What Happens When an Economist Walks Into a Brothel?

(Bloomberg Businessweek) -- To learn how to manage risks in your life, don’t consult office-bound economists or actuaries. Ask the real experts: prostitutes, gamblers, magicians, paparazzi, big-wave surfers, movie producers, horse breeders, and soldiers. Their careers require them to take risks. They succeed by doing so smartly—deriving as much benefit as possible per unit of risk taken. Allison Schrager, herself an economist, though not of the office-bound variety, interviewed all of these exotic professionals for an intriguing new book, An Economist Walks Into a Brothel: And Other Unexpected Places to Understand Risk. .Schrager, who earned her doctorate at Columbia University, is a journalist at Quartz and co-founder of the risk advisory firm Life Cycle Partners LLC. (Disclosure: I got to know her when she worked at Bloomberg Businessweek writing smart articles like this.).Schrager’s visits to legal brothels in Nevada were eye-opening. The prostitutes were willing to accept lower pay to work legally because they felt safer—no risk of being arrested, for one thing. The legal brothels employ security guards, and there’s a panic button in every room. Risk reduction is also a big draw for the people on the other side of the transaction, the johns. Schrager says the highest-earning prostitutes are middle-aged women who offer comfort and intimacy. The highest-priced service is called the Girlfriend Experience. “Most of the guys are just lonely,” one prostitute told her. “Many of them don’t even want to have sex.”.Prostitution seems like a long stretch from the risks most of us deal with, such as outliving our retirement funds, but Schrager inventively extracts five life lessons from her interviews with practitioners of the so-called oldest profession, as well as others who’ve chosen unusual career paths. They are, briefly:.No risk, no reward. You need to take risks, but make sure you have a clear objective. “We often take big risks without thinking through what we want, just that we need a change and want to shake things up,” she writes. Schrager discovered that big-wave surfers, far from being happy-go-lucky, are control freaks—which makes sense, because the careless ones don’t survive..I am irrational and I know it. Schrager found a professional poker player who plays only 12 percent of his hands, having overcome a youthful tendency to bet too often. We all tend to make dumb mistakes, she writes, so “better awareness is key.”.Get the biggest bang for your risk buck. Don’t put all your money into one investment unless you’re really sure that it’s a winner, which you never really are. “Taking more risk than necessary is inefficient.” To me, this is the core idea of the book..Be the master of your domain. You can master risk through hedging or insurance. Insurance sounds boring, but Schrager says it “works like magic.” Unlike a hedge, which requires you to give up some of your upside potential in return for limiting your downside risk, an insurance policy “appears to pull off the unimaginable: downside protection with unlimited upside.”.Uncertainty happens. “Even the best risk assessment can’t account for everything that might happen.” Plan for the stuff you can’t plan for. She quotes Meir Finkel, an Israeli colonel, who wrote that on the battlefield, the key is “the ability to recuperate swiftly from the initial surprise.”.Risk is a topic of constant interest here at Bloomberg. The latest issue of Bloomberg Businessweek features a “CEO’s Guide to Taking Risks: How to make bold moves without being reckless.” Its advice overlaps with Schrager’s—“Acknowledge your temperament” sounds a lot like “I am irrational and I know it.” Meanwhile, John Authers, Bloomberg senior editor for markets, has launched an online book club whose first author is the late Peter Bernstein, who wrote Capital Ideas: The Improbable Origins of Modern Wall Street as well as Against the Gods: The Remarkable Story of Risk. .Chief executive officers and Wall Street players could learn a thing or two from the paparazzi, prostitutes, and other outre characters who inhabit An Economist Walks Into a Brothel..To contact the editor responsible for this story: Cristina Lindblad at mlindblad1@bloomberg.net.©2019 Bloomberg L.P.

What Happens When an Economist Walks Into a Brothel?

The art of risk-taking learnt from the prostitutes.

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