Talk is Cheap

Last week, I saw a tweet by Ryan Kulp highlighting predictions by Gonz Sanchez on the 2020 European startup ecosystem. The predictions, while interesting, weren’t what caught my attention. To me, the shocking thing was Gonz literally put monetary stakes on his predictions. Take a look at this screenshot from the Seedtable newsletter:

The more I thought about this bold move, the more I realized that these are the only types of public predictions worth paying attention to. The person making their prediction in public needs to have skin in the game. Let’s face it: most predictions are completely wrong. And yet the people making these predictions can, penalty free, keep making predictions year after year. Nassim Taleb elaborated on this idea in his recent book Skin in the Game, and while people talk about this concept all the time, in practice, not much has changed. We’re still paying attention to talking heads and their predictions, with no skin in the game.

There are infinite examples of bad predictions made by people we as a society still treat as experts. One of my favorite examples of this is Paul Krugman. In 1998, he famously said this about the future of the internet:

“The growth of the Internet will slow drastically, as the flaw in ‘Metcalfe’s law’—which states that the number of potential connections in a network is proportional to the square of the number of participants—becomes apparent: most people have nothing to say to each other! By 2005 or so, it will become clear that the Internet’s impact on the economy has been no greater than the fax machine’s.”

This was such a hilariously bad public prediction but of course, Krugman hasn’t suffered for this at all – in fact, he’s still a regular New York Times columnist.

You can apply this concept to investments as well. If someone spouts off about Beyond Meat being ubiquitous by 2025 (for example) or Tesla being the next Apple, ask them if they own Beyond Meat or Tesla shares. If they don’t, they’re full of shit.

This goes way beyond business. Sports podcasts, shows, and talking heads make predictions on a daily basis. Almost none of them have actual skin in the game. With the proliferation of sports betting, it should be a requirement for someone making a prediction to have money on the line. Otherwise, they’re just spouting nonsense. Think the Packers will win the Super Bowl? Show us your bet ticket. Think James Harden will win MVP? Show us the money.

A great sports example from this past weekend: the Baltimore Ravens were a unanimous pick to win against the Tennessee Titans by the dozens of experts on NFL.com, ESPN, Bleacher Report, SB Nation, USA Today, and Sports Illustrated. Obviously the Titans won big and all the experts were wrong but you can bet that none of the talking heads lost anything. And of course, they’ll still be making their nonsense predictions this week and people will still be listening to them.

You may be thinking that someone touting companies (or a sports bet) they own creates a conflict of interest. There’s inherent bias. That is correct to an extent but there’s a conflict of interest either way you look at it. Someone who makes a prediction without anything riding on the outcome is immune from negative consequences of being wrong and can say something just to be sensational or non-combative, depending on their goals. All else being equal, I’d rather trust the person who faces the consequences of their actions.

I hope what Gonz did with his public predictions becomes standard. If you’re going to make a public prediction, stake something on it. If you don’t feel confident enough to do that – completely fine – just keep the prediction to yourself. And of course, don’t ever take anyone’s predictions seriously unless they have skin in the game.