How Prostitutes and Paparazzi Hedge Their Risk

“An Economist Walks Into a Brothel…” Nope, that’s not the start of a joke setup. It’s the title of a new book that, with a light touch, applies serious finance principles to managing risk for a host of risky businesses, like legal bordellos, stud farms and Hollywood film studios.

In an interview with ThinkAdvisor, the author, financial economist and journalist Allison Schrager, reveals how prostitutes at a Nevada brothel pick up investing advice.

In a broader context, she argues that financial advisors are essential to solving America’s retirement crisis.

Schrager, who lectures at New York University, has devoted her career to studying retirement and working with retirement products. Under the direction of Nobel laureate Robert C. Merton, finance professor at the Massachusetts Institute of Technology, she has worked in depth on solutions to help people save for and invest for retirement.

Indeed, Schrager, 41, has successfully married an academic background — her doctoral dissertation was on the move from defined benefit plans to defined contribution plans — and working in the finance industry itself with journalism, writing articles for Quartz, Bloomberg BusinessWeek and Playboy, among others.

Co-founder of LifeCycle Finance Partners, a risk advisory consultancy for FAs and firms, she previously led retirement product innovation at Dimensional Fund Advisors.

For “An Economist Walks into A Brothel: And Other Unexpected Places to Understand Risk” (Portfolio – April 2, 2019), she ventured into the field to interview folks in risky jobs, including poker champs; paparazzi; Ret. Gen. H.R. McMaster, President Donald Trump’s second national security advisor; and the co-founder of the now-defunct fraudulent Crazy Eddie electronics chain (“His prices [were] INSAAAAANE!”).

In the interview, Schrager discusses her five principles for assessing risk; when gambling retirement funds is appropriate; and why she thinks insurance is “magical.”

ThinkAdvisor recently chatted with the economist, on the phone from her New York City office.

Here are highlights of our conversation:

THINKADVISOR: What prompted you to make a study of retirement when you were only in your 20s?

ALLISON SCHRAGER: Everyone thinks of retirement as an old person’s problem, but it’s actually a life-cycle problem: How do you allocate a finite number of resources throughout your lifetime and spread them in an optimal way, and how much risk do you have to take to do it?  People brush this off as trivial but it’s a very deep, hard problem.

Why did you write your book?

The original idea was to help financial planners have more tools to communicate risk to their clients. I’d found that advisors struggled a lot with how to explain risk in a way that was meaningful.

Why do you advise readers at several points in your book to consult with a financial planner rather than make decisions on their own?

Many books on personal finance say that it’s easy to do it yourself. That isn’t realistic. How to move resources across your lifetime in a way that’s predictable is a very hard problem. How people spend down in retirement is the whole point of [retirement planning]. The problem is complicated and idiosyncratic.

And so that is why you encourage readers to seek help from an FA?

Professional advisors play a really important role. Having a conversation with a human with some training is super-important. The only way we’re going to solve the retirement problem is by finding a way to make advisors part of the solution.

The brothel you visited — Moonlite Bunny Ranch — gives the women that work there access to financial advisors, you write. Why and to what extent?

They have the best financial literacy program I’ve ever seen. The first thing, when they’re [hired], is that they [are required to] to set a life financial goal, like buying property, starting a business, going to school. The owner, Dennis Hof [now deceased], told me: “Most of them will never make this kind of money again — and they also work harder if they have a financial goal.”

What’s included in the program?

A financial planner from a big bank sits at all the twice-weekly staff meetings and gives the women financial advice. A lot of them come from the sorts of families where no one even has a bank account. Yet [as a result of the program], they said things to me like, “My IRA is all passive funds. Why pay for active management?”! And some of the women who are bigger earners find their own personal advisors.

You write that working in a brothel is a hedge. How so?

The women give up their upside — 50% of their earnings — for safety. If they worked illegally, independently, they’d get to keep all their earnings. But that’s a lot riskier.

What was your first impression when you walked into the brothel?

It was crazy, like nothing I’d ever seen. But first you have to ring a doorbell that triggers a bell throughout the brothel so all the women know to come running. They line up in their underwear waiting for the customer to pick them out of the lineup. After I went there the first time, they told me to ring twice so the women knew it wasn’t a customer and wouldn’t get excited and come running.

Returning to the concept of risk in general, you write: “The question should be, how can I take smarter risk?” instead of, “Should I take a risk?” Please explain.