An Economist Walks into a Brothel

AN ECONOMIST WALKS INTO A BROTHEL

by Mike Hart

It takes a certain type of economist—someone who’s devoted years to analyzing data but also possesses a keen eye for the quirks that guide humanity—to take apart, scrutinize and explain risk. And that’s why Allison Schrager’s provocatively titled book, An Economist Walks Into a Brothel and Other Unexpected Places to Understand Risk, makes for a fascinating read.

It turns out there’s much more to risk than one would assume. Yet, as Schrager peels the onion and examines the layers, many of her observations aren’t that shocking. Much seems obvious, but in this book, it’s formulated in a way that feels new and enlightening.

Life is risky. Anything can happen. Not everyone’s programmed the same way. Some people are risk-averse and some love pushing to the edge. So what happens is almost always a matter of choice.

Starting with these realities, the author introduces ways of dealing with risk to achieve goals. She explains these subtexts in a series of true stories about how risk-takers have thought about and managed challenges.

The protagonists in these stories include a brothel owner, a professional poker player, a military organization and David Bowie, the rock star. Their personal tales are among the episodes that provide the starting point for the author to lay out her compelling presentation. As the Yiddish proverb says, “Man plans and God laughs.” But the book is filled with accounts of failed attempts to stack the odds.

The individual stories flesh out the “Five Rules” the author introduces early in the book. The rules begin with simple statements like “No Risk, No Reward,” “Get the Biggest Bang for Your Risk Buck” and “Uncertainty Happens.”

Risk, it turns out, is far more than a simple reality of life. As framed by Schrager, understanding, managing and massaging risk is a key to success in life. When uncertainty arises, “it is possible to plan for the unplannable,” she writes. “It often comes down to managing the risk you can imagine and retaining just the right amount of flexibility for the unexpected.”

As an experienced professional trader of equities and their derivatives, I found this book resonated in a special way. Traders live with risk. It’s built into every position we take. And every trader tells stories of catastrophic decisions as well as glorious successes.

Sometimes luck—good or bad— determines the success of a trade. But in every trade the management of risk is crucial. While An Economist Walks Into a Brothel is written for everyone, it’s a perfect primer for traders.

Schrager’s insightful analysis includes forays into riskmanagement techniques from financial economics. Hedges and insurance, she explains, contain elements that aren’t obvious.

This speaks to the very core of what traders do. As the author says: “The central lesson from financial economics is that risk is the cost we pay to get more.” Smart risk takers don’t back away from risky situations, she writes. Instead of debating whether to take a risk or take a pass, people should calculate the level of risk they’re willing to take and then reach out to achieve their goals.

As Schrager puts it: “Measure the risk involved and then take only as much as you need in order to get what you need.” It’s a view that works in everyday life and in trading as well.

—Mike Hart, tastytrade, @mikehart79

AN ECONOMIST WALKS INTO A BROTHEL: 4 out of 5

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