What Happens When an Economist Walks Into a Brothel?

Allison Schrager
I’m Alan Alda and this is C+V, conversations about connecting and communicating
Allison: 05:13 So, I get an email from them saying, “Well, if you’re going to be writing about brothels, you should be writing about the best brothel, because we’re the best brothel.” I was like, “I don’t write about brothels, but I’m going to take this call, obviously.”
When you read the book, you see. I went into all these strange subcultures. So I had to bang on a lot of doors to get people to talk to me and explain the secrets of how things work, and I heard no a lot. It was actually the time in the brothel I had before that, I think, really got me to be at a point where Dennis said to me, “If you don’t hear no, you haven’t asked for enough.” I’m like, all right, I still hate hearing no, but I tell myself every time someone says no to me, I asked for enough.
That’s Allison Schrager whose book “An Economist walks into a brothel,” not only has a wonderfully provocative title. It also offers wonderfully sage advice on topics as varied as how to take risks and how hearing the word “no” can actually mean you’ve done well in a negotiation.
Alan: 00:00 Allison, I’m so glad to be talking to you today because you are some communicator. Just take the title of your book, I mean you get our attention immediately with that title.
Allison: 00:14 Well, thank you. I’m not normally a good title maker, but something… It initially was a chapter subhead, but I actually did come up with it.
Alan: 00:25 Oh, that’s great. It happens a lot, doesn’t it? You’re thinking about one part of your story, and a phrase emerges that really captures the whole thing.
Allison: 00:35 Yeah. It didn’t even occur to me. It sounds like a joke. I mean, I know that sounds so obvious, but for me, it was… I put myself in all these really strange situations that were so outside my comfort zone, and it was certainly a brothel that was one of them. I felt like once I walked in there, it just felt like I was in another universe.
Alan: 00:54 So, the book is about assessing risk, right?
Allison: 00:58 Mm-hmm (affirmative), yes.
Alan: 00:58 What do you mean by risk, first of all, just so I know I’m talking about the same thing you are?
Allison: 01:03 Well, people define risk differently, but the way I think about it and the way it’s defined in financial economics is, risk is a whole range of things that could happen. Any time you make a decision, it’s a risk. Good things can happen, and bad things can happen. What risk is, is it’s a measurement of all those things, so something you can estimate. Suppose you were going to the airport, and it’s never the same amount of time. So, the risk of going to an airport is, it could take anywhere between, say, 3 hours and 10 minutes.
Alan: 01:38 It can take anywhere between three hours…
Allison: 01:40 Well, you know what it’s like going to Newark. There’s traffic.
Alan: 01:46 Yeah. There are times when there’s a terrible traffic jam, and that takes five hours. How do you know not to go so far as to prepare for the absolute worst all the time?
Allison: 02:00 Well, and that’s the sort of fundamental question people grapple with. I said there’s ways of measuring risks. So, technically, risk is everything that could happen between five hours and five minutes, but there’s something in finance, they call volatility, which is, I guess in statistics, called a center deviation, which is just typically how long it takes. 67% of the time, it probably takes somewhere between 40 and 20 minutes to go to the airport.
Alan: 02:26 But then you get 1929 in the stock market.
Allison: 02:29 Yeah. Well, I mean, this is this constant struggle we have, is, do we worry about what happens, typically, and how much do we prepare for that one-off? Would you never invest in the stock market because a financial crisis might happen? Would you miss out on, say, 70 years of good returns for one bad year?
Alan: 02:48 Well, that’s my style. I guess I must be really risk-averse, because I believe in total diversification, total. I keep one half of my money on one side of the mattress and the other half under the other side of it. So, you’re talking to us in an extreme example here, but what could you learn? What did you learn about risk management when you visited the brothel as you write about in the book?
Allison: 03:18 Well, my idea going there was that you can always put a price on risk, and so the sex industry, it’s a very risky business. What I-
Alan: 03:29 It’s risky because of possible disease, violence.
Allison: 03:33 Yeah, or if you’re… Most sex workers work illegally, so they risk arrest.
Alan: 03:38 Right.
Allison: 03:38 If you’re a customer, you risk arrest, public shaming. We certainly… A lot of high profile people have lost their livelihoods and careers because they got caught. I initially went to the brothel the first time to learn negotiation skills. They invited me there, because they have a very extensive negotiation training program.
Alan: 03:58 They invited you there. How did they know who you were? How do you get an invitation from a place like that?
Allison: 04:06 I’m an economist that studies retirement, so it wasn’t a normal invite. I have a relative who, when I was trying to come up with a book proposal, I was like, “I need to meet interesting risk takers. Do you know anyone who has committed a crime?” He said to me, “Yeah, my girlfriend runs an illegal sex business. Why don’t you talk to her?” And so, I spoke to her, and it turns out, she runs an illegal sex business online, and she takes one third of her workers’ earnings to screen all the customers, to make sure that they are safe. I was like, “Oh, that’s a risk premium. That’s so interesting.” So, I wrote an article about it for Quartz, and it did super well, and it turns out, like any industry, there’s a hierarchy. The Bunny Ranch is like the Goldman Sachs of sex brothels.
Alan: 05:03 This is in Nevada?
Allison: 05:04 It’s in Nevada.
Alan: 05:06 I was supposed to say Nevada, I think.
Allison: 05:08 I never say it right.
Alan: 05:09 Yeah, I always get it wrong.
Allison: 05:10 It’s Nevada?
Alan: 05:11 Yeah, they like that.
Allison: 05:11 Long A?
Alan: 05:11 Yeah.
Allison: 05:13 Okay. So, I get an email from them saying, “Well, if you’re going to be writing about brothels, you should be writing about the best brothel, because we’re the best brothel.” I was like, “I don’t write about brothels, but I’m going to take this call, obviously.” I get on the call, and he starts explaining the sex industry to me, and it really honestly didn’t interest me that much, but then he said something really interesting to me. He said, “The women, they come here, and every transaction is individually negotiated. We don’t have set prices.” I was like, “Oh, so you have women who are about 20, negotiating with men who are in their 60s for tens of thousands of dollars?” He’s like, “Yeah, and no one has ever asked about that before. It’s interesting. They come here not really knowing their value, so we have a training program to teach them how to negotiate better.” I was like, “I would really like to see that.” They’re like, “Why don’t you come out?” So, I was-
Alan: 06:06 What do they teach them?
Allison: 06:07 Oh, actually, I ran by what they taught them, and it changed my life, too. I actually really learned how to negotiate there.
Alan: 06:14 Tell me. This is interesting.
Allison: 06:16 I ran it by a business school professor, and it’s exactly what they teach in MBA programs.
Alan: 06:20 Oh.
Allison: 06:20 Dennis Hof, who owned the brothel before he died, used to sell timeshares. So, he was trained in this, which is… It’s certain things, like you don’t, when you negotiate, just say, “Take or leave $10,000.” What you do is you offer a set of options, like a menu. That way, it’s less adversarial. You don’t say, “$10,000, take it or leave it.” The women there, someone would come in. They’re a little nervous. They’d hold their hands, and they would say, “Listen, I know you’ve never done this before, but how about we take a bath, and then we have dinner, and then we’ll do whatever sex act, and then you’ll sleep over.”
Allison: 06:58 The guy will be like, “That’s amazing. I’d love to do that.” Then she’s like, “Yes, and that will be $10,000.” They’re like, “Whoa, I was thinking it would be like 200.” Then she’ll be like, “All right, maybe we’ll take dinner out of the cart.” And so, until they get to that place, so therefore, you’re not having this interaction where it’s yes or no and someone has to hear no. It’s just, you’re choosing a menu, but you do hear no, which is something I was always very uncomfortable with, which Dennis became like a therapist to everyone there and to me, of letting me feel more comfortable hearing no.
Alan: 07:33 So, how did it affect your life? That’s interesting.
Allison: 07:35 I think it definitely gave me a lot of the bravery to do the book, because it made me more comfortable with rejection, because when you read the book, you see. I went into all these strange subcultures to find out how they worked, and some of them were more secretive than others. I had to bang on a lot of doors to get people to talk to me and explain the secrets of how things work, and I heard no a lot. It was actually the time in the brothel I had before that, I think, really got me to be at a point where Dennis said to me, “If you don’t hear no, you haven’t asked for enough.” I’m like, all right, I still hate hearing no, but I tell myself every time someone says no to me, I asked for enough.

Alan: 08:11 And you took that experience and the strength you got from that and went into a lot of different kinds of worlds, poker players, and horse breeders, and surfers, so many, such a wide variety, but let’s not leave the brothel moment for a second because I’m trying to understand something. They have to figure out the risk, and the risk is diminished by having a place that’s legal, for one thing, right?
Allison: 08:46 Exactly.
Alan: 08:47 And then they are examined, medically, not nearly enough as far as I’m concerned.
Allison: 08:55 Once a week, that’s a lot.
Alan: 08:55 Once a week is a lot? All you need is the next guy.
Allison: 08:58 Well, they have to use condoms. They actually send, what they call, testers in, so people who are working for the brothel, but the women don’t know, and if anyone ever gets caught not using a condom, then the whole thing is shut down, and the women will be fired.
Alan: 09:18 There’s risk. I understand the risk is reduced for, both, the women and the customers, but what about… Something I felt as I was reading it… There was one sentence that really got to me where they come out and they present themselves to the customer, a line of women with their hands behind their back, and wait to be selected. I thought, I felt that was a very sad image, and I thought, what about the risk that they face that they may not be aware of, of the emotional toil? This is the emotional cost to them of putting themselves in that… and that’s even before they go in and get physically used. Is that factored in in any way?
Allison: 10:06 That was my first response. The first time you see a lineup, it is jarring. I mean, as a woman, to me, it just looked incredibly demeaning. I asked all these women, like, “Do you feel rejected?” This is interesting. When you’re there a lot, you actually see this is true. They’re like, “No, because there’s someone for everyone.” In society, we have a very narrow definition of what’s attractive. We always think you must have these features to be attractive. You must be this age range. You must be this thin. You must have this hair color or whatever. But when you see a lot of these lineups come and go, you see, they have all types at the brothel, and you see all types get picked, all ages, all ranges. You realize, we have our societal definition of what’s attractive, but what men go into a brothel are looking for is a very wide range.
Alan: 11:03 Sometimes, company.
Allison: 11:05 Yeah, and who they feel comfortable with. I mean, sometimes… It sounds kind of sick, but you could almost… When someone would walk in, almost predict who they were going to pick, and it wasn’t the most beautiful woman in the lineup. It would be something about his body type makes sense with that body type, and that would be who he would pick.
Alan: 11:22 Am I wrong to assume that going through the whole range of activities, not just being selected, but what comes after being selected, and doing that over and over again, am I wrong to think that there’s a psychological price you have to pay?
Allison: 11:38 I think the women who work there have a different composition to them. I mean, I’m not saying it’s good or bad.
Alan: 11:47 Yeah. You approach it in your writing in a very even-handed objective way, I think.
Allison: 11:53 Yeah. I mean, I can’t say I ever felt comfortable there, but they definitely have a different approach to sex than I do. Some, there just for the money, and maybe it is hard for them. Others… I met a woman there. She’s a mother of five in North Dakota, and she said she goes there to get away from her kids.
Alan: 12:19 That’s so complicated, I can’t begin to process.
Allison: 12:24 You hear everything.
Alan: 12:25 You started with the brothel. What was the next place you went, the next world you immersed yourself in?
Allison: 12:32 Well, the next one was the paparazzi. They were in New York, so I didn’t actually have to live amongst them.
Alan: 12:39 You really hung out with paparazzi for long hours, didn’t you?
Allison: 12:43 They were the hardest group to penetrate. They were very reluctant to talk to me.
Alan: 12:48 Oh, what, they value their privacy? Is that the problem?
Allison: 12:50 Yeah.
Alan: 12:50 Oh, that’s kind of ironic, isn’t it?
Allison: 12:50 They actually said that. I started going up to them on the street. I’m like, “I really want to tell your side of the story.” They’re like, “We like our privacy.”
Alan: 13:00 That’s a killer. What did you learn from them? What was there about reducing risk or managing risk as you learned from them?
Allison: 13:09 Well, there’s different kinds of risk. This is true… The whole premise of the book is that these sort of basic frameworks of risk measurement and management from financial markets work in every market. In financial markets, there’s roughly two kinds of risk. There’s, what we call, idiosyncratic risk, which is the risk an individual stock will rise or fall, and then there is systematic risk, which is the risk that the whole stock market will crash. The paparazzi face a lot of both. Actually, we all do, but they face a lot of extreme, both kinds of risk, because they have the idiosyncratic risk that one day, they’re going to get that perfect shot.
Alan: 13:48 Or the other side of it, the star will one day not be shootable or salable.
Allison: 13:48 Yeah, they do that a lot. They can wait five hours for a shot, and if the star keeps their head down, it’s worthless. It’s completely random and idiosyncratic. The way you manage idiosyncratic risk in the stock market is you buy a mutual fund. You just buy a lot of stocks. If you hold enough stocks, there’s no idiosyncratic risk. What the paparazzi do, is they do something similar, is they form these alliances of other paparazzo. So, they tip themselves off when there is… They let everyone in the network know that there’s a tip if it comes up, like Alec Baldwin is going to be here. So, better go. Or, they may do a stakeout together so they can hit different entrances of a restaurant.
Allison: 14:31 This is effectively pulling their risk together and diversifying it, but it doesn’t do much for the bigger risk, which is systematic risk, which is, like I said, the whole market could collapse because once pictures started being sold online and people stopped buying glossy magazines, the market for their photos has just dropped. There used to be something called, or it’s still called this, a just like us photo. It started in Us Weekly. It’s a picture of a celebrity doing something boring, like getting coffee.
Alan: 14:58 Right, or taking out the garbage.
Allison: 15:00 Yeah, and so in what they called the Gold Rush Era, there’s the Lindsay Lohan, Britney Spears umbrella era, that kind of picture would get $10,000. Now, it only gets 5.
Alan: 15:11 It’s still a lot of money for nothing.
Allison: 15:13 $5?
Alan: 15:14 Oh, $5? I thought you said 5,000.
Allison: 15:17 Oh, no, no, no. $5.
Alan: 15:21 Their profession is kind of shaky, ridden with risk, it sounds like.
Allison: 15:27 Yeah. I mean, to some degree, we’re all dealing with these sorts of risks. You have idiosyncratic risk, if you have a job and that particular job doesn’t work out, but then we also are facing much more systematic risk, which is the risk your whole industry could disappear.
Alan: 15:40 When you examined the effort in the movie industry to turn it into a formula, what particular risk were you exploring there? What aspect of risk?
Allison: 15:54 Well, risk measurement, because as I was talking about the airport example earlier, that’s a fairly easy risk to measure. Right? It’s pretty consistent, usually between 20 and 40 minutes to get to the airport, but certain kinds of of risks, like the risk that a movie is going to be successful is just so unpredictable.
Alan: 16:13 I remember when this was… I was still directing movies when this guy who felt he had figured out how to reduce or eliminate risk in how you put a movie together. I remember thinking, this is not going to work. What was he actually trying to do? How did he think he had it worked out?
Allison: 16:36 He thought, actually, he could use the tools from finance. He thought if he had all this old, perfect data, as you know in the movie industry, film studios are very secretive with their profit data. So, they gave him access to it, so he was able to, he said, put odds based on things that happened in the past, how likely a movie in the future would be. It’s like…
Alan: 16:55 So, what the story is, what the stars are…
Allison: 17:00 What type of movie it is, the marketing strategy, and you get some predictability, but the problem with movies is, the industry changes so quickly. Data that was five-years-old just tells you nothing. I mean, think about what the movie industry was five years ago, before streaming. It has just completely changed the economics of movies.
Alan: 17:20 I know. If you watch a movie now, and you don’t have the urge to watch the next chapter, you’re cheated.
Allison: 17:25 Yeah, and not only that, Amazon, or Disney, or whoever knows. Before, you didn’t have great data. I mean, you had box office data, but you didn’t really know who was seeing what movie and whether or not they really liked it. Now, it’s like they know all your demographics. They know whether or not you finish it.
Alan: 17:44 I, initially, was interested in what this guy was doing because I have an affinity for formulas.
Allison: 17:50 Oh, yeah?
Alan: 17:51 I love formulas. When I was a kid, I was very young, I had a family where we had three daughters, and I wasn’t getting work as an actor. So, I sold mutual funds. I was a taxi driver.
Allison: 18:04 Really?
Alan: 18:04 Yeah, I did a lot of jobs. I was a doorman, but I thought… My wife’s father had introduced me to the racetrack. I thought, well, this is interesting, but I don’t want to gamble. I’m certainly not going to gamble our money away. That’s ridiculous, but if I had a formula, that wouldn’t be gambling. So, I researched formulas for about six months or more. One day, a mutual fund appointment fell through and I said, “I’m going to go research this some more.” Arlene, my wife, said, “Stop with the research. Go to the racetrack. Get it over with.” So, I took all our money, and I went to the racetrack, and I was using a system called the martingale system where… In the research I had read up to that point, fortunes had been made with it. I missed the ones where fortunes had been lost.
Allison: 18:56 Yeah. Well, this-
Alan: 18:57 But I won. We lived for a month off the racetrack.
Allison: 18:59 It works, until it doesn’t.
Alan: 19:00 That’s right.
Allison: 19:01 I mean, I think you just told a parable that describes pretty much every financial crisis. Everyone has this formula that works, until it doesn’t.
Alan: 19:08 Yeah. Galbraith wrote a book about that, where he said, “Every generation can’t remember the previous generation’s foolishness, and they create their own set of foolishness all over again and think, oh my God, I’ve got it now, and they don’t keep in mind that there’s going to be that disaster that,” I guess, the white swan, the black swan.
Allison: 19:35 Yeah, exactly, because we are saying about the way you measure risk, is you get comfortable in that zone of what’s roughly predictable, but then you always have these tale events or something you never could imagine happening. I like the formulas. I think the formulas are helpful, but you have to recognize their limitations.
Alan: 19:55 How do you know what the limitation of a formula is? Because in all the research I did, I came across these magazines that would say, “If you followed this formula, you would’ve made a million dollars in July of 1952,” because in fact, if you take one month of results, you can figure out a formula that will produce a tremendous profit that month, but that’s the only month in all of human history that it will ever work.
Allison: 20:26 Well, that’s why I’m a fan of using as much data as possible, but this is also what makes movie prediction impossible because…
Alan: 20:33 You don’t have enough data. You don’t have enough… There are too many variables.
Allison: 20:37 Well, and also, movie data from 10 years ago, I mean, people made money off DVD sales 10 years ago.
Alan: 20:42 Right.
Allison: 20:42 It’s worthless.
Alan: 20:44 Right.
Allison: 20:44 So, you need a lot of history, and you need that history to be relevant. That’s what makes movie risk and assessment just so much harder than others.
We’re taking a short break from my conversation with economist Allison Schrager. When we come back, Allison dives into the worlds of professional poker, horse racing, and even surfing, to discover strategies that could actually make you a better investor.
This is C+V and now back to my conversation with Allison Schrager

Alan: 20:53 When we were talking about how you know how much risk to take, I was thinking of when you immersed yourself in the world of poker players. One of the problems there, as I imagine it, or as I think I remember from your book, is that they would sometimes get overconfident. How do you know when you’re confident enough and not overconfident? Because when I’m overconfident, I feel it’s just right on the confidence scale.
Allison: 21:24 Well, it’s hard because it’s a behavioral bias that’s well-documented, is you have moments where people do feel overconfident and/or… With the poker players, I learned that often, that need to take more risk is when you’re down.
Alan: 21:41 So, they’re losing and they say, “I got to take more risk. Keep betting and hoping I’m going to get it, because I’m down, and I got to get back to even.”
Allison: 21:50 Yeah. When they’re up, they take less risk, but really, statistically, you’re just as likely to win or lose a hand, whether or not you’re up or down. So, you should really… The poker player I spoke to, he was like, “You should pay consistently all the time.” He’s developed all these tricks to sort of rein in his overconfidence.
Alan: 22:07 Like what?
Allison: 22:08 Well, first of all, he never has too much of his own money at stake. He has other people pay his… They take a piece of his winnings, if they put up the money for the poker tournament. Therefore, he doesn’t have that much of his own money at stake, so less of his ego is involved. He also cuts all these side deals with the other poker players, like if they’re about-
Alan: 22:31 How does that work?
Allison: 22:31 If they’re about to play whatever, last couple of hands, the two poker players will go aside and be like, “Listen, there’s a million dollars at stake, zero if you get nothing. Let’s agree we’re each going to get 250,000, and then whoever wins gets the remaining 500.” So, you’ve created this lower bound on your earnings.
Alan: 22:51 Oh, so then they’ll divide it up. Whoever wins divides it up among the other people, according to that formula.
Allison: 22:57 Exactly, yeah. Do instead of your biggest loss being zero, it’s only 250. Of course, you give up some earnings for that, too, because now instead of the winning, you don’t get a million. You get 750.
Alan: 23:09 So, this gets into the area that you talk about a lot, hedge.
Allison: 23:12 Yeah.
Alan: 23:13 Is that a hedge, what you just described?
Allison: 23:15 It’s a hedge, mm-hmm (affirmative). Well, actually, no. The hedge is when he has other people do his buy-in, because they get a fraction of all of his earnings. What I just described is actually technically insurance, because you’re paying a premium.
Alan: 23:30 So, you’re buying a known outcome.
Allison: 23:34 Yeah.
Alan: 23:35 That’s insurance.
Allison: 23:36 So, yeah. If you lose, you get 250.
Alan: 23:39 Right.
Allison: 23:40 If there’s a fire in your house, you get money.
Alan: 23:43 I give that company… They advertise on television. I give them $30 a month, and then when I die, they give me a million.
Allison: 23:48 Yeah.
Alan: 23:49 I know exactly what the figure is.
Allison: 23:51 Exactly.
Alan: 23:51 But, this is different. This is somebody… We don’t know what the outcome is going to be when you do a hedge.
Allison: 24:01 You do, but you give up a chance of downside in exchange for giving up a share of your upside.
Alan: 24:12 Right, so that kind of reduces the anxiety, I guess.
Allison: 24:12 Exactly, and this is what allows… This poker player is Phil Hellmuth, who is known for being very sort of unpredictable and temperamental, but when he plays, he’s actually quite rational.
Alan: 24:25 What do you think was the most interesting world that you immersed yourself in?
Allison: 24:31 I couldn’t say one was the most. I loved them all. When I was doing it, it would be all I would talk about, and I think the most interesting thing I had ever done, but I think I had the most fun in Hawaii. I had never been to Hawaii before, and for me to go to a surfer risk conference was just so fun.
Alan: 24:46 The surfers have their own risk conference? That’s interesting. So, they’re really aware… I think of surfers, I guess, a lot of us do, as sort of crazy guys looking for ways to get killed.
Allison: 24:58 That’s what I always thought. You think they’re going to be these daredevils, but they said they have a regular risk conference where they debate all the same strategies that I just applied to surfing. In fact, I met this man there, named Brian Keaulana, who brought jet skis to big wave surfing.
Alan: 25:16 What do they use the jet skis for?
Allison: 25:19 Well, jet skis, actually, are a lot like financial derivatives in that…
Alan: 25:23 Jet skis are financial derivatives. I love that.
Allison: 25:26 A financial derivative is technically insurance. You buy insurance against an asset price falling too large, but you can also use them as leverage, so you can take bigger risks and also face bigger losses. What jet skis do is they’re like insurance. If you wipe out, they’re sitting in the water, and they’ll rescue you, but you can also use them to push you on a bigger wave and take a bigger risk.
Alan: 25:47 They push you?
Allison: 25:49 Yeah. I guess humans… Bigger waves travel faster. So, humans can’t paddle on a wave over, maybe, 30 or 40 feet, but if you’re on a jet ski, the jet ski can sort of push you on to a bigger wave, so now you can surf a wave that’s, say, 80 feet. But, the thing is, it’s like finance. People lever up, and they have all these derivatives, so they think they’re safe, but there’s no way an 80 foot wave is safe, and there’s no way taking a lot of financial risk is ever safe. The whole point of this conference is this guy started it, the guy who brought jet skis to big wave surfing, because he felt like people… He had enabled people to take these huge risks they weren’t prepared for and didn’t realize. So, he started this annual risk conference to talk about how to be smarter about risk, how to plan for risk.
Alan: 26:43 As I remember, there’s a risk that’s personal, and the jet ski sort of helps out there, but then there’s a risk to the whole system, right?
Allison: 26:55 Yeah.
Alan: 26:55 People have to rescue you. People have to risk their lives when you wipe out, and then I remember this very interesting thing. Weren’t there discussions about whether or not they should allow just anybody to wear a jacket that would protect them?
Allison: 27:13 Yes.
Alan: 27:14 Why was that?
Allison: 27:18 Big wave surfing started with just a bunch of guys in the water and a surfboard. There’s been this new innovation that’s constantly coming along that makes it possible for weaker swimmers or weaker surfers to surf bigger waves. It started with a leash, then it was the jet ski, and now it’s something called an inflatable vest, which is a vest that goes on top of your wetsuit. It’s very thin, but if you start drowning, you pull a cord, and it turns into a full-on life jacket that gets you to the top.
Alan: 27:47 You become a boat.
Allison: 27:48 Exactly. When I was there, there were these really sort of in passion discussions about who should have access to this, because they anticipate, like everything else, it’s going to mean surfers who have no business surfing large waves are going to be out there and pose risks to others.
Alan: 28:06 To others, and then maybe you’ll have more deaths, too, because…
Allison: 28:07 Exactly.
Alan: 28:07 … they think they’re protected.
Allison: 28:10 I mean, but this is the same conversation we’re having in financial markets, is you have these derivatives, and you can take all this leverage, and you can actually bring a whole financial system down. So, who should be able to buy them?
Alan: 28:21 The whole question of regulation plays into this because regulation is a way to reduce harm to the whole system, right?
Allison: 28:33 Yeah. Although, it’s interesting because I think you need that regulation, and usually, it needs to come from outside body, often the government. It makes a lot of sense for finance, but when I asked surfers if you should have that sort of regulation, should there be a license? There’s a license for scuba diving. Should there be a license for big wave surfing? They all hated that idea. They were like, “No, we need to keep the government out of surfing,” but they all expected the companies that made the vests to self-regulate, which I think seems a little unfair.
Alan: 29:05 Yeah. Well, what incentive do they have?
Allison: 29:08 Well, also, I mean, it’s expensive to develop this technology. I spoke to one guy who worked on developing it, and he’s just like, “Listen, this is a life-saving piece of technology. Are we supposed to say to someone, ‘You can’t buy it, because you don’t have the skills.'”
Alan: 29:24 When the government says, “We’re going to…” We just had this horrible disaster in 1929, another one in 2008, and the government says, “We’re not going to let people leverage so much that if a little downtick occurs, everything comes tumbling down.” That sounds, to me, like it’s an attempt to protect the system, and everybody ought to benefit from that.
Allison: 29:54 Yes.
Alan: 29:55 But, there’s always resistance to it, and each new generation wants to find a way around that.
Allison: 30:01 Well, there’s a lot of money from taking leverage. An individual always has an incentive to do more, especially if the losses are shared amongst everyone.
Alan: 30:10 Right, right.
Allison: 30:11 That’s why [inaudible 00:30:12] be like, too bad.

Alan: 30:18 Let me… You… Oh, I know. I didn’t mention all the… This is very interesting. You studied the world of the brothel, movies, paparazzi, poker, surfers, and horse breeding.
Allison: 30:34 Yes.
Alan: 30:35 What did you learn about horse breeding?
Allison: 30:37 I learned a lot about horse breeding, because I didn’t know much about it before. It turns out that a change in the 1986 tax code really transformed the market for horses. Before that, a lot of people… You would breed a horse. You would race a horse, and most of the time, that didn’t work out. It’s a very risky thing to do. It’s a lot of money. It was between stud fees, between training the horse, keeping the horse, racing the horse. After 1986 tax reform, for a variety of reasons, it no longer became a profitable tax shelter. So, all of a sudden, people actually had to make money on these horses. What everyone did is, instead of breeding a horse to race, they sold a horse after one year.
Allison: 31:22 The thing is, though, after one year, you don’t really know how good a racer it’s going to be yet. You don’t really have that much information. The only information you really have is who its parents are, and you don’t have a lot of control over who the mare is, but you can pick who the studs are because a horse can breed up to three times a day. What you ended up doing is just this collapse of the stud industry where there was just a very small number of high end studs everyone wanted to breed with, which meant horses got way more inbred.
Alan: 31:58 Which was not good for the whole system.
Allison: 32:00 Yeah, bad diversification. There’s benefits to genetic diversification.
Alan: 32:06 That’s why I keep a horse under one side of the mattress and one… What are you like? After all this study of risk and you’ve devoted not just the time you spent writing the book, but your education, your work on this, how are you with regard to risk? Are you more risk-averse than not, or are you less risk-averse?
Allison: 32:32 In some ways. I mean, I’m a cautious person. I don’t ski. I think it looks terrifying to me.
Alan: 32:39 Me, too.
Allison: 32:42 Well, yeah, and you also said you’re risk-averse, yet you went into entertainment, which is a very risky industry, so I think we-
Alan: 32:47 I don’t think I knew it at the time.
Allison: 32:49 Yeah, but a more risk-averse person would’ve been an accountant.
Alan: 32:52 Yeah, that’s true.
Allison: 32:54 I think we all have ways in which we’re risk takers or risk-averse. I feel like I’m a risk-averse person. I mean, I’m a retirement economist. It’s not exactly the sexiest job, yet instead of doing what I should’ve done, which is work for the government, or for a corporation, or a university, I went to brothels and wrote a book about it. I guess I have some risk taking in me.
Alan: 33:15 Are there parts of your lives where you’re more risk-averse than others? Once you get a sense of risk in one area, does it slop over into other areas, or different approaches to life and finance? I mean, can somebody be more risk-averse, choosing a life partner, and less risk-averse in choosing an investment?
Allison: 33:43 Totally. I mean, people can be… Thinking about risk systematically, you can do that everywhere, but as I said, people I know who are the most risk-averse, then, often take the biggest risks in some other area. I know a lot of people who, when they chose a life partner, didn’t maybe marry the person they were madly in love with because they were afraid that made them vulnerable. Instead, they’d marry someone they felt more safe with, more secure. They ended up not being as happy, because they weren’t married to someone they were in love with. Often, that turned out to be a bad risk, or they thought they were protected and they weren’t. But, when you think of it this way, I mean, I think the biggest way you can manage risk in your life is to be very clear of what you want.
Alan: 34:26 Yeah, that’s what I’m really interested in, because now that we bring up these different areas of life in which evaluating risk becomes possible and important, what are the things we have to keep in mind to assess risk better?
Allison: 34:41 I think, as I said, I go through all these fancy things, all the hedging, all the financial derivatives, but really, being clear on what you want out of life… because you take risks to get what you want, so you need to take risks to get more, but you should only take a risk if it’s going to bring you closer to something you want. Often, we just take a risk for the sake of taking a risk, because we want change or we want something new, but you really have to be thoughtful of, is this going to get me closer to my goal? I mean, I see this in finance where I study retirement, where people aren’t really thinking, well, what do I need in retirement? Instead, they’re just like, well, I just want to have as much money as possible. Well, that’s not really a clear financial goal. It’s a lot harder to make that goal if you’re like…
Alan: 35:23 There are a lot of people who say, “All I want is more.”
Allison: 35:26 Yeah. The best way to do that is just take a lot of risk, but then you know you could have a stock market crash before you retire. You’re setting yourself up for a lot of failure there, as opposed to if you’re more thoughtful and you’re like, “I want $50,000 a year in income,” you can invest for that, and you’re much more likely to get that.
Alan: 35:46 In every area of your life, it’s a good idea to have a goal.
Allison: 35:50 Exactly, and-
Alan: 35:51 What’s next?
Allison: 35:53 Well, you want to have a goal, and you want to take risks that bring you closer to the goal, and then from there, you can do things to manage the risks. You can hedge. You can insure. You can diversify. These are the sort of three things you can do to reduce risk, but as we were talking earlier, you have to be clear that even if you have the best strategy in the world, you’ve diversified, you’ve hedged, you’ve insured, there’s always things that can happen you don’t anticipate. So, you always have to be ready for the unexpected.
Alan: 36:21 I’m curious. You’re on a date with a guy, and you think, I got to hedge here. How would you hedge?
Allison: 36:28 You have an alternative plan.
Alan: 36:30 Like what? My grandmother calls me and tells me I got to get out of this date.
Allison: 36:34 I have a dinner. I made plans with a friend long ago, and it was great to see you.
Alan: 36:44 So, that’s your hedge?
Allison: 36:45 That’s your hedge.
Alan: 36:46 You’ve got an out, if you need it.
Allison: 36:47 Yeah. Of course, if you’re having a great date, then you have some friend waiting for you in a restaurant, so you give up that possibility.
Alan: 36:53 Yeah, but then the friend knows that it was worth it, so your friend is happy for you.
Allison: 36:58 I’m a better friend than that. I’m just like, give up on the great date, and I’m like I have this plan.
Alan: 37:03 Oh, you go with the friend waiting in the restaurant.
Allison: 37:05 You can’t leave a friend waiting in a restaurant. That’s terrible.
Alan: 37:08 Oh my God. I guess you have to be madly in love on the first date not to ditch the friend.
Allison: 37:15 Exactly. That’s a high bar.
Alan: 37:16 Yeah, probably not a good one to live by, either.
Allison: 37:20 Yeah, no.
Alan: 37:25 Unless Graham and Sarah have thoughts, I’m going to get to the seven questions. Yeah. This has been really wonderful.
Allison: 37:37 No, thank you. I’ve had such a good time.
Alan: 37:37 Me, too. I’ve really learned a lot from you here.
Allison: 37:39 Oh, thank you.
Alan: 37:40 We always end our podcast with seven quick questions. I hope you’re up for it.
Allison: 37:44 Oh, sure.
Alan: 37:45 They’re mainly about communicating and relating. What’s the hardest thing you’ve ever tried to explain to someone?
Allison: 37:55 Probably, I’ve tried to have to explain investments to my mother.
Alan: 38:00 Oh, that’s interesting, investments to your mother. How do you handle a nosy person?
Allison: 38:08 I’m pretty open.
Alan: 38:10 So, you just go ahead and let them ask you questions. You have a stop sign where they can’t go past?
Allison: 38:17 You give them enough information, but not more than you want to give.
Alan: 38:21 Yeah.
Allison: 38:22 People are pretty self-involved. So, you just give them that little bit and then turn the question to them.
Alan: 38:26 Yeah, that’s a good way to handle it. I had a friend once who said, “I’m very personable, but I’m private, too.” The difference between being personable and private is interesting. What’s the strangest question anyone has ever asked you?
Allison: 38:43 That’s a good question. I know I’ve heard some weird questions. Probably… It would have to be when I was in the brothel and someone asked me to negotiate with them.
Alan: 39:16 You mean a customer?
Allison: 39:17 Yeah.
Alan: 39:22 Well, I don’t know whether to congratulate you or not.
Allison: 39:25 You feel like it’s an occupational hazard being there, but you have to understand, all the women are in their underwear, and I was wearing normal clothes.
Alan: 39:30 So, maybe that was more attractive to this person, but why did he assume you were working there?
Allison: 39:35 No. Actually, he was trying to make a deal with all the women in the brothel, and they all said no, and I was his last choice.
Alan: 39:46 Well, I’m going to get off this question right now. This is a safer question. How do you stop a compulsive talker?
Allison: 39:58 How do you stop a compulsive talker? I don’t know if you can stop a compulsive talker.
Alan: 40:02 So, you just let them talk?
Allison: 40:07 Actually, you ask them questions.
Alan: 40:09 Yeah. Yeah, that’s good. Okay, number six, how do you like to start up a real conversation with someone you don’t know at a dinner party?
Allison: 40:25 That’s a good question. I don’t know if I’m a very good conversationalist.
Alan: 40:28 Well, you have been today.
Allison: 40:32 Well, I never like to ask people what they do because then people never say anything interesting. I usually will ask them, what was the last good meal they had?
Alan: 40:45 Oh, that’s interesting. That’s interesting.
Allison: 40:46 You can tell a lot by what people eat.
Alan: 40:48 I never heard that before. Last question, what gives you confidence?
Allison: 40:56 I did a lot of math in grad school, and I feel like I’m good at math. Anyway, I wasn’t naturally, and that made me feel like I can do anything.
Alan: 41:05 Because it was hard to do, and you accomplished it?
Allison: 41:08 It was hard. I didn’t know a lot of math. I learned a lot of math very fast. I was able to do very advanced math, and especially when you’re a woman in a quantitative field, people always try to think you’re not going to know stuff, but when you’ve done that much math, you feel very confident.
Alan: 41:23 That’s great. What a nice conversation. Thank you.
Allison: 41:26 Yeah, I really enjoyed this.
Alan: 41:27 I did, too, very much. Thanks, Allison.
Allison: 41:29 Thank you so much for having me.
Allison Schrager is an economist, journalist at Quartz, and co-founder of LifeCycle Finance Partners, LLC, a risk advisory firm. She’s also a professor at New York University.
She’s been a regular contributor to the Economist, Reuters, and Bloomberg Businessweek and you’ll definitely want to pick up a copy of her recent book, “An Economist Walks Into a Brothel.”
For more information about Allision and all her work, please visit: AllisonSchrager.com

Allende Trailer:
Next in our series of conversations I talk with Isabel Allende … she’s one of the best-known and most beloved Latin American authors of all time. Her books including, “House of the Spirits,” and“Eva Luna” are intoxicating. A master of magical realism, she creates unforgettable characters that move through powerful stories.
How to communicate with passion and heart, next time on Clear + Vivid.