Schrager - An economist walks into a brothel: And Other Unexpected Places to Understand Risk

The revolutionary idea that defines the boundary between modern times and the past is the mastery of risk: the notion that the future is more than a whim of the gods and that men and women are not passive before nature.

PETER BERNSTEIN, AGAINST THE GODS

Despite the bright Nevada sun, the room was dark and the air stuffy; an obscure I Love Lucy rerun played on mute. A bell rang and a nondescript, pudgy man entered. Suddenly about a dozen women came running from a maze of long hallways, whooshed past me, and lined up in the foyer. Each woman folded her hands behind her back, stepped forward, and said her name. The man pointed to the second woman on the left, a zaftig platinum blonde wearing a red thong and lace bra. She took his hand and led him to her room.

Welcome to the Moonlite BunnyRanch. A legal brothel is perhaps not where you would expect to find an economist who specializes in retirement finance, but Im an unusual kind of risk junkie. I hunt risk to understand it better. I dont seek out adrenaline-charged situations. Ive never bungee jumped, I dont ski, and I may be the only New Yorker who is afraid to jaywalk. Rather than look for risky situations for the rush of defying the odds, I search for unusual places that can teach me more about risk and how to manage it.

I was trained to shape policy, advise captains of industry, or write research papers at a university. And yet there I was, sitting on a red velvet sofa in a vinyl-sided house in a remote corner of Nevada because unusual markets like sex work thrive on risk. We can always find better ways to measure and reduce risk, so I go wherever people might be defying the odds. After all, financing retirement when you dont know if the stock market will soar or crash, or how long you will live, requires mastering risk.

Sex work is a risky business. I went to Nevada to understand how the industry isolates and assigns a price to this risk. Most sex workers and their clients could be arrested or subject to violence. Sex workers who find their customers on the streets are thirteen times more likely to be murdered than the general population. Thirty-five percent of sex-worker homicides are committed by serial killers. Paying for or selling sex carries a stigma: sex workers and their customers face social, professional, and legal repercussions if they are caught. I went to the brothel to understand what it costs to eliminate this risk.

When people hear the word risk, they automatically think of something terrible, the worst-case scenario, like losing their job, their wealth, or their spouse.

But we need to take risks to make our lives better. We must gamble to get what we want, even if it comes with the possibility of loss. If we want a great relationship, we risk heartbreak. If we want to get ahead at work, we have to volunteer for projects that we might fail at. If we avoid risk, our lives wont move forward. Technically, risk describes everything that might happenboth good and badand how probable each of these outcomes is.

Even the history of the word risk illustrates our complicated feelings about the concept: it derives from rhizikn, an ancient Greek seafaring term that describes a dangerous hazard. Though its usage evolved slightly over the years, it always described something perilous. But the meaning changed in the sixteenth century, when exploration of the New World began, and people started to think about risk as something controllablenot left to fate. The Middle High German word rysigo means to dare, to undertake, enterprise, hope for economic success.

Whether you realize it or not, you take risks large and small, every day, in all parts of your life. The good news is that you dont have to leave it all up to chance and hope for the best. This book will show you how to mindfully take a risk and minimize the possibility that the worst will happen.

We are often taught to think of decisions in terms of if I do X, then Ill get Y, but in reality any time we make a decision, a range of Ys could happen, from a superior Y to a terrible outcome. Once we recognize this, we can take steps to alter the range of Ys. We cant guarantee a positive outcome, but when we think about risk more strategically we can increase the odds that things will work out. This is sometimes called taking a calculated risk, but there is a science to risk that helps you understand what is worth trying and how to maximize the chance of success when you do take a risk.

The science of risk Im referring to comes from financial economics. While you might be imagining men with slicked-back hair and fancy suits trying to make moneyor take yoursmost of what goes on in financial markets is simply buying and selling risk. Risk in finance is an estimate of everything that might happen to an assetsay, the odds of a stock going up 2 percent or 20 percent, or dropping 60 percent. Once risk is measured it can be bought or sold: people can choose to increase risk or reduce it, according to their preference. Financial economics studies risk in financial markets, but its lessons can be applied to any market or decision we encounter in our lives.