Hammurabi's Code (Skin in the Game)

Hammurabi in Paris

Hammurabi’s law was posted on a basalt stele around 3,800 years ago in a central public place in Babylon, so every literate person could read it, or, rather, read it to others who couldn’t read. It contains 282 laws and is deemed to be the first codification of our rule extant. The code has one central theme: it establishes symmetries between people in a transaction, so nobody can transfer hidden tail risk, or Bob Rubin–style risks. Yes, the Bob Rubin trade is 3,800 years old, as old as civilization, and so are the rules to counter it.

What is a tail? Take for now that it is an extreme event of low frequency. It is called a “tail” because, in drawings of bell-curve style frequencies, it is located to the extreme left or right (being of low frequency), and for some reason beyond my immediate understanding, people started calling that a “tail” and the term stuck.

Hammurabi’s best known injunction is as follows: “If a builder builds a house and the house collapses and causes the death of the owner of the house—the builder shall be put to death.”

For, as with financial traders, the best place to hide risks is “in the corners,” in burying vulnerabilities to rare events that only the architect (or the trader) can detect—the idea being to be far away in time and place when blowups happen. As one old alcoholic ruddy-faced English banker told me when I graduated from school, volunteering career advice: “I give long-term loans only. When they mature I want to be long gone. And only reachable long distance.” He worked for international banks and survived playing his trick by changing country every five years, and, from what I recall, he also changed wives every ten years and banks every twelve. But he didn’t have to go hide very far or very deeply underground: nobody until very recently clawed back (that is, reclaimed) the past bonuses of bankers when something subsequently went wrong. And, not unexpectedly, it was the Swiss who started clawing back, in 2008.

The well-known lex talionis, “an eye for one eye,” comes from Hammurabi’s rule. It is metaphorical, not literal: you don’t have to actually remove an eye—hence the rule is much more flexible than it appears at first glance. For, in a famous Talmudic discussion (in Bava Kamma), a rabbi argues that if one followed the letter, the one-eyed would only pay half the punishment if he blinds a two-eyed person, and the blind would go scot-free. Or what if a small person kills a hero? Likewise, you do not need to amputate the leg of the reckless doctor who cut the wrong leg: the tort system, through courts, not regulation, thanks to the efforts of Ralph Nader, will impose some penalty, enough to protect consumers and citizens from powerful institutions. Clearly the legal system might produce some irritants (particularly with torts) and has its class of rent-seekers, but we are vastly better off complaining about lawyers than complaining about not having them.

More practically, some economists have been trying to blame me for wanting to reverse the bankruptcy protection offered in modern times; some even accused me of wanting to bring back the guillotine for bankers. I am not that literal: it is just the matter of inflicting some penalty, just enough to make the Bob Rubin trade less attractive, and protect the public.

Now, for some reason that escapes me, one of those strange things one finds only in France, Hammurabi’s code, a stele in gray-black basalt, resides in the Louvre Museum in Paris. And the French, who normally know about a lot of things we don’t know much about, don’t seem to know about it; only Korean visitors with selfie sticks appear to have heard of the place.

On my penultimate pilgrimage to the site, I happened to lecture French financiers in a conference room in the museum building about the ideas of this book, and the notion of skin in the game. I was speaking right after the man who, in spite of looks (and personality) quite similar to those found in Mesopotamian statues, epitomizes absence of skin in the game: former Federal Reserve governor Ben Bernanke. To my sorrow, when I publicly questioned the audience, using the irony of the situation, namely that almost four millennia ago we were sort of more sophisticated with these things, and that the monument was 300 feet from where I was lecturing, nobody in the room, in spite of the high culture of French financiers, figured out what I was talking about. Nobody was aware of Hammurabi beyond some player in Mesopotamian geopolitics, or suspected his connection to skin in the game and the accountability of bankers.

Table 1 shows the progression of the rules of symmetry from Hammurabi onward, so let us climb the ladder.

TABLE 1 • EVOLUTION OF MORAL SYMMETRY

FROM TALEB AND SANDIS, 2016

HAMMURABI/LEX TALIONIS	15TH LAW OF HOLINESS AND JUSTICE	SILVER RULE	GOLDEN RULE	FORMULA OF THE UNIVERSAL LAW
“An eye for an eye, a tooth for a tooth” (Hammurabi, Exodus 21.24)	“Love your neighbor as yourself” (Leviticus 19.18)		“Do unto others as you would have them do unto you” (Matthew 7:12)	“Act only in accordance with that maxim through which you can at the same time will that it will become a universal law.” (Kant 1785: 4:421)