New Book – ‘An Economist Walks Into A Brothel’
Exploring the esoteric realms of sex workers, tank commanders, magicians, film makers, high rollers and horse breeders, economist Allison Schrager shows how people estimate and transmute risk, producing winners and losers across underground ecosystems and interdependent domains.
Risk management is the bewildering study of decision making, and of the related topics of valuation, exchange, and strategic interactions. The aim, of course, is to minimize the possibility that the worst will happen while maximizing favorable outcomes. Drawing on military history, sociology, neurology, and econometrics, Allison Schrager’s bangin’ new book, ‘An Economist Walks Into A Brothel’, illuminates some of the most deeply fundamental activities of human existence: the decision process, navigating uncertainty and traversing interconnected systems fraught with freakish feedback loops and iffy outcomes.Written in pretty prose and packed with thought-provoking parables, Allison tackles risk assessment from bizarro real world perspectives, as higher-order consequences cascade across a diverse swath of human endeavor. She stylishly probes the way the paparazzi lens big cheese VIPs in exchange for lump-sums of cash or nothing at all; gets the low-down on high-end whorehouse economics (‘brothel-nomics’) and creepy counterparty risk; lifts the lid on hedging/insuring/convexity in the film industry; sizes up big wave surfers and the savvy ways they soak up systemic risk; contemplates the ways in which the fog of war can change the course of historical events from the vantage of masterful risk tactician General H. R. McMaster (hooah!); and breaks down the economics of racehorse rearing, demonstrating that brood mares and studs can be a lucrative, albeit highly kurtotic, asset class requiring proper diversification. [Fun fact: from conception to racing, it costs more than $100,000 to make and train a racehorse (not including the stud fee). Only 8% of horses will earn a return, and that return isn’t all that high].
In aggregate, the book is a fascinating intellectual journey filled with insightful Freakanomics-style stories and off-the-grid intel. Allison had a front-row seat in the risk industry (she once worked at Dimensional Fund Advisors) and possesses an avid intelligence rigorously trained in the dismal science (she earned a PhD in Economics from Columbia University where she studied under braniac Bob Merton). She also possesses a punk-y, prankish point of view that endows her subject matter with heaps of cheekiness and charm, so that reading her book was a rare pleasure and high-brow pedagogical kapow!
At VIVISXN, we love the subject of risk and try to keep up to scratch on the latest thinking and best practices. In thinking about risk today — both systemic and idiosyncratic — Allison reminds us that participants are pricing in yesterday’s crash, the known unknown, rather than tomorrow’s unknown unknown (she has entire chapters on ‘risk misperception’, ‘moral hazards’ and disaster myopia). To understand things like volatility, randomness, complexity, hedging and the fog of war is to value the forward expectation of uncertainty, which is as much a function of human psychology as it is an expression of mathematics and data science. The best takeaway is her reminder to be goal-oriented, resilient, humble and hyper-adaptive: “Go for what you want, measure the risk involved, and then take only as much as you need in order to achieve your aim.” Mmm-hmmmm.
Allison Schrager’s book is a really, really great read! Fear and greed, pleasure and pain, and risk-adjusted assessments about the future are interchangeable in a speculative, high stakes (‘mixed-strategy equilibria’) game of perception. Through the prism of prostitutes, poker players, necromancers, gnarly surfers, auteurs, horse breeders, and infantrymen, ‘An Economist Walks Into A Brothel’ unpacks the mysteries of highly complex systems perpetuated by self-centric agents with bounded rationality, wrapped in informational asymmetries and enveloped in fluid change.
“Predictions, especially about the future, are tough to make.”
Our prediction: this book will become a full tilt blockbuster — à la Michael Lewis’ The Big Short — in the very near future. BIG UP, A.S.!! Watch/listen to Allison and Josh Brown discuss hidden risks, financial markets, surfing, David Bowie, zombie vs. action films and convexity below:
This post was authored by VIVISXN’s proprietary AI Thought Bot ®
Images David Noles + Allison Schrager + DoD + Wikimedia Commons
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