Book Excerpt: Risk Management: Big Wave Surfers Are Just Like Actuaries, Only With Better Tans

You might not think a big wave surfer and a financial engineer have much in common. But they both face the same problem: insurance removes the downside and leaves us with unlimited upside, but that gives us the incentive and the ability to take even bigger risks.

This is one big reason why people are wary of modern finance. Regulators struggle to rein in excessive risk taking, while still getting the benefits from risk mitigation tools that aim to make markets less risky. But they aren’t the only ones who search for the right balance.

I went searching for answers at a risk conference for big wave surfers. Now, risk conferences are usually my domain (I am a retirement economist after all), so it was a little strange at first to see the surfers out of their natural habitat in a neon-lit hotel conference room with only one small window. In many ways the Big Wave Risk Assessment Group (BWRAG) Safety Summit on the North Shore of Oahu was different from other risk conferences I’ve attended. Everyone (but me) was tan and in excellent physical shape—even participants well into their sixties. Most wore shorts, T-shirts, and flip-flops. The day included workshops on holding your breath led by deep-sea divers. Former Special Forces officers instructed us on how to tie a tourniquet and perform an emergency tracheotomy with a pen. At one point, someone used the word “gnarly,” but as a technical term. I even renewed my CPR certification.

But in other ways, the Big Wave Safety Summit was just like a pension risk conference: most of the attendees were men; a majority of the time was spent looking at PowerPoint slides of numbers and figures; and there were impassioned debates about who bears responsibility for risk regulation. Surfers also shared the latest tools on how to minimize risk and discussed techniques on how to turn uncertainty into risk by estimating probabilities.*

The goal of the conference is to apply risk science to big wave surfing. Instead of going into the ocean and hoping for the best, surfers are schooled in the “art” of risk: how to form calculated, informed risk assessments. The risk mitigation tools appear to be different from those used in financial markets, but they serve a similar purpose. Surfers form well-trained teams to raise the odds of a successful rescue (diversification). They monitor wave conditions, identify hazards (sharks, crowds, rocks, deep water, cold), and make probability estimates on the odds things will go wrong. This is so the surfers can make informed trade-offs about the thrill of riding a big wave safely (hedging). And they use the latest technology to rescue them when they wipe out (insurance).

Some of the techniques are low-tech and commonsense. For example, waves tend to travel in packs, or sets. If you know the surfable waves in front of you are part of a five-wave set, a hedging strategy is taking the fourth wave, even if the first one is bigger. That way after you finish, or wipe out, you aren’t pounded or held underwater by the next big waves in the set. Long says he usually takes later waves in a set. That day in 2012 was an exception. He had been out in the water for more than four hours and had already let lots of great waves pass only to find the later waves in the set small or unsurfable. That second wave he took was part of the first large five-wave set that day.

The Big Wave Safety Summit started after the famed surfer Sion Milosky drowned off the coast of Northern California. Surfers decided there needed to be more safety and training mechanisms in place and  best practices established to reduce risk. BWRAG brings surfers together to make safety a priority and learn about the latest risk technology.

Risk awareness is more critical than before as technology continues to transform big wave surfing. A sport of a few men riding 20- to 30-foot waves has morphed into a scientific endeavor, supported by the latest gadgets, to surf 50-, even 80-foot waves. When used correctly, technology augments but does not replace skill. The problem is many surfers  use technology to make up for deficient swimming and surfing abilities.

* Shout-out to Gerd Gigerenzer: the surfers were encouraged to think in terms of frequencies instead of pure probabilities.

Adapted from An Economist Walks Into a Brothel: And Other Unexpected Places to Understand Risk by Allison Schrager with permission of Portfolio, an imprint of Penguin Publishing Group, a division of Penguin Random House LLC. Copyright © Allison Schrager, 2019.

The views expressed here are those of the author, and do not necessarily represent the views of BloombergQuint or its Editorial team.