WEBVTT - Allison Schrager: How Do We Master Risk? 0:00:01.440 --> 0:00:07.200 I'm Bethany McLean. This is making a killing interviews with authors, journalists, filmmakers, 0:00:07.240 --> 0:00:10.719 and economists, reframing the stories you've heard in the headlines, 0:00:10.960 --> 0:00:14.120 and explaining why these stories and the lessons learned are 0:00:14.160 --> 0:00:24.520 important for all of us to understand. There's this inversion 0:00:24.600 --> 0:00:27.760 that I have always liked that's safe as risky, and 0:00:27.880 --> 0:00:30.600 risky is safe. It's the idea of a swing and 0:00:30.640 --> 0:00:33.160 a miss. You might be scared to try something new 0:00:33.159 --> 0:00:35.720 and miss, but if you never swing at all, you're 0:00:35.800 --> 0:00:39.080 guaranteed to miss one hundred percent of the time you 0:00:39.200 --> 0:00:41.960 risk at all if you just sit safely on the sidelines. 0:00:42.800 --> 0:00:45.640 This is good life advice to be sure risk brings 0:00:45.720 --> 0:00:48.360 change into our lives. You won't get a raise if 0:00:48.400 --> 0:00:51.199 you never change jobs. You'll never fall in love if 0:00:51.200 --> 0:00:53.559 you don't go out on that first date. It's a 0:00:53.560 --> 0:00:57.000 phenomenal skill to learn which risks are worth taking and 0:00:57.120 --> 0:01:00.000 how to reduce the downside so you can figure out 0:01:00.160 --> 0:01:02.960 how best to save her retirement, which degree is worth 0:01:03.000 --> 0:01:05.840 the tuition, where to buy a house, and on and 0:01:06.000 --> 0:01:09.000 on and on. But how can we also get smarter 0:01:09.080 --> 0:01:12.240 at understanding risk and reward in business? At Fortune five 0:01:12.319 --> 0:01:17.040 hundred companies on Wall Street in global markets. As technology 0:01:17.120 --> 0:01:20.680 changes everything at an exponential rate, how do we run 0:01:20.880 --> 0:01:24.080 risk reward analysis when the world around us is being 0:01:24.120 --> 0:01:28.360 disrupted at this whispering pace. I'm excited that I get 0:01:28.360 --> 0:01:31.160 to talk today with Alison Schrager, author of the new 0:01:31.200 --> 0:01:34.840 book An Economist Walks into a Bravel, which has got 0:01:34.840 --> 0:01:37.080 to be one of the best titles ever. She's a 0:01:37.120 --> 0:01:40.840 retirement finance economist and has spent years talking to risk 0:01:40.880 --> 0:01:44.480 takers in all kinds of businesses. But in a Hollywood 0:01:44.480 --> 0:01:48.280 worthy twist, she's lately been studying risk in the unlikeliest 0:01:48.280 --> 0:01:51.280 of places, talking to sex workers at the Bunny Ranch 0:01:51.360 --> 0:01:55.040 brothel and Nevada. It turns out they are experts at 0:01:55.040 --> 0:01:58.480 pricing and reducing risk. I say it all the time 0:01:58.680 --> 0:02:02.480 in the world of business. Truth is always always stranger 0:02:02.480 --> 0:02:06.120 than fiction. Anyway, Alison has learned that there's a science 0:02:06.160 --> 0:02:08.520 to good risk taking. She says that no one reaches 0:02:08.560 --> 0:02:10.799 the top of their field, be it sex work or 0:02:10.880 --> 0:02:15.000 running a fortune five hundred company without mastering risk. They 0:02:15.040 --> 0:02:17.600 don't jump in and just go with their gut. They 0:02:17.639 --> 0:02:21.239 possess a deliberate, thoughtful strategy so they know what risks 0:02:21.240 --> 0:02:24.120 to take, and how to reduce the downside if things 0:02:24.120 --> 0:02:27.320 don't go their way. I've always loved the quote with 0:02:27.360 --> 0:02:30.600 which Alison begins her book. It's from Peter Bernstein's Against 0:02:30.639 --> 0:02:35.240 the Gods. The revolutionary idea that defines the boundary between 0:02:35.280 --> 0:02:38.400 modern times in the past is the mastery of risk, 0:02:38.880 --> 0:02:41.440 the notion that the future is more than a whim 0:02:41.440 --> 0:02:43.840 of the gods, and that men and women are not 0:02:44.000 --> 0:02:49.680 pass before nature. So how do we master risk? Okay, 0:02:49.680 --> 0:02:52.000 so the Bunny Ranch, we obviously have to start there. 0:02:52.160 --> 0:02:56.200 How did you find these guys? Well, so it's a 0:02:56.240 --> 0:02:59.440 funny story. Oh, I was really struggling with my book proposal. 0:03:00.360 --> 0:03:03.000 I felt like I needed a great risk taker, and 0:03:03.240 --> 0:03:06.600 so I had a drink with a cousin who I 0:03:06.639 --> 0:03:09.160 can't name, and I was like, I, really, do you you 0:03:09.280 --> 0:03:11.160 know anyone who was broken the law? I could really 0:03:11.200 --> 0:03:13.600 use a criminal. Maybe they'll help me because I was 0:03:13.600 --> 0:03:16.000 having problems coming up with stories. I love that I 0:03:16.040 --> 0:03:18.959 could really use a criminal. That's awesome. And he tells 0:03:19.040 --> 0:03:23.480 me that his girlfriend runs an illegal brothel, and well, 0:03:23.760 --> 0:03:26.040 you know, it was really way more information than I needed. 0:03:26.040 --> 0:03:27.919 It was a very specific kind of brothel. And that 0:03:28.080 --> 0:03:32.520 it was out of New York and they specialized in submissives, 0:03:32.840 --> 0:03:35.160 so women who get tied up and then have sex 0:03:35.160 --> 0:03:37.040 with their clients. And because this is a very high 0:03:37.120 --> 0:03:40.400 risk thing, even more risky than normal sex work, what 0:03:40.600 --> 0:03:43.760 she did is she got a thirty percent cut if 0:03:43.880 --> 0:03:46.800 she did all the screening and made them safer. And 0:03:46.840 --> 0:03:49.640 I was like, oh, that's an interesting risk story. So 0:03:49.880 --> 0:03:54.600 I wrote a court story about this woman and met 0:03:54.640 --> 0:03:58.320 her and she's lovely, and the bunny ranch saw it. 0:03:58.760 --> 0:04:01.680 He called me, and they're right, Well, if your bunny 0:04:01.720 --> 0:04:04.840 ranch called you fabulous, if you're gonna be writing this 0:04:04.960 --> 0:04:07.120 is snobbery. I guess it's a hierarchy in every business. 0:04:08.080 --> 0:04:10.280 If you're gonna be writing about brothels, you should be 0:04:10.280 --> 0:04:12.600 writing about our brothel because we're the biggest and most 0:04:12.600 --> 0:04:17.080 important one. I don't write about brothels, but it's an 0:04:17.120 --> 0:04:20.920 interesting call. So I'm gonna take this. And they had 0:04:20.960 --> 0:04:22.640 something they want me to write about. It didn't really 0:04:22.640 --> 0:04:25.760 make sense for me, but then they said something quite interesting, 0:04:25.920 --> 0:04:30.240 which was, well, so we don't upset prices, but what 0:04:30.680 --> 0:04:33.960 the women come in and they negotiate every price and 0:04:34.120 --> 0:04:36.719 every transaction individually and I was like, well, that's interesting. 0:04:36.800 --> 0:04:38.760 You so telling me of women and who are about 0:04:38.760 --> 0:04:41.560 twenty years old negotiating for tens of thousands of dollars 0:04:41.560 --> 0:04:44.640 with men in their sixties. And I why, yes, yes, 0:04:44.720 --> 0:04:46.680 And you know, no one's ever asked about that before. 0:04:47.680 --> 0:04:49.479 You know, they come in not knowing their values. So 0:04:49.480 --> 0:04:52.039 we have a negotiation training program. And you heard this 0:04:52.240 --> 0:04:55.560 a brothel through the lens of an economist. Yeah, so 0:04:55.560 --> 0:04:58.240 I'll say I need to see this. So I went 0:04:58.240 --> 0:05:02.320 out there and met Dennis Hof and spent about a 0:05:02.360 --> 0:05:04.679 week and a half going through their negotiation training program. 0:05:05.320 --> 0:05:08.240 And that's where I developed a relationship to where they 0:05:08.240 --> 0:05:10.279 were going to let me come back and collect pricing 0:05:10.360 --> 0:05:12.679 data because I was struck by how much they charged. 0:05:13.000 --> 0:05:14.920 I wouldn't have expected they could get away with it, 0:05:15.000 --> 0:05:16.760 because I mean, this is not an easy place to 0:05:16.800 --> 0:05:19.880 get to, and like, why just pay a lot less 0:05:19.920 --> 0:05:22.560 and use someone like my cousin's girlfriends. And it's a 0:05:22.640 --> 0:05:27.080 huge markup over the illiegal market, right three stunning and 0:05:27.160 --> 0:05:29.840 you have to go to Nevada. But I discovered it's 0:05:29.880 --> 0:05:32.200 like Dennis was just like, you come here and you 0:05:32.240 --> 0:05:34.840 just don't have to worry about anything, And is that 0:05:34.920 --> 0:05:36.960 the key lesson for you? What was the key lesson 0:05:37.000 --> 0:05:39.480 for you out of this about risk? That you know, 0:05:39.640 --> 0:05:43.200 every market puts a price on risk, and in any market, 0:05:43.240 --> 0:05:46.320 you have to pay to reduce risk. So that's the 0:05:46.320 --> 0:05:49.040 thing that three hundred percent is. So you know, you 0:05:49.040 --> 0:05:51.200 don't have to worry about some sort of Robert Craft situation. 0:05:51.880 --> 0:05:54.719 Come there, you're not going to get caught. You know, 0:05:54.720 --> 0:05:56.560 they even have some innocuous thing you put on your 0:05:56.560 --> 0:06:01.880 credit card, totally discreet, it's completely legal, and you don't 0:06:01.920 --> 0:06:03.599 have to worry about anything. So you pay for that. 0:06:03.720 --> 0:06:07.080 So it's aspect or risk premium that you're paying. But 0:06:07.120 --> 0:06:10.240 the women pay it too, because anyway they're charging it 0:06:10.320 --> 0:06:12.640 was a fourteen hundred dollars an hour on average, they 0:06:12.680 --> 0:06:15.159 actually have to pay fifty percent of the brothel and 0:06:15.200 --> 0:06:17.400 then taxes on top of that. Tell me a little 0:06:17.440 --> 0:06:19.680 bit about Shelby Starr and why she was willing to 0:06:19.720 --> 0:06:23.520 do things this way, Well, because she didn't. She's someone 0:06:23.560 --> 0:06:25.520 who never really wanted to break the law. I mean, 0:06:25.560 --> 0:06:27.599 I met women there who worked in the illegal market, 0:06:27.640 --> 0:06:29.680 and they add bad experiences and that's why they're there. 0:06:29.720 --> 0:06:32.000 But a lot of them just wanted to do this 0:06:32.120 --> 0:06:33.800 job and didn't want to if you worry about dealing 0:06:33.800 --> 0:06:35.680 with law enforcement. They didn't want to have to deal 0:06:35.720 --> 0:06:39.400 with crazy. I mean, they said, my cousin's girlfriend has 0:06:39.480 --> 0:06:42.840 to do this to protect people, because it's super dangerous 0:06:42.839 --> 0:06:45.479 being a sex worker and meeting people online and doing 0:06:45.520 --> 0:06:47.640 some illegal activity with them. So you don't know if 0:06:47.640 --> 0:06:49.560 they're gonna be crazy, if they're going to kill you, 0:06:49.960 --> 0:06:52.360 beat you up, or you're going to be arrested. So 0:06:52.520 --> 0:06:54.120 they just don't want to deal with that. I mean, 0:06:54.160 --> 0:06:58.120 Shelby definitely sees herself and they all do is people 0:06:58.160 --> 0:07:00.520 who are in legitimate businesses and they don't want to 0:07:00.560 --> 0:07:03.279 feel in any way that what they're doing is illegal. 0:07:03.640 --> 0:07:06.000 So it teaches you about managing risk. But it also 0:07:06.040 --> 0:07:08.880 teaches you about this other concept that we think of 0:07:08.920 --> 0:07:11.800 as belonging to the world of finance, but really belongs 0:07:11.840 --> 0:07:14.800 to the much broader world, which is hedging, right exactly. 0:07:15.320 --> 0:07:18.480 So it's a hedge. So in finance, you paid to you, 0:07:18.680 --> 0:07:21.080 you take some risk off the table, and that's a hedge. 0:07:21.440 --> 0:07:24.520 So in finance, it would be like the simplest way 0:07:24.520 --> 0:07:26.200 to think about it is if you were investing in 0:07:26.240 --> 0:07:28.240 the stock market, like a stock index fund, and you 0:07:28.280 --> 0:07:31.120 weren't totally comfortable with market risk, you would put a 0:07:31.120 --> 0:07:34.160 little bit in a treasury bond and so that's a hedge. 0:07:34.160 --> 0:07:36.400 You get a lower return, but you also have lower risk. 0:07:36.920 --> 0:07:40.120 And that's effectively what they're doing. They're they're sharing their 0:07:40.200 --> 0:07:42.720 risk with the brothel and an exchange they or they 0:07:42.720 --> 0:07:45.280 are actually the brothel's taking getting rid of all their risk, 0:07:45.440 --> 0:07:47.960 and an exchange they get at lower pay. It's one 0:07:47.960 --> 0:07:50.280 of the fascinating things about your book that I found 0:07:50.320 --> 0:07:53.800 so interesting is how relevant these topics that we think 0:07:53.800 --> 0:07:57.840 of as financial topics are too ordinary life, right, Yeah, 0:07:57.880 --> 0:08:00.040 And that was the goal, is that you know, the 0:08:00.160 --> 0:08:02.240 risk concepts are everywhere. I mean, finance is the study 0:08:02.280 --> 0:08:04.360 of risk and financial markets, and that's partially just because 0:08:04.360 --> 0:08:08.240 there's tons of data, but they really apply everywhere. I 0:08:08.240 --> 0:08:09.840 actually want to back up and talk a little bit 0:08:09.880 --> 0:08:12.520 about you, because you have a very personal story about 0:08:12.640 --> 0:08:15.200 risk that you tell in the book, but tell us 0:08:15.240 --> 0:08:17.440 about it. Yeah, and I think a lot of us 0:08:17.480 --> 0:08:21.200 have been there and that you know, we often think, 0:08:21.480 --> 0:08:23.880 you know, if something's hard, or if we work hard 0:08:23.920 --> 0:08:27.920 at something, it's not going to be risky. But This 0:08:27.960 --> 0:08:29.960 speaks to why it's so important. And this is the 0:08:30.000 --> 0:08:32.760 easiest risk management piece of advice I can give you. 0:08:32.800 --> 0:08:35.200 We're not easy, but the most important for all the 0:08:35.240 --> 0:08:37.800 fancy things you can do, if you have a very 0:08:37.800 --> 0:08:42.080 clearly well defined goal of the risk you're taking, then 0:08:42.360 --> 0:08:44.680 nothing else is going to do more to ensure that 0:08:44.720 --> 0:08:47.040 a risk works out. And so I went to grad 0:08:47.080 --> 0:08:49.920 school right out of undergrad and it was an economics PhD. 0:08:50.000 --> 0:08:52.840 And you know, I love economics. I always like idolized 0:08:52.880 --> 0:08:54.920 famous economists in a really weird, geeky way when I 0:08:55.000 --> 0:08:57.840 was in high school. That's the line you're not going 0:08:57.880 --> 0:09:01.360 to hear about from everybody. I always lied famous economists. 0:09:01.360 --> 0:09:03.600 I love that. Yeah. No, I was such a nerd 0:09:03.640 --> 0:09:05.520 about it. I was so excited to get into like 0:09:05.559 --> 0:09:07.960 good PhD programs where I ought to work with them. 0:09:08.160 --> 0:09:10.280 I wanted to be one of them, I thought. And 0:09:10.400 --> 0:09:14.120 so I, you know, at twenty three, just jump into 0:09:14.160 --> 0:09:17.320 a quantitative PhD program. Anyway, I hadn't even taken calculus, 0:09:17.360 --> 0:09:21.240 I'd know math training, and it was just awful. I mean, 0:09:21.360 --> 0:09:24.640 it's it's it's it's a tough PhD. All PhDs are tough, 0:09:24.679 --> 0:09:27.720 but economists tend to be particularly unhappy, and I'm told 0:09:27.760 --> 0:09:30.319 my program was particularly unhappy. They even tell me now 0:09:30.320 --> 0:09:32.000 when I see people from my department, theyre always like, 0:09:32.040 --> 0:09:33.559 we're so much nice sort of people than we were 0:09:33.559 --> 0:09:36.920 to you. But it was just a tough experience, and 0:09:37.360 --> 0:09:40.480 especially the first year I was struggling so much because 0:09:40.520 --> 0:09:43.240 I didn't have the math training as a former math major. 0:09:43.320 --> 0:09:45.440 My heart is going out to you. Yeah, Like I 0:09:45.520 --> 0:09:47.560 learned about, you know, a master's worth of math on 0:09:47.640 --> 0:09:51.640 my own at night and still failed every exam. It 0:09:51.720 --> 0:09:56.200 was just never note I empathize. So I figured, well, 0:09:56.200 --> 0:10:00.240 this is hard. So therefore if I just work hard 0:10:00.240 --> 0:10:03.520 and then do not only that an insanely quantitative dissertation 0:10:03.600 --> 0:10:06.520 way more than necessary, then somehow this is going to 0:10:06.600 --> 0:10:08.559 bring me great success and this is all going to 0:10:08.600 --> 0:10:11.600 pay off because it's this hard, then something great's going 0:10:11.640 --> 0:10:16.360 to happen. And then I solve this ridiculously difficult math problem. Anyway, 0:10:16.400 --> 0:10:19.400 I'm not really a math person, or didn't consider myself one. 0:10:20.160 --> 0:10:21.760 And then I went on the job market and was 0:10:22.040 --> 0:10:23.680 on all these interviews to be a professor, and I 0:10:23.720 --> 0:10:25.240 was like, I have no interest in being here. I 0:10:25.280 --> 0:10:27.480 have you know, it's a great job for some people. 0:10:27.600 --> 0:10:30.160 But I realized, you know, this is not what I 0:10:30.200 --> 0:10:33.080 ever wanted. So it's things I invested in this asset 0:10:33.160 --> 0:10:35.960 that never really got me to my goal because I 0:10:36.000 --> 0:10:38.760 wasn't sure what my goal was. But it definitely wasn't that. 0:10:39.160 --> 0:10:41.800 I loved your chapter heading getting what you want requires 0:10:41.840 --> 0:10:45.079 knowing what you want. Yeah, and it's so basic, I guess. 0:10:45.120 --> 0:10:47.440 It's so like the secret but also for a finance 0:10:47.480 --> 0:10:49.880 and you see this all the time in financial markets too, 0:10:50.080 --> 0:10:53.240 is you know when you invest with an for something 0:10:53.880 --> 0:10:56.200 as this in retirement, which is what my background's in, 0:10:56.480 --> 0:11:01.320 is that people everyone's geared towards investing for this huge 0:11:01.360 --> 0:11:03.240 pot of money on day one er retirement, Like you 0:11:03.320 --> 0:11:05.839 often see like what's your number, which is this pile 0:11:05.840 --> 0:11:08.040 of money number, like maybe a million dollars if you're 0:11:08.120 --> 0:11:11.280 lucky to retire with. But that's not your goal. Your 0:11:11.280 --> 0:11:14.520 goal is income and investing for a pot of money 0:11:14.520 --> 0:11:16.600 and investing for income that lasts a lifetime or to 0:11:16.640 --> 0:11:20.559 totally different financial goals and require two totally different strategies, 0:11:20.559 --> 0:11:22.240 and if you invest for one, you're going to be 0:11:22.240 --> 0:11:24.800 a lot riskier with the other. One makes a ton 0:11:24.840 --> 0:11:27.559 of sense, getting what you want requires knowing what you want, right, 0:11:28.320 --> 0:11:30.840 But let's go let's go to that your fascination with 0:11:30.920 --> 0:11:33.640 retirement because okay, that word in and of itself for 0:11:33.760 --> 0:11:35.800 most of us, unless it's some kind of mixture of 0:11:35.880 --> 0:11:39.200 Durad's stultifying boredom, I don't know. But you've always been 0:11:39.200 --> 0:11:42.319 fascinated by retirement. Yeah, I mean, I think one of 0:11:42.320 --> 0:11:44.720 the reasons people are put off by it is it's 0:11:44.720 --> 0:11:46.520 sort of the last thing you do before you die, 0:11:46.720 --> 0:11:48.920 and it's when you sort of give up on being 0:11:48.920 --> 0:11:52.760 that person who contributes. It courses you to confront mortality. Yeah, 0:11:52.800 --> 0:11:55.200 and also that you're like done with your career and 0:11:55.360 --> 0:11:56.920 now you're just sort of being put out to pasture. 0:11:56.960 --> 0:11:59.880 Although retirement, modern retirement need to be that way, but 0:12:00.040 --> 0:12:03.040 for me, it was always this fascinating problem because it 0:12:03.120 --> 0:12:05.600 was this pure distillation of what I thought economics was, 0:12:06.000 --> 0:12:10.280 which is allocation of scarce resources. But it's over your lifetime, right, 0:12:10.360 --> 0:12:12.880 So you make a certain amount of money and you 0:12:12.920 --> 0:12:15.240 have to spend a certain amount of money, and how 0:12:15.400 --> 0:12:18.800 do you do that in the best way? And if 0:12:18.840 --> 0:12:21.840 you take more risk, you have the expectation of more 0:12:22.240 --> 0:12:24.360 So how do you manage that risk. So this is 0:12:24.480 --> 0:12:27.240 very pure, beautiful problem, which honestly, most of the most 0:12:27.280 --> 0:12:31.720 interesting things happen when you're young, because it's a lifetime problem. 0:12:32.520 --> 0:12:34.960 And I think when I was in grad school and 0:12:35.000 --> 0:12:37.160 thinking about the problems, the problem you want to solve 0:12:37.160 --> 0:12:38.840 and what you want to dedicate your career too, it 0:12:38.920 --> 0:12:42.360 just really interested me. And what's the key insight that 0:12:42.400 --> 0:12:44.960 you had that enabled you to think about retirement in 0:12:44.960 --> 0:12:49.040 a different way. Well, you know, it's evolved over the years. 0:12:49.040 --> 0:12:51.560 Even in grad school, I was thinking about risk. My 0:12:51.640 --> 0:12:54.680 dissertation was looking at the move from define benefit to 0:12:54.679 --> 0:12:58.199 define contribution plans, and I wasn't totally sold that define 0:12:58.240 --> 0:13:00.559 benefit plans were that great that I saw all these 0:13:00.640 --> 0:13:03.160 risks they did pose to people, the risk that this 0:13:03.200 --> 0:13:04.920 company is going to go to business and you're gonna 0:13:04.920 --> 0:13:06.320 have to take a huge haircut. I mean this as 0:13:06.320 --> 0:13:08.800 big as you right now in Chicago. Who I believe me, 0:13:08.960 --> 0:13:13.400 I know, Chicago unheedgeable risk for the participants in the 0:13:13.480 --> 0:13:16.480 retirement or even if you back in the day, you know, 0:13:16.520 --> 0:13:19.000 if you change jobs, you would often give up your pension. 0:13:19.160 --> 0:13:20.800 So I was interested in what was risk here to 0:13:20.800 --> 0:13:24.199 find contribution to find benefit. But back then I was 0:13:24.240 --> 0:13:27.480 a macroeconomist, so I was thinking about it in a 0:13:27.480 --> 0:13:30.520 more of a policy way. Then after grad school, as 0:13:30.520 --> 0:13:32.080 I said, after I had blow up my career when 0:13:32.120 --> 0:13:33.720 I realized I didn't want to be a professor, and 0:13:33.960 --> 0:13:35.600 when you're in grad school, that's all you're told you 0:13:35.600 --> 0:13:38.760 could ever be. So I was kind of lost, and 0:13:38.840 --> 0:13:41.440 so I made a really sot of questionable decision to 0:13:41.440 --> 0:13:43.760 be a journalist. Oh that's not a question about decision. 0:13:43.760 --> 0:13:46.000 Who would call that a question about decision company. It 0:13:46.040 --> 0:13:47.880 was like, I mean, granted, every year they tell your 0:13:47.920 --> 0:13:50.040 journalism is dead, but there's two thousand and six, and 0:13:50.480 --> 0:13:52.400 it was actually a really good time to do this 0:13:52.440 --> 0:13:55.000 because it was the very early days of web journalism 0:13:55.120 --> 0:13:57.040 when everyone thought this was going to disrupt the market, 0:13:57.080 --> 0:14:00.559 but also didn't take it seriously at all. So the anyway, 0:14:00.559 --> 0:14:02.600 I had no idea how to write. We sort of 0:14:02.640 --> 0:14:04.200 just let me come in and write for them for 0:14:04.280 --> 0:14:06.720 free on the web because they just were like, well, 0:14:07.320 --> 0:14:09.200 this's the web most of the time. If you decide 0:14:09.240 --> 0:14:10.439 you want to life change, you want to write for 0:14:10.440 --> 0:14:12.600 the economist. That does not work. They want people who 0:14:12.600 --> 0:14:14.400 actually know how to write that's important to them. But 0:14:14.440 --> 0:14:16.320 they let me do it because it was web days 0:14:16.360 --> 0:14:18.600 and they were pretty open. So for all your calibration 0:14:18.679 --> 0:14:21.440 of risk, what role do you think luck place? Because 0:14:21.480 --> 0:14:24.840 to some extent that two thousand and six move, was 0:14:25.040 --> 0:14:28.040 luck right with timing or would you think about it differently? 0:14:28.400 --> 0:14:31.120 I was. It didn't feel like it at the time. 0:14:31.560 --> 0:14:34.000 In retrospect, it was because I learned this amazing skill, 0:14:34.080 --> 0:14:37.720 skills about storytelling, skills about how to communicate economics to 0:14:37.760 --> 0:14:40.600 an audience, which you certainly don't learn at academia. But 0:14:40.720 --> 0:14:43.840 I think everyone gets a certain amount of luck in life, 0:14:44.440 --> 0:14:46.760 but it's about knowing how to capitalize on it and 0:14:46.840 --> 0:14:50.000 knowing how to hedge or be prepared for bad luck too. 0:14:50.280 --> 0:14:52.160 I mean, at the time it looked like bad luck. 0:14:52.200 --> 0:14:54.520 I had no job, I was graduating from an economics 0:14:54.520 --> 0:14:56.760 PhD with no job. I was writing for free for 0:14:56.800 --> 0:14:58.760 the web. I mean, this did not seem like a 0:14:58.800 --> 0:15:02.200 good move. So before we leave the topic of retirement alone, 0:15:02.320 --> 0:15:04.480 I want to come back to it because one I 0:15:04.520 --> 0:15:07.400 want to ask you how big an issue is this today? 0:15:07.640 --> 0:15:09.080 I mean, it's a big issue. I think it's not 0:15:09.120 --> 0:15:12.000 the issue people think it is. I think everyone's convinced 0:15:12.040 --> 0:15:14.880 they just don't have enough money, and that's true for 0:15:14.960 --> 0:15:16.920 a lot of people. I don't want to minimize that, 0:15:17.000 --> 0:15:19.680 but I think that's not the primary issue. The primary 0:15:19.680 --> 0:15:21.160 issue is that people don't and this is one of 0:15:21.160 --> 0:15:23.160 the reasons I really want to do the book have 0:15:23.320 --> 0:15:26.480 the tools to really manage They've been handed a huge 0:15:26.560 --> 0:15:29.400 risk problem with the fine benefit plans. The employer took 0:15:29.440 --> 0:15:32.720 all the risk. Now we've a fairly significant risk problem, 0:15:32.800 --> 0:15:36.040 a problem I've dedicated my whole career too, and still 0:15:36.040 --> 0:15:39.960 haven't found easy answers to on everyone. So people don't 0:15:39.960 --> 0:15:42.840 really have the tools to manage this incredibly complicated risk problem. 0:15:42.960 --> 0:15:44.920 And I think a lot of the personal finance literature 0:15:44.960 --> 0:15:47.560 gets people, leads people stray or sets them up to 0:15:47.800 --> 0:15:50.160 feel like they're failing because they's like, oh, it's easy, 0:15:50.240 --> 0:15:53.080 just do this, but aren't really addressing all the risks 0:15:53.080 --> 0:15:56.400 they're really facing. So we've dumped a problem on people 0:15:56.440 --> 0:15:59.400 and not given them the tools to manage it. In essence, Yeah, 0:15:59.400 --> 0:16:01.240 and it doesn't mean it's not workable. I mean, I 0:16:01.280 --> 0:16:05.280 think the defined contribution for on K structure can really 0:16:05.320 --> 0:16:08.240 work and give people secure retirement. But we have to 0:16:08.280 --> 0:16:10.640 think more holistically about the tools and think of it 0:16:10.920 --> 0:16:14.320 as this lifetime problem rather than well, I don't know, 0:16:14.400 --> 0:16:16.360 you just save and invest and we'll see what happens, 0:16:16.360 --> 0:16:18.600 and perhaps get people to think about it like you do, 0:16:18.760 --> 0:16:22.240 as a beautiful, pure problem rather than it's some force 0:16:22.280 --> 0:16:24.880 of existential dread hanging over all of our heads. Right. 0:16:25.840 --> 0:16:27.760 I wanted to go back to this notion as well, 0:16:28.200 --> 0:16:30.680 of the concept of risk free. I loved this quote 0:16:30.680 --> 0:16:33.440 you use from Gerta. The dangers of life are infinite, 0:16:33.440 --> 0:16:36.120 and among them is safety. Is there actually something as 0:16:36.120 --> 0:16:39.240 simple as risk free? Well? There is. I don't think 0:16:39.280 --> 0:16:41.120 a lot of people appreciate this, certainly not a lot 0:16:41.120 --> 0:16:43.120 of people actually, who even work in finance, that the 0:16:43.160 --> 0:16:46.000 foundation of all risk problems is the risk free asset. 0:16:46.040 --> 0:16:48.840 If you look at any of these complicated formulas that 0:16:48.840 --> 0:16:50.960 people do to price risk, there's always the risk free 0:16:51.040 --> 0:16:54.160 rate in there. So it is in some ways it 0:16:54.200 --> 0:16:56.720 calibrates how much risk you can take. Because if a 0:16:56.720 --> 0:17:01.160 savings bond is going to pay you sent inflation adjusted 0:17:01.200 --> 0:17:03.600 to return, why bother going into the stock market. So 0:17:03.960 --> 0:17:06.080 it determines how much risk you take, and it determines 0:17:06.119 --> 0:17:08.879 how much you put a price on risk. Obviously you 0:17:08.920 --> 0:17:11.920 know there's problems with it and that people sometimes get 0:17:11.920 --> 0:17:14.640 confused about, Like as I said, I assume more education 0:17:14.720 --> 0:17:17.080 was a risk free asset. That's not always true. Or 0:17:17.160 --> 0:17:20.040 people assume a bond can't default when it does, so 0:17:20.359 --> 0:17:23.280 there can be this illusion of either you've defined risk 0:17:23.280 --> 0:17:25.360 free wrong, or you think something's risk for you when 0:17:25.400 --> 0:17:28.639 it's not and that can create other risks. Or I 0:17:28.760 --> 0:17:31.000 just wrote a fun story which I was ripping off 0:17:31.000 --> 0:17:35.879 of the book, which is sometimes I worry that you 0:17:35.920 --> 0:17:38.520 know the risk free value of not leaving your home, 0:17:38.640 --> 0:17:40.439 which is sort of the risk free choice, right, Like 0:17:40.480 --> 0:17:42.240 I'm not gonna bother go home, I'm gonna do stay, 0:17:42.240 --> 0:17:44.679 I'm gonna watch Netflix is supposed to Leaving your house 0:17:44.720 --> 0:17:46.160 is always a risk. You don't know it's gonna happen. 0:17:46.160 --> 0:17:47.439 You might have a bad time, you could get hit 0:17:47.440 --> 0:17:49.560 by a car, or something great could happen. It's just 0:17:49.600 --> 0:17:52.879 like stay at home. It's become so compelling, Like maybe 0:17:52.920 --> 0:17:56.440 this is why millennials apparently aren't having sex anymore. Is 0:17:56.480 --> 0:17:58.720 it's just like why go out on a Tinder date 0:17:58.760 --> 0:18:02.000 when you can watch Game of throwing good questions? But 0:18:02.600 --> 0:18:04.840 is staying at home truly risk free or is that 0:18:04.920 --> 0:18:07.200 an illusion? It's an illusion or in the short run, 0:18:07.320 --> 0:18:09.159 or maybe it is. I mean, maybe you feel like 0:18:09.520 --> 0:18:11.560 I can have a very satisfying life never leaving the 0:18:11.560 --> 0:18:13.760 house and playing video games and watching Game of Thrones. 0:18:13.800 --> 0:18:16.639 But it's important to take risks. It's, you know, it's 0:18:16.680 --> 0:18:19.400 how your life moves forward. It's how you actually will 0:18:19.440 --> 0:18:22.040 meet people and have a career and do all these 0:18:22.080 --> 0:18:25.040 important things that will ultimately make you happier. I mean, 0:18:25.080 --> 0:18:27.199 maybe the fact that people are staying in more and 0:18:27.200 --> 0:18:30.360 have become more attached to these sort of risk free 0:18:30.760 --> 0:18:32.920 sources of stimulation is also why there's higher rates of 0:18:32.960 --> 0:18:35.680 anxiety and depression. It goes back to that Gerta quote, 0:18:35.680 --> 0:18:37.840 I think the dangerous of life are infinite, and among 0:18:37.880 --> 0:18:40.720 them as safety. It's an incredibly compelling quote. So what 0:18:40.760 --> 0:18:44.040 do you think people misunderstand most about risk? I think 0:18:44.080 --> 0:18:45.840 they tend to think of it as this binary thing, 0:18:46.040 --> 0:18:48.639 like either you're a risk taker or you're not, or 0:18:48.640 --> 0:18:50.720 either you take a risk in you're someone who shakes 0:18:50.800 --> 0:18:53.080 up things or you don't. But really risk has this 0:18:53.200 --> 0:18:57.280 huge middle ground that you calibrate to whatever your preferences. Are, 0:18:57.359 --> 0:18:59.920 or whatever your desires are, and once you take a risk, 0:19:00.160 --> 0:19:01.879 you can manage it. I mean, I think people to 0:19:01.920 --> 0:19:03.960 call this a calculated risk, although they don't really able 0:19:03.960 --> 0:19:05.800 to say what that means, which is, you take a 0:19:05.920 --> 0:19:08.720