WEBVTT - Allison Schrager Discusses Monetary Policy 0:00:02.200 --> 0:00:06.359 This is Masters in Business with Barry Ridholts on Bloomberg 0:00:06.480 --> 0:00:09.760 Radio this weekend. On the podcast, I have a special guest. 0:00:10.200 --> 0:00:14.840 Her name is Alison Schraeger, and amongst other things, she 0:00:15.080 --> 0:00:17.360 is the author of a book that I took with 0:00:17.400 --> 0:00:21.920 me on vacation and absolutely found intriguing. My my version 0:00:22.040 --> 0:00:25.599 is just demolished because I plowed through it on a 0:00:25.680 --> 0:00:30.320 beach uh in Turks and Caicos, and really, despite everything 0:00:30.320 --> 0:00:32.159 going on around me, I kind of ignored it and 0:00:32.200 --> 0:00:35.800 just worked my way through the book. I love the 0:00:35.840 --> 0:00:39.600 title and economists walks into a brothel, which really has 0:00:39.640 --> 0:00:42.280 nothing to do with sex and everything to do with 0:00:43.200 --> 0:00:48.879 finding ways to do risk reward analyzes in really unusual places. 0:00:48.920 --> 0:00:52.600 So whether it's big wave surfing or horse breeding, or 0:00:52.960 --> 0:00:58.240 poker playing or paparazzi, there are all these unusual um 0:00:58.280 --> 0:01:03.000 situations where we don't really think about the risk reward analysis, 0:01:03.480 --> 0:01:06.600 but really the details of that have a major impact 0:01:06.720 --> 0:01:11.679 on how these industries and these individuals progress. And and 0:01:11.720 --> 0:01:15.520 once you start looking into that, it changes the way 0:01:15.560 --> 0:01:20.920 you look at everything from insurance to annuities to hedging 0:01:21.080 --> 0:01:26.760 to market based portfolios. Risk permanent permeates everything we do 0:01:27.280 --> 0:01:30.720 and most of us just don't give it enough time 0:01:30.760 --> 0:01:37.440 and thought to recognize the dangers and advantages it potentially 0:01:37.920 --> 0:01:40.880 can afford us. So, if you're at all interested in 0:01:41.480 --> 0:01:47.200 filling the blank investing, insurance, understanding risk, understanding what happens 0:01:47.200 --> 0:01:51.200 in a brothel from an economic perspective, I think you're 0:01:51.200 --> 0:01:54.880 gonna find this to be an absolutely fascinating conversation. So, 0:01:54.920 --> 0:02:00.640 with no further ado, my interview with Alison Traeger. This 0:02:01.120 --> 0:02:05.160 is Masters in Business with Barry Ridholts on Bloomberg Radio. 0:02:05.640 --> 0:02:09.480 My special guest this week is Alison Schreeger. She is 0:02:09.520 --> 0:02:12.679 an economist and adjunct professor at n y U, a 0:02:12.800 --> 0:02:17.600 journalist at Courts, co founder of life Cycle Finance Partners, 0:02:17.840 --> 0:02:21.440 which is a risk advisory firm. She is also the 0:02:21.480 --> 0:02:25.000 author of An Economist Walks Into a Brothel and Other 0:02:25.120 --> 0:02:29.880 Unexpected Places to Understand Risk. Alison Schreeger, Welcome to Bloomberg. 0:02:30.080 --> 0:02:32.880 Thank you for having me. My pleasure. So, so let's 0:02:32.919 --> 0:02:38.800 talk a little bit about your um backgrounds. You describe 0:02:38.800 --> 0:02:41.680 in the book making a series of what you later 0:02:41.760 --> 0:02:46.519 called risky career decisions, not exactly sure what you wanted 0:02:46.560 --> 0:02:50.320 to do. Your assumption was, hey, PhD program and economics. 0:02:50.600 --> 0:02:56.000 Obviously you're gonna become a professor. How did that work out? Um? Well, 0:02:56.040 --> 0:02:57.920 in the end, I think it worked out well for me, 0:02:58.240 --> 0:03:00.880 but the path was a lot rocky year than I 0:03:00.880 --> 0:03:03.760 would have expected. I think, like a lot of people, 0:03:03.880 --> 0:03:05.880 especially in this day and age, I fell into this 0:03:06.000 --> 0:03:08.959 idea that more education was just better and it would 0:03:09.000 --> 0:03:10.600 open up all these doors. And most of the time 0:03:10.600 --> 0:03:12.639 it does. I think that is normally a good bet, 0:03:12.680 --> 0:03:15.920 and certainly an economics PhD is is a good thing 0:03:15.960 --> 0:03:19.120 to have in life. But I had kind of a 0:03:19.200 --> 0:03:22.320 rocky transition when I finished grad school because I had 0:03:22.360 --> 0:03:26.760 invested essentially my whole twenties into learning all these skills 0:03:26.840 --> 0:03:28.799 and really being cut off from the rest of the world, 0:03:28.880 --> 0:03:32.160 and then realized what I was investing in was this 0:03:32.240 --> 0:03:35.360 idea of becoming a professor, and had this realization as 0:03:35.360 --> 0:03:36.920 I graduated, this was not what I wanted to do 0:03:36.960 --> 0:03:42.640 at all. So undergrad it and Edinburgh PhD at Columbia University. 0:03:43.000 --> 0:03:46.920 What sort of thesis were you working on that? Um? Weirdly, 0:03:47.040 --> 0:03:49.480 even when I was like eighteen, I was always really 0:03:49.520 --> 0:03:54.640 fascinated by retirement. Uh So my PhD thesis was on 0:03:55.440 --> 0:03:59.640 risk in retirement, so it was I started around two 0:03:59.680 --> 0:04:02.160 thousand and so this is as DC Plans had really 0:04:02.160 --> 0:04:04.200 taken a foothold in the market and I was doing 0:04:04.200 --> 0:04:06.280 some work in the UK where they were taking over, 0:04:06.640 --> 0:04:10.080 so really understanding more deeply the risks and define contribution 0:04:10.200 --> 0:04:15.800 versus define benefit pensions. So eventually you come to the realization, hey, 0:04:15.880 --> 0:04:19.680 I'm not going to be any sort of professor. And 0:04:19.720 --> 0:04:23.680 then you happened to have a job interview with a 0:04:23.800 --> 0:04:29.480 world famous Noble Prize winning economist, Robert Martin. What happened 0:04:29.480 --> 0:04:33.360 with that? Well, I uh, as I said, I had 0:04:33.360 --> 0:04:35.480 this hard realization when I was finishing grad school. I 0:04:35.520 --> 0:04:37.120 didn't want to be professor. I didn't want to be 0:04:37.160 --> 0:04:39.040 a government bureaucrat all the things you're supposed to do 0:04:39.120 --> 0:04:41.599 with an economics PhD. So I kind of had this 0:04:41.680 --> 0:04:45.480 burn it all down, do something new attitude, which also 0:04:45.560 --> 0:04:48.200 turned out to be helpful for the book. So I 0:04:48.240 --> 0:04:50.320 was like, I'm gonna do something fun. I've just spent 0:04:50.360 --> 0:04:52.680 my whole twenties while everyone else was partying solving a 0:04:52.720 --> 0:04:56.840 math problem. So I went to the economist unpaid, because 0:04:56.920 --> 0:04:59.560 this is early days with web journalism, and they would 0:04:59.600 --> 0:05:01.359 take people who had never written before to write for 0:05:01.360 --> 0:05:04.920 the web back then and what you pay for right, 0:05:06.080 --> 0:05:08.240 So I was just writing web web stuff for the 0:05:08.240 --> 0:05:11.200 economists for free with any com PhD. And then someone 0:05:11.240 --> 0:05:15.280 passed my dissertation along to Bob Merton and turned out 0:05:15.360 --> 0:05:19.359 retirement was also his main interest. He was working on 0:05:19.440 --> 0:05:22.080 market solutions to the retirement problem. So so let me 0:05:22.120 --> 0:05:25.240 interrupt you there and ask some questions here, because this 0:05:25.320 --> 0:05:30.039 is really kind of fascinating. You're wildly overqualified to turn 0:05:30.120 --> 0:05:33.520 out web based nonsense where you're not being paid for 0:05:33.560 --> 0:05:38.000 a website, and you know they treat unpaid volunteers not 0:05:38.240 --> 0:05:41.719 especially well, and they have the same respect for their content. 0:05:42.160 --> 0:05:46.720 Who said, oh, I know Allison's pH d thesis. Let 0:05:46.720 --> 0:05:49.440 me give this to Bob. He's busy, he want a 0:05:49.520 --> 0:05:52.160 Nobel prize, but he'll like this. How on earth did 0:05:52.200 --> 0:05:55.440 that come about? Um a friend of mine who I 0:05:55.480 --> 0:05:57.679 think had him when he was doing his NBA at Harvard. 0:05:58.440 --> 0:06:01.360 And because my dissertation, that is exactly what Bob was doing. 0:06:01.360 --> 0:06:03.839 Bob was trying to come up with financial models that 0:06:04.000 --> 0:06:06.280 took the best to define benefit plans and put them 0:06:06.279 --> 0:06:09.080 in a defined contribution structure, and that turns out, you know, 0:06:09.160 --> 0:06:10.479 as I said, as much as I said burn it 0:06:10.520 --> 0:06:13.240 all down, I always had a good dissertation which I 0:06:13.320 --> 0:06:16.720 thought about risk in a clever way. So once Bob 0:06:16.760 --> 0:06:20.240 didn't know, i'd sort of hit bottom career wise. You know, 0:06:20.279 --> 0:06:21.960 it just goes to show where something you feel like 0:06:22.040 --> 0:06:24.279 something can feel like it totally blew up. I was thinking, 0:06:24.360 --> 0:06:26.560 I just really messed up here, you know, I just 0:06:26.600 --> 0:06:30.200 wasted all this time. And then my paper ended up 0:06:30.240 --> 0:06:32.600 in front of him and he was like, I really 0:06:32.640 --> 0:06:34.880 want to do this. He called me in. He's like, 0:06:34.920 --> 0:06:37.440 if you come work with me, I will teach you finance. 0:06:37.720 --> 0:06:39.599 Let me tell you when I first was handed a 0:06:39.640 --> 0:06:43.240 book whose title was an economist walks into a brothel. 0:06:44.440 --> 0:06:48.520 I'm intrigued. Okay, now, your your thought is they're not 0:06:48.560 --> 0:06:51.520 going in there as a customer or anything like that. 0:06:51.560 --> 0:06:55.080 You thought is what sort of wacky economic data are 0:06:55.080 --> 0:06:58.800 they going to be analyzing? As an economist looking at 0:06:58.800 --> 0:07:01.480 the sex trade, it's pretty fast spending subject. How did 0:07:01.480 --> 0:07:05.400 you find your way to Nevada and going to the 0:07:05.400 --> 0:07:10.560 bunny ranch? So I wrote a story for courts because 0:07:10.560 --> 0:07:12.680 I'm it's interesting. I've always been in shouting risk even 0:07:12.720 --> 0:07:15.960 as a journalist. You know, after I started working with Bob, 0:07:16.360 --> 0:07:18.880 before I was a macro economist, I became I learned finance. 0:07:18.920 --> 0:07:21.239 I'm like, everything I know about the economy, I was wrong. 0:07:21.920 --> 0:07:25.240 Risk is a much more rigorous and interesting way to 0:07:25.320 --> 0:07:29.280 understand the macro economy and every economic problem. So I 0:07:29.360 --> 0:07:32.680 was applying that in sort of this freakonomics see way 0:07:32.720 --> 0:07:36.040 as a journalist, and I wrote a story about uh, 0:07:36.760 --> 0:07:39.280 a friend of a friend who was running an online 0:07:39.280 --> 0:07:44.400 brothel where her value add was screening clients. This is 0:07:44.920 --> 0:07:48.320 an illegal operation, so when you work illegally, you have 0:07:48.360 --> 0:07:51.840 to screen your clients otherwise, especially these were first submissives specifically, 0:07:52.320 --> 0:07:55.440 so they get they get tied up, so they're particularly vulnerable. 0:07:55.480 --> 0:07:59.119 So screening has especially important premium. So she was being 0:07:59.160 --> 0:08:01.720 paid this memium to screen them, and I was like, well, 0:08:01.720 --> 0:08:04.160 this is pretty cool. Uh. So I wrote the story 0:08:04.160 --> 0:08:06.560 about it did super well, as you can imagine, And 0:08:06.720 --> 0:08:09.400 so I got a call from the Bunny ranch saying, 0:08:09.440 --> 0:08:11.520 if you're gonna be writing about brothels, you should be 0:08:11.520 --> 0:08:15.720 writing about us, and all, well, I don't write about brothels, 0:08:15.760 --> 0:08:19.240 but this is an interesting call, So I'm gonna continue 0:08:19.240 --> 0:08:23.880 this um and so I was talking to them and 0:08:24.040 --> 0:08:26.280 they were I'm like, how does this all work? They're like, well, 0:08:26.800 --> 0:08:30.240 the women come in and every we don't upset prices. 0:08:30.240 --> 0:08:33.319 They negotiate every transaction and they kind of another throwaway 0:08:33.320 --> 0:08:35.120 thing he said. And I was like, well, that's actually 0:08:35.200 --> 0:08:37.480 very interesting. So you're telling me you have women who 0:08:37.480 --> 0:08:39.640 are about twenty years old negotiating with men in their 0:08:39.640 --> 0:08:42.720 sixties over tens of thousands of dollars. He's like yeah, 0:08:42.800 --> 0:08:45.400 and it's interesting you say that because most of them 0:08:45.400 --> 0:08:46.959 come here not knowing how to negotiate. So have a 0:08:47.000 --> 0:08:52.040 negotiation training program. So the Bunny Ranch in Nevada reaches 0:08:52.080 --> 0:08:54.520 out to you and says, hey, if you want to 0:08:54.559 --> 0:08:58.000 have a conversation about a brothel and about risk and 0:08:58.200 --> 0:09:02.040 analyzing numbers, come to to us. What was your thought 0:09:02.040 --> 0:09:05.600 process when you got this phone call? Well, at first 0:09:05.679 --> 0:09:07.560 I was like, this isn't my thing, this isn't what 0:09:07.600 --> 0:09:11.240 I'm like known for. I'm a retirement economist. But when 0:09:11.280 --> 0:09:15.000 they said the thing about we have a negotiation training program, 0:09:15.040 --> 0:09:17.760 which is something I struggle with. Two, Like, you would 0:09:17.760 --> 0:09:21.000 think a car dealership has a negotiating training program, not 0:09:21.040 --> 0:09:24.120 a brothel or sales job on Wall Street, you know 0:09:24.280 --> 0:09:26.280 they and they're like well, and then he even said 0:09:26.280 --> 0:09:29.080 the headline, the women here don't know their value, so 0:09:29.120 --> 0:09:31.079 we teach them to know their value and to ask 0:09:31.120 --> 0:09:33.679 for enough. And I was like, well, I could use that. 0:09:34.200 --> 0:09:36.320 So I talked to my editor at Courts to sending 0:09:36.360 --> 0:09:39.200 me there to go through their negotiation training program. It 0:09:39.240 --> 0:09:41.880 was the immediate reaction, this is a great story. Oh yeah, 0:09:41.880 --> 0:09:45.640 they send a video crew, all right, so they were 0:09:45.679 --> 0:09:48.160 they were pretty hip that, hey, this is funky and 0:09:48.160 --> 0:09:51.160 on you. This was freaky before fre economics, wasn't this 0:09:51.320 --> 0:09:53.679 freakonomics is already out, but okay, it took it to 0:09:53.720 --> 0:09:55.679 another level because I don't think Steve Levitt's spent a 0:09:55.760 --> 0:09:58.160 lot of time in brothels. Now he focused on young 0:09:58.400 --> 0:10:02.559 drug dealers in the inner city and other similarly freaky stuff. 0:10:02.800 --> 0:10:05.240 But this is like right up his alley for sure. 0:10:05.640 --> 0:10:09.240 So you get to the Bunny ranch. How receptive were 0:10:09.360 --> 0:10:13.960 the women to speaking to you about all these sorts 0:10:14.000 --> 0:10:18.760 of economic related um issues of of salary and compensation 0:10:18.800 --> 0:10:21.880 and negotiation and the beginning Some some are very very wary, 0:10:21.960 --> 0:10:24.959 some are very open, but once you get talking to them, 0:10:24.960 --> 0:10:27.160 they open up because I think a lot of people 0:10:27.280 --> 0:10:29.360 go there and they don't really take them seriously as 0:10:29.360 --> 0:10:33.960 business women. And okay, uh, Dennis when he was alive, 0:10:34.440 --> 0:10:37.040 this is the guy who was running the bunny ranch. Yes, 0:10:37.640 --> 0:10:40.959 uh really had a lot of good business training going on. 0:10:41.200 --> 0:10:43.360 And the women they're are great business women and they're 0:10:43.400 --> 0:10:45.600 proud of what they know. So once you get them 0:10:45.600 --> 0:10:47.800 talking about that, they do open up. Because this is 0:10:47.800 --> 0:10:50.400 a special skill a lot of them have learned, and 0:10:50.440 --> 0:10:52.240 a skill honestly, I think most people could learn on 0:10:52.280 --> 0:10:56.320 their jobs and they don't. So how to value the 0:10:56.400 --> 0:10:59.920 worth of your own work products relative to the mare 0:11:00.080 --> 0:11:02.920 could place and relative to customer on the other side 0:11:02.920 --> 0:11:05.360 of the desk from you, and how to ask for it, 0:11:05.480 --> 0:11:09.080 how to feel comfortable. Especially it's an interesting negotiation because 0:11:09.120 --> 0:11:12.760 you have to negotiation can be very fraught and afterward 0:11:12.800 --> 0:11:14.640 you're gonna have this very intimate encounter with this person. 0:11:15.360 --> 0:11:18.360 So making that transition, which is I mean a more 0:11:18.440 --> 0:11:23.559 exaggerated version how Valley calls that the pivot, it's a 0:11:23.559 --> 0:11:25.320 more exactitary vision of what we all do, right, Like, 0:11:25.360 --> 0:11:26.839 we have to negotiate with someone and we have to 0:11:26.880 --> 0:11:30.640 work with them. So this is just that on steroids? Huh? 0:11:31.080 --> 0:11:33.840 And and so what is the secret? What did they 0:11:33.920 --> 0:11:37.880 do that's somewhat different than what or what did they 0:11:37.920 --> 0:11:41.480 teach you that you didn't know going into this? I 0:11:41.520 --> 0:11:46.280 think I always saw negotiation is very adversarial, and what 0:11:46.320 --> 0:11:48.240 I learned is how to make it not so, how 0:11:48.280 --> 0:11:50.920 to just put a bunch of things out there, which 0:11:50.920 --> 0:11:54.160 apparently is a negotiation technique. Here's a here's a men, 0:11:54.240 --> 0:11:58.079 you choose a be your sake. That's really interesting, and 0:11:58.200 --> 0:12:01.520 therefore then it's not adversarial. It's just, hey, you know, 0:12:01.640 --> 0:12:04.040 everyone feels like they're getting what they want. I'm customizing 0:12:04.080 --> 0:12:07.080 this experience for you. So when I was there, I 0:12:07.120 --> 0:12:10.480 learned a lot about pricing, sex pricing, and something that 0:12:10.520 --> 0:12:13.800 fascinated me was how much more they could charge than 0:12:13.840 --> 0:12:18.120 the illegal market. And now the assumption is, from the 0:12:18.240 --> 0:12:21.480 John's point of view, they're going into a place where 0:12:21.520 --> 0:12:25.760 they know the workers have been tested for STDs, they 0:12:25.800 --> 0:12:28.280 know they're not going to get mummeda, ripped off, they 0:12:28.320 --> 0:12:31.520 know they're not going to get arrested. That should be 0:12:31.520 --> 0:12:34.120 worth some sort of premium, shouldn't it. I never thought 0:12:34.160 --> 0:12:36.800 of it that way before, but that was what always 0:12:36.800 --> 0:12:39.600 on the lookout for risk fascinated me because I mean, 0:12:39.600 --> 0:12:42.000 the premium is large. When I went, I went back 0:12:42.000 --> 0:12:44.719 to the brothel for bookwork and surveyed a lot of 0:12:44.760 --> 0:12:48.360 the women on their transactions. And then it just turned 0:12:48.400 --> 0:12:51.600 out that this economist I knew, scraped all the data 0:12:51.640 --> 0:12:53.800 from the Erotic Review, which is yelped for a legal 0:12:53.800 --> 0:12:57.120 sex work. So I had one point two million legal 0:12:57.160 --> 0:13:01.360 sex transactions. So i'd really good robust data set. So 0:13:01.640 --> 0:13:04.079 I was kind of surprised in reading that chapter, that 0:13:04.160 --> 0:13:07.720 section of the book the Bunny Ranch. To go to 0:13:07.840 --> 0:13:12.120 the Bunny Ranch, it's a couple of thousand dollars per 0:13:13.160 --> 0:13:16.920 um experience. I don't know what's called. The median price 0:13:17.320 --> 0:13:20.480 I found was four hundred dollars an hour. That's a 0:13:20.480 --> 0:13:25.680 lot of money. Yeah, uh, you know, especially if you 0:13:25.760 --> 0:13:29.040 just hire a woman online, even for escorting, which is 0:13:29.080 --> 0:13:31.200 more high end. I think equivalent to what you get 0:13:31.240 --> 0:13:33.200 at the Bunny Ranch is three or four hundred dollar 0:13:33.280 --> 0:13:35.959 an that's all. Yeah, and you don't have to go 0:13:36.040 --> 0:13:40.720 to Nevada. Yeah, but then the risk is four dollars. 0:13:40.720 --> 0:13:43.600 But you might get arrested, you might get robbed, you 0:13:43.679 --> 0:13:46.320 might who knows. You might get killed, so it's worth 0:13:46.360 --> 0:13:49.719 a premium, one would argue, And you effectively do that 0:13:50.360 --> 0:13:53.720 in an economist walks into a brothel. Uh that what 0:13:53.840 --> 0:13:58.800 you're paying is you're paying an insurance premium to eliminate 0:13:59.320 --> 0:14:04.160 all of the risk associated with legal sex for higher transactions. 0:14:04.240 --> 0:14:06.240 And on the other side too, because you think these 0:14:06.280 --> 0:14:09.680 women they're getting so much money, but they're really not. Now, 0:14:09.720 --> 0:14:13.120 what's the payout to the woman relative to at Ridge. 0:14:13.200 --> 0:14:16.319 Let's call it fifteen hundred dollar average. They're getting what 0:14:16.360 --> 0:14:19.320 you wrote about half goes to them, Well, not even 0:14:19.400 --> 0:14:21.840 half goes to the brothel. So they have to give 0:14:21.880 --> 0:14:25.840 fifty of their cut to the brothel. And then, uh, 0:14:25.880 --> 0:14:28.840 they're legal sex workers, right, so they ten ninety nine employees, 0:14:29.160 --> 0:14:33.400 so the self employment tax together cover that. And I 0:14:33.440 --> 0:14:36.200 mean these are high earners. They're making, you know, probably 0:14:36.200 --> 0:14:38.520 at least a hundred grand a year, so I mean 0:14:38.800 --> 0:14:40.320 a lot of them don't live in Nevadas. They might 0:14:40.360 --> 0:14:41.800 have stayed income taxes on top of it all. So 0:14:41.840 --> 0:14:44.720 we're talking. So do they do an I RA A 0:14:44.840 --> 0:14:46.560 or a KYO. They have to have some sort of 0:14:46.600 --> 0:14:50.280 retirement friends. So Dennis had really had really good financial 0:14:50.320 --> 0:14:52.600 planners coming in and give them very good financial literacy. 0:14:52.680 --> 0:14:55.040 I was talking to these women who came from households 0:14:55.040 --> 0:14:56.600 where no one had a bank account. They're like, I 0:14:56.640 --> 0:14:58.440 didn't even know the credit score was. And then they're 0:14:58.440 --> 0:15:01.000 telling me, oh, yeah, my ra is on index funds. 0:15:01.000 --> 0:15:04.080 You know, why pay the fees for active That's just 0:15:04.280 --> 0:15:06.440 that's just hilarious. I have a I have a million, 0:15:07.160 --> 0:15:10.400 a million horrific puns, and I'm not going to touch 0:15:10.480 --> 0:15:13.440 a single one of them. Wait, so are you saying 0:15:13.480 --> 0:15:17.360 they were passive investors not active? Is that? Is that 0:15:17.680 --> 0:15:21.480 what you're saying? They were indexers? Right, They're they're all indexers. 0:15:21.520 --> 0:15:26.280 That's hilarious. That's that's really hilarious. So what was the 0:15:26.360 --> 0:15:30.160 single most surprising thing that you came away from the 0:15:30.160 --> 0:15:36.080 Bunny Ranch with having interviewed all these professional legal sex workers. 0:15:36.120 --> 0:15:39.160 The most surprising thing? I mean, I know it's sounds 0:15:39.200 --> 0:15:42.400 almost patronizing, and I knew they'd be smart, but I 0:15:42.440 --> 0:15:46.160 was shocked at how much I learned from them about business, 0:15:46.240 --> 0:15:50.520 about negotiation, and about risk. So more than just smart savvy, 0:15:50.720 --> 0:15:54.520 very savvy. Let's talk a little bit about risk, because 0:15:54.560 --> 0:15:59.440 I think different people think of risk differently, How can 0:15:59.680 --> 0:16:04.560 you define what risk is for the average person. Well, 0:16:04.600 --> 0:16:06.560 I think of risk. I think of it as an 0:16:06.680 --> 0:16:09.080 estimate of all the different things that could happen and 0:16:09.080 --> 0:16:11.680 how probable they are. As I say, it's a very 0:16:11.720 --> 0:16:15.040 technical definition. Let me ask you the same question a 0:16:15.040 --> 0:16:18.080 little bit differently, then, Since you run a firm who's 0:16:18.240 --> 0:16:22.160 got the words life cycle in its name, how does 0:16:22.320 --> 0:16:27.680 risk change over the course of a person's lifetime. Well, um, 0:16:27.840 --> 0:16:29.920 you have career risk, you have academic risk, you have 0:16:30.000 --> 0:16:32.600 retirement risk. I mean there has to be a million 0:16:32.680 --> 0:16:37.200 different points in one's life where the risks that are 0:16:37.320 --> 0:16:41.320 presented to you are very different with different ramifications. Totally, 0:16:41.400 --> 0:16:43.920 and how we are able to deal with risk and 0:16:44.000 --> 0:16:46.880 understand risk and how risk averse we are can also 0:16:46.960 --> 0:16:49.560 change over a life cycle, which makes it even more complicated. 0:16:50.160 --> 0:16:52.960 You know, there's all this evidence about behavioral biases, but 0:16:52.960 --> 0:16:56.440 there's also evidence as people get older those biases tend 0:16:56.480 --> 0:16:59.240 to be less prevalent. Really, so, is it that we 0:16:59.400 --> 0:17:02.600 get a little wiser with age or it just matters less? 0:17:03.200 --> 0:17:05.439 Have we get a little wiser with age? There's experience 0:17:05.840 --> 0:17:09.359 that just as well. Experience really changes how you perceive risk. Like, 0:17:09.400 --> 0:17:11.520 once you've seen things blow up for you a couple 0:17:11.520 --> 0:17:13.959 of times, suddenly you become a little more risk averse 0:17:14.080 --> 0:17:16.760 or a little more aware of the probabilities you face, 0:17:16.960 --> 0:17:19.240 or take time to hedge or ensure when you take risks. 0:17:19.600 --> 0:17:21.840 Let's talk about that, because you have a few chapters 0:17:21.880 --> 0:17:26.080 in the book on the differences between insurance and hedging. 0:17:26.160 --> 0:17:29.760 So let's talk a little about hedging, whether we're referring 0:17:29.760 --> 0:17:33.280 to a market perspective or any other perspective. What is 0:17:33.359 --> 0:17:35.960 hedging and what should the average person use it for? 0:17:36.560 --> 0:17:38.280 I think of hedging and is it This is a 0:17:38.320 --> 0:17:41.560 distinction that a lot of people don't. I think asn't 0:17:41.600 --> 0:17:44.439 often made very clearly. In fact, I had lunch with 0:17:44.480 --> 0:17:47.520 the CEO of an insurance firm who even he kept 0:17:47.520 --> 0:17:50.000 we kept messing up insurance and hedging. So it's it's 0:17:50.040 --> 0:17:52.840 a very subtle but important difference, and you make it clear. 0:17:53.000 --> 0:17:56.720 They're two very distinct things. They are, and if you 0:17:57.800 --> 0:18:00.520 draw a picture of what they mean in on a graph, 0:18:00.600 --> 0:18:03.520 it's very clear. But intuitively it's a very hard difference. 0:18:04.000 --> 0:18:07.000 So I think of hedging as you just take less risk. 0:18:07.520 --> 0:18:11.480 So in basic finance world, that would be of a 0:18:11.560 --> 0:18:14.080 risky asset and you have a risk free asset. So 0:18:14.160 --> 0:18:17.119 hedging is just putting more of your portfolio and the 0:18:17.240 --> 0:18:20.879 risk free asset, the typical sixty stock and bond portfolio. 0:18:21.040 --> 0:18:24.080 You're not so much hedging your stocks as you're removing 0:18:24.119 --> 0:18:27.200 some risk and putting it into much lower risk fixed 0:18:27.200 --> 0:18:31.159 income exactly, So you're you're hedging your portfolio balance. So 0:18:32.359 --> 0:18:36.880 I've always thought of hedging as I'm willing to give 0:18:36.960 --> 0:18:42.240 up some upside and an exchange reduce my downside. That's 0:18:42.280 --> 0:18:44.879 exactly it. Okay, So if you is it, If you 0:18:45.200 --> 0:18:48.520 in some sixty you do fifty fifty, that's a less 0:18:48.560 --> 0:18:51.560 upside of stocks do well, but also less downside risk 0:18:51.600 --> 0:18:55.560 of stocks crash. Or conversely, I'll own X y Z 0:18:55.640 --> 0:18:58.320 stock and I'll marry a put to it, and that 0:18:58.359 --> 0:19:01.560 protects it. It costs me something, cost me a couple 0:19:01.560 --> 0:19:04.160 of percent, but hey, if the stock falls out of bed, 0:19:04.320 --> 0:19:08.760 the put should cover some percentage of most of that downside. Yeah, 0:19:08.800 --> 0:19:11.480 they usually think of puts assure a little bit more insurance, 0:19:11.520 --> 0:19:13.080 as I was saying it. So, so now let's talk 0:19:13.080 --> 0:19:16.760 about insurance. How do you think of insurance? What? What 0:19:16.840 --> 0:19:20.879 does purpose does insurance serve. So insurance is a little different. 0:19:20.920 --> 0:19:24.360 So rather than giving up you know, upside, what you're 0:19:24.400 --> 0:19:26.000 doing is you're paying someone a fee, So you give 0:19:26.040 --> 0:19:27.879 up that amount of upsite, but it's a set amount 0:19:28.200 --> 0:19:33.160 and you eliminate downside risk, So a predetermined costs, and 0:19:33.280 --> 0:19:37.119 what you're purchasing is putting that risk or eliminating that 0:19:37.200 --> 0:19:40.280 risk from yourself, putting it onto someone else in a 0:19:40.320 --> 0:19:43.600 specific state of the world. Yeah, so it's insurance, which 0:19:43.640 --> 0:19:46.560 is if if X happens, if this, if this stock 0:19:46.600 --> 0:19:51.280 goes above the strike price, then I get something. So 0:19:51.520 --> 0:19:54.520 I've never owned a car where I did not have 0:19:55.000 --> 0:19:58.199 at one point in the ownership of that car, uh, 0:19:58.359 --> 0:20:00.560 some piece of gravel of rock mo up on our 0:20:00.600 --> 0:20:03.840 local crappy highways here in New York and either ding 0:20:04.520 --> 0:20:08.920 or crack the windshield. So once I could start affording it, 0:20:09.240 --> 0:20:11.919 I always get glass insurance on the car, and I 0:20:11.960 --> 0:20:17.680 have replaced literally every single windshield I've ever owned. Um 0:20:17.840 --> 0:20:20.360 is that a good use of of insurance or am 0:20:20.359 --> 0:20:23.720 I just padding their profits and wasting money? It sounds 0:20:23.760 --> 0:20:25.480 like it. I mean, if you're if you're if you're 0:20:25.480 --> 0:20:28.240 claiming it. Well, but you know, a car you have three, 0:20:28.280 --> 0:20:31.560 four or five years at least UM, and you're paying 0:20:31.680 --> 0:20:34.240 whatever it is, a hundred bucks that I guess what 0:20:34.440 --> 0:20:36.520 I'm really paying for is, Hey, I don't have to 0:20:36.720 --> 0:20:38.280 worry about whether or not I break a window of 0:20:38.359 --> 0:20:41.639 somebody else. Somebody else is responsible for that. Is that 0:20:41.720 --> 0:20:44.639 a fair definition of insurance? Even though you're paying a 0:20:44.680 --> 0:20:48.240 fixed amount, that stress and worry goes away exactly because 0:20:48.280 --> 0:20:51.240 now the stress of breaking the window is on the 0:20:51.240 --> 0:20:53.400 insurance company. I mean, you have to still go through 0:20:53.400 --> 0:20:56.680 the rigamarole replacing it, but the financial risk is borne 0:20:56.680 --> 0:20:59.600 by someone else. So let's talk a little bit about 0:20:59.600 --> 0:21:03.040 the book and some of the other things, um you describe. 0:21:03.200 --> 0:21:06.600 Outside of the Bunny Ranch, you spoke to a number 0:21:06.640 --> 0:21:11.000 of poker players who had some kind of surprising statistic. 0:21:11.200 --> 0:21:14.800 The one player whose name escapes me, but was notorious 0:21:14.840 --> 0:21:18.560 for having yes for having these sort of hissy fits 0:21:18.920 --> 0:21:21.960 when he either wasn't happy with his own play or 0:21:21.960 --> 0:21:25.280 what have you. He said, he should really only be 0:21:25.359 --> 0:21:28.800 playing a very small percentage of hands. And I would 0:21:28.800 --> 0:21:34.760 have guessed what percentage does he play? It's twelve percent, 0:21:34.880 --> 0:21:37.680 twelve percent. That's in a one out of eight hands, 0:21:37.680 --> 0:21:40.960 so seven out of eight hands he's not participating in. Yeah, 0:21:41.000 --> 0:21:42.800 and there's a lot of poker terminology, which is new 0:21:42.800 --> 0:21:44.560 for me because I'm not a player, and they call 0:21:44.640 --> 0:21:48.600 that patient. I don't know if that's specific to poker, 0:21:48.720 --> 0:21:51.560 but you would think if you're passing on seven out 0:21:51.560 --> 0:21:53.760 of eight hands, there's a lot of patients with that, 0:21:53.920 --> 0:21:56.040 especially for someone who struck me as so volatile and 0:21:56.080 --> 0:21:58.800 out of control. Now is how much of that is 0:21:58.840 --> 0:22:00.520 real and how much of that is just to get 0:22:00.560 --> 0:22:02.680 into the heads of the other players. I think it's 0:22:02.680 --> 0:22:05.359 a combination of both. I think that's his natural temperament 0:22:05.520 --> 0:22:08.959 and he's noticed it's also an asset. So in the 0:22:09.000 --> 0:22:11.119 beginning it wasn't an asset. It was a bit of 0:22:11.200 --> 0:22:14.120