, 2018
On why sharing in the downside of a decision is what keeps the decision honest.
Draw your own card. It does not take long, and it rewards taking your time.