What sex workers and surfers can teach us about risk management
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From navigating law enforcement to personal safety, sex work is one of the riskiest forms of labor out there. It involves selling sexuality, personality and intimacy, which makes it a uniquely complicated commodity. In the state of Nevada, sex work is legal, but there’s a cost to that risk reduction. Allison Schrager, a risk economist and co-founder of risk advisory firm LifeCycle Finance Partners, met professional sex workers, surfers and racehorse breeders to learn about how they take calculated risks in hopes of maximizing rewards. Below is an edited transcript of host David Brancaccio’s interview with Schrager.
David Brancaccio: You went to a lot of places in this book to learn about risk reward, risk management. You talked to celebrity photographers, paparazzi, there’s a surfer dude in there, but tell me about the brothels. Give me a hint about how a place where people pay legally for sex can help one understand risk management.
Allison Schrager: Sex work is notoriously a very risky job. If you go back centuries, Jack the Ripper was targeting sex workers. And sex workers, even today, most of them face a lot of risk in terms of law enforcement, in terms of violent psychopaths. So I went to the legal brothels in Nevada to see how much it costs to reduce all of that risk.
Brancaccio: The legal brothels.
Schrager: The legal brothels.
Brancaccio: Because they’re expensive compared to if you go to illegal services.
Schrager: You pay a big premium for that safety. And that’s what I learned, was to go there, collect data, talk to the women who work there about how they feel about risk, and what they give up in terms of their earnings to get that safety, too.
Brancaccio: I mean, I know people who pay an agent 10 percent. Sex workers in a legal brothel pay how much to management?
Schrager: Fifty percent.
Schrager: Five-oh. And that’s not all of it. Because they’re legal sex workers who get 1099s, they actually have to pay taxes — full taxes, self-employment taxes. And it’s interesting, because the customers pay a lot more and the sex workers have to pay a lot more. And then the house, or the pimp, takes the spread.
Brancaccio: And for the customers, there’s also risk reduction.
Schrager: Exactly. They pay a 300 percent markup. Most sex work is illegal. It happens in cities across the country. People order sex workers off of websites. But that’s very risky for customers, too.
Brancaccio: And is this risk priced correctly? When your economist eye looks at this, is the risk priced correctly when you visited a brothel?
Schrager: Well, the economist in me, you know, it’s hard to say. I guess if the market clears, if there’s adequate supply and demand, I suppose it must be.
Brancaccio: Tell me another example from your travels to learn about risk management of stud horses. They breed hundreds of times a year in hopes of making new, winning race horses. This is what, risk diversification?
Schrager: Well, it’s underdiversification. There’s been this big uptick in inbreeding because now that people generally sell horses after one year instead of breeding them to race, you don’t know how good a racer you’re going to be after one year. The only information is who the sire is or who the mare is. That means that the pool of desirable sires has shrunk considerably. Now race horses are more inbred, so they’re underdiversified, which may be causing future problems for horses.
Brancaccio: If we’re asking ourselves, “Why is any of this important?” I mean, this is what Wall Street does. This is what the financial services industry does besides helping us, hopefully, with our retirement.
Schrager: Yeah, financial economics, all it is is the study of risk and financial markets. But the lessons apply everywhere. Financial markets just are a great experiment because you have a lot of data and people are explicitly buying and selling risk all the time. But we do that everywhere, in every decision we make and in every market you can find.
Brancaccio: I sometimes worry that we humans worry about the wrong things all the time. Are we humans good at risk or terrible at risk?
Schrager: I think we’re better than people give [us] credit for. It’s very fashionable to say, “People are hopeless at risk, and we need to steer them correctly.” And what I found — and this is somewhat consistent with a lot of psychology literature — is people are good at risk in one area of their life but then maybe not so much in others. We naturally do have an ability to deal with risk, it’s just sometimes we deal with unnatural environments. So the idea is if we can call it out and see the science behind what we’re doing when we do make good risk decisions, we can apply that better thinking to everything.
Brancaccio: I noticed this throughout the book: you keep reminding us that, by the way, it’s not just about risk. You need to identify what your hoped reward is. If that’s fuzzy, you’re in trouble, right?
Schrager: Exactly. I think where people go wrong is the way we think about risk is sort of off. We think, either you take a risk or you don’t. It’s this binary thing, and when you take a risk, you’re just, like, “Burn it all down! Let’s just take a huge risk because things aren’t right.” But that’s not a good way to take a risk. You need to have a goal. And this is true in financial markets, too. It’s like, “What is the goal? What am I looking to get? Is it more money? Is it more security?” And then you take a risk that will hopefully further you to get closer to that goal.
Brancaccio: What did you learn from talking to a surfer dude?
Schrager: Be mindful of your risk’s impact to others.
Brancaccio: Oh, really?
Schrager: Yes. If something terrible happens to you, people need to rescue you. You could crash into someone else. They have a conference where they talk about systemic risk.
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