When someone has skin in the game, they have some stake in the outcome of their opinion or decision. They are incentivized to act in their own best interest, naturally aligning them with the best outcome. It mitigates effects like moral hazard, which misaligns incentives of the parties in an interaction based on an asymmetry of knowledge, power, and/or other factors.
The metaphor of skin in the game also relates to a number of core concepts in moral philosophy:
This was economist Thomas Schelling’s insight way back in 1969 — just one of many examples of “unknown knowledge” that exists in the world today. His Spatial Segregation Model takes a few simple premises and shows that a set of quite tolerant people, who genuinely prefer to live in a diverse neighborhood in terms of race, income, and other factors, nevertheless end up self-segregating into clusters of like individuals — as follows:
Slight preference for homophily: 30%
We set up a fairly dense environment with a low preference for similarity — people are quite tolerant and are only looking to have 30% of their near neighbors be similar to them:
But when we run the simulation, we end up with an equilibrium state where individuals are surrounded by 75.2% similar neighbors:
If we run the spatial segregation model with a 50% preference for similar neighbors, the outcome is even more stark: the agents achieve equilibrium at a whopping 87.7% similarity: