Speaker 1: I'm Jason Kelly Carol Masser. Welcome to the Bloomberg Business
Speaker 1: Week Extra. It's our weekly podcast. This is where we
Speaker 1: give you one of our full interviews of the week.
Speaker 1: Our podcast this week is with economist and author Alison Schrager.
Speaker 1: She's at with a new book about Understanding Risk, and
Speaker 1: it has something of a risky title as well, What
Speaker 1: Happens when an Economist walks into a Brothel? Not a joke,
Speaker 1: it's a book. And here's our conversation. All right, So Alison,
Speaker 1: how did you get the idea for this book? Well,
Speaker 1: I always had this idea that, you know, financial economics
Speaker 1: was a really unexplored area of economics. You wouldn't think
Speaker 1: so because it's so you know, you hear about it.
Speaker 1: But I felt like it applied to all areas of
Speaker 1: economics and not just financial markets. So I was flirting
Speaker 1: with this idea and then it was actually Business Week
Speaker 1: who called me and said, you know, we want to
Speaker 1: do a column exploring different ways to explore risk and
Speaker 1: unconventional places and because finances the study of risk, that's
Speaker 1: initially what sparked the idea. And this is a few
Speaker 1: years in the making at this point. So how long
Speaker 1: does it take to assess risk in this through this
Speaker 1: lens um? I mean assessing the risk of writing a book. Yeah,
Speaker 1: there a terrible risk decision. Yeah, I think it's always
Speaker 1: really hard to justify that. I think it has to
Speaker 1: be purely a creative endeavor because that was I think
Speaker 1: it was two thousand fourteen, and it was me starting
Speaker 1: to think about how risk could be reported rather than
Speaker 1: just be in a financial model, because financial models always
Speaker 1: had this rough idea from my background academia that financial
Speaker 1: models are really just little parables just told with math. Yeah.
Speaker 1: So it was when I was a business week when
Speaker 1: I started exploring like could I take that same parable
Speaker 1: and report it and find stories that match up to it?
Speaker 1: And so how do you find your footing back then
Speaker 1: as a journalist versus and academic. Well, I climb out
Speaker 1: of the Ivory tower. I you know, I think what
Speaker 1: was hard is it's not your opinion anymore, and that
Speaker 1: you have to as as academics, we don't really talk
Speaker 1: to people. In fact, were discouraged from it because and
Speaker 1: for sometimes good reasons. It's not lack of curiosity. It's
Speaker 1: partially that you don't want anecdotes to bias your analysis,
Speaker 1: but it's not a very effective way to tell a
Speaker 1: story and connect with people. Uh So it was learning
Speaker 1: how to do that, how to write for an audience,
Speaker 1: how to tell stories that connect, and how to find
Speaker 1: people really off the beaten path and learn how to
Speaker 1: get them to open up to you. So let's go
Speaker 1: back even further. Why do you become an economist in
Speaker 1: the first place. Well, I think, like a lot of economists,
Speaker 1: I grew up with a lot of questions, and I
Speaker 1: grew up in a community where there was called bimodial
Speaker 1: income distribution. People with their upper middle class are very poor,
Speaker 1: and I never quite understood why. Where was this in
Speaker 1: stories Connecticut? So so of Northeastern Connecticut that has a
Speaker 1: lot of declining industry, but it was also a big
Speaker 1: university tech so I think those income differences always really
Speaker 1: I was actually the fourth generation to grow up there,
Speaker 1: so I always felt really connected to the lower income people. Anyway,
Speaker 1: I had professional parents, so I couldn't quite figure out
Speaker 1: why this was happening generally after generation. And when I
Speaker 1: started studying economics, I started getting answers. And I just remember,
Speaker 1: even when I was a fifteen with economics, I always
Speaker 1: just wanted to know more, like there was just never enough.
Speaker 1: And I think that's why I knew early I would
Speaker 1: go all the way and get a PhD with it,
Speaker 1: because it's just every time I learned an answer, I
Speaker 1: had a new question. And so were your parents academics? No, no,
Speaker 1: Justice said, just grew up there. Yeah. Uh. And so
Speaker 1: you go through your your studies and and do you
Speaker 1: have a sort of a specialty within economics at that point?
Speaker 1: I do, well. I actually specialized pretty early my early
Speaker 1: twenties with retirement finance, which is an interesting role even
Speaker 1: within economics. So if your study retirement economics, it's actually
Speaker 1: a macro public finance, which is the questions of how
Speaker 1: should society best movement resources through the future. Um, but
Speaker 1: that's a huge risk problem, right, And well, I got
Speaker 1: some exposure to finance financial economics. I didn't get a lot,
Speaker 1: mainly because a lot of financial economics at the university
Speaker 1: I was at was mainly, like, you know, grinding data
Speaker 1: and looking for violations in the efficient markets hypothesis, so
Speaker 1: it didn't really appeal to me. But then after grad
Speaker 1: school I kind of went rogue and left academia and
Speaker 1: I ended up meeting Robert Merton, who is a famous
Speaker 1: financial economist for solving black shoals, and he was like
Speaker 1: looking at my research, which was really thinking about how
Speaker 1: people manage wage and asset risk and what makes sense
Speaker 1: and sort of defined benefit versus defined contribution pensions, and
Speaker 1: he uh, it was like, I think this is really interesting.
Speaker 1: Why don't you come work with me and I'll teach
Speaker 1: you finance. And that's what exposed me to sort of
Speaker 1: financial economics, which is just the study of risk and markets.
Speaker 1: And as I got to know him and was mentored
Speaker 1: by him for almost seven years, I really started to
Speaker 1: see these problems everywhere and see how his way of
Speaker 1: thinking and understanding the world in any market in terms
Speaker 1: of how you put a price on risk and value
Speaker 1: risk really could explain so much much bigger than even
Speaker 1: retirement or any problem. And so how do you attack
Speaker 1: a book like this? How do you create the framework
Speaker 1: to tell the right stories in the right order? So
Speaker 1: I really you know, they said the book is this
Speaker 1: is a little salicious, you know, going to brothels, But
Speaker 1: it started with every author notes you've got to start
Speaker 1: with a good title, or you gotta at least have
Speaker 1: a good title to sell it and this is a
Speaker 1: great one, thank you. UM. It started actually quite nerdy
Speaker 1: of thinking about what themes is. I was working in
Speaker 1: retirement retirement finance. I felt very strongly there are certain
Speaker 1: things people need to know that I don't think of
Speaker 1: that complicated, but we just don't teach people that people
Speaker 1: need to understand about markets and financial risk. So I
Speaker 1: just started thinking about each topic, like each lesson from
Speaker 1: finance that people wanted to know, and that was the
Speaker 1: original outline, and then I just sort of found stories.
Speaker 1: I found any market that seemed quirky or interesting to me,
Speaker 1: I would just go and show up and see what
Speaker 1: the story was there, and it always matched. There's always
Speaker 1: something there that lined up with this broader theme from
Speaker 1: risk or financial risk that was just lying in plain sight.
Speaker 1: And so I I want to get into some of
Speaker 1: those stories, especially surfing in a minute. But one of
Speaker 1: the great things you do at the top of the book,
Speaker 1: near the beginning of the book is you talk about
Speaker 1: the rules of risk, and we don't have to go
Speaker 1: through all of them, but tease out a couple for us.
Speaker 1: So the first thing is, and this sounds so simple,
Speaker 1: is you really have to define risk and reward. Like
Speaker 1: everyone says, you know, no risk and reward, but what
Speaker 1: that really means is actually something more complicated. First, you know,
Speaker 1: I go through a lot of very complicated ways. You know,
Speaker 1: everything in this book is what everyone does on Wall
Speaker 1: Street is just trumped up, packaged around and layered off
Speaker 1: on each other. But it's all these basic ideas. But
Speaker 1: the most sophisticated strategy will never compensate for not taking
Speaker 1: a well defined risk to start with, which is being
Speaker 1: really clear of what you want and what you're risking for.
Speaker 1: You know, in pension economics, the way to find benefit
Speaker 1: plans are supposed to work but not always is you
Speaker 1: define a goal, which is you need this stream of
Speaker 1: income in the future, and you take just enough risk
Speaker 1: to get that, and once you have that risk, to
Speaker 1: take risk off the table. Oh, no one does that
Speaker 1: because they never actually make enough money or people get
Speaker 1: confused about their goal. But this is actually the most
Speaker 1: efficient way to take risk and the most thoughtful way
Speaker 1: to do it. So you want to define what you're
Speaker 1: taking a risk for, put it in risk free terms,
Speaker 1: and then figure out exactly how much risk you want
Speaker 1: to take to get it. And honestly, if you do
Speaker 1: that you're there. That's easier said than done. And how
Speaker 1: does that work in the real world? Well, it is
Speaker 1: it it's defining what you want. I mean, it's that's
Speaker 1: not an easy thing. People spend a lot of money
Speaker 1: on therapists and life coaches just trying to figure out
Speaker 1: what it is they want out of life. But I
Speaker 1: mean you have to think through you know, even if
Speaker 1: if you know a relationship ends and you are unhappy
Speaker 1: in it, like what are you looking for in a partner?
Speaker 1: Like exactly, very be very clear. If you're unhappy in
Speaker 1: your job, like what do you want out of your job?
Speaker 1: And I mean one thing I discuss is what we
Speaker 1: do in finance is or you're supposed to do and
Speaker 1: a lot of people do is you price it in
Speaker 1: risk free terms? Like what would get you there with
Speaker 1: as little risk as possible. So I use the example
Speaker 1: of you know, if you want a pleasant evening, Um,
Speaker 1: you know, you can stay in and watch Netflix that's
Speaker 1: low risk, or you can go out and you can
Speaker 1: go to a party. I mean, there's a whole range
Speaker 1: of things that could happen. You could have a bad time,
Speaker 1: You can get hit by a car, or it could
Speaker 1: be the best party of your life. You can meet
Speaker 1: the love of your life. So the risk free is
Speaker 1: home watching Netflix. Risky is going out to a party.
Speaker 1: So let's talk about surfing, because that was one of
Speaker 1: my favorite chapters in here, and because that's something that
Speaker 1: even if you don't surf, you understand sort of the risks,
Speaker 1: or at least the basic risk. So take us inside
Speaker 1: that business, because you actually spent some time in of
Speaker 1: all places, a hotel ballroom with surfers. Again, like so
Speaker 1: much cognitive dissonance throughout this, um, but help us understand
Speaker 1: how they think about risk because it's new. Well, they
Speaker 1: actually think a lot about it. Um. They actually have
Speaker 1: an annual risk conference, and I mean actually think they
Speaker 1: do it a couple of times a year now in
Speaker 1: a hotel ballroom with like no windows except that I
Speaker 1: mean they all look cooler than other risk conferences. I
Speaker 1: mean we're in the room and their slides and there's numbers,
Speaker 1: but everyone's like in shorts and their supertan and they're
Speaker 1: great looking and um, then there's me, uh and the
Speaker 1: only woman there too, and everyone's very sort of like,
Speaker 1: if you want to be here, fine, But what I
Speaker 1: was surprised is you know, this felt a lot like
Speaker 1: a pension risk conference in the content of what we're
Speaker 1: talking about. One of their intellectual leaders is a man
Speaker 1: named Brian Carolina who brought jet skis to big wave
Speaker 1: surfing and he's also worked as a stuntman, and he
Speaker 1: has is a native Hawaiian. He's a long history of
Speaker 1: relatives who have worked in water sports. And he said
Speaker 1: to me, you know, I had this revelation I think
Speaker 1: it was the nineties that risk is something that could
Speaker 1: be managed. And he really became the self taught risk
Speaker 1: guru who really studies the principles of risk and risk
Speaker 1: minimization and risk management. And so how does that actually
Speaker 1: apply to surfing? How do these guys who are chasing
Speaker 1: after a reward that is, if not hard to define,
Speaker 1: hard to quantify, I would imagine, And yet they talk
Speaker 1: about waves and wave sets and things like that, take
Speaker 1: us inside that. Yeah, So a couple of things. So
Speaker 1: in the book I mentioned different ways to manage risk.
Speaker 1: One is hedging, the other's insurance. So they both apply
Speaker 1: to surfing. So an example of a hedge in surfing,
Speaker 1: so a hedging is just taking less risk, balancing risk
Speaker 1: and reward and money that just right combination. So waves
Speaker 1: travel and sets of say five, and one thing that
Speaker 1: they suggest you do is it's not a matter. They're
Speaker 1: not like these dudes who go out and back. I'm
Speaker 1: as serf the biggest wave because it's there. In fact,
Speaker 1: often a bigger wave might be the first one in
Speaker 1: a set, but you would never take that wave because
Speaker 1: if you wipe out, you've got four big waves barreling
Speaker 1: on you. So they'll take a later wave in the
Speaker 1: set any way, it might be smaller or less perfect wave,
Speaker 1: just because it's a safer thing to do, so they're
Speaker 1: not just jumping on the biggest wave. The other thing
Speaker 1: they do is insurance, which is making sure they have
Speaker 1: resources in place if they wipe out. So Brian is
Speaker 1: notable in industry because he brought jet skis to big
Speaker 1: wave surfing. And a jet ski is a lot like
Speaker 1: a stock option a lot of ways, and that it's
Speaker 1: there if you wipe out, so it's really insurance, but
Speaker 1: just like an option, you can also flip it around
Speaker 1: to take more risk and lever up right, so he
Speaker 1: does so. After he brought jet skis to surfing as insurance,
Speaker 1: other surfers started noticing you could use them to push
Speaker 1: you on bigger waves you couldn't physically paddle out on.
Speaker 1: So this is what's enabled people to now surf these
Speaker 1: eight foot waves you see pictures of is those same
Speaker 1: jet skis which are originally insurance but can also really
Speaker 1: be used as leverage, right, And I want to explore
Speaker 1: that a little bit because one of the things you
Speaker 1: talk about, which is well known to certainly our audience,
Speaker 1: well known to just about everyone on Wall Street and
Speaker 1: certainly Main Street as well, given the financial crisis, is
Speaker 1: this notion of leverage and taking bigger and bigger risks
Speaker 1: and finding instruments that allow you to do that. And
Speaker 1: you have a line in the book late in the
Speaker 1: book where you were, which I think is very profound,
Speaker 1: where you say these big risk pose costs to others.
Speaker 1: And I feel like, as a society we're really grappling
Speaker 1: with that right now. Where do you sort of come
Speaker 1: out help us understand how that plays into the broader
Speaker 1: theory here? Well, and this is the big question. I've
Speaker 1: gone to a couple of like academic economics, financial macro conferences,
Speaker 1: and this is the big question. And this was almostly
Speaker 1: the big question at the surf Risk conference. It wasn't
Speaker 1: just techniques to manage your own risk, it was you're
Speaker 1: taking If you take these outside risks, you're posing risks
Speaker 1: to others too, in terms of resources you need to
Speaker 1: get rescue, in terms of crashing into someone, in terms
Speaker 1: of it's just dangerous to rescue you. So the question is,
Speaker 1: and I think this is the big debate we have
Speaker 1: in finances, where does responsibility lie and who should take responsibility?
Speaker 1: I asked the surfers. I was like, do you because
Speaker 1: you know, in finance, we you know, we assume people
Speaker 1: can't just control themselves, and we need regulation because there's
Speaker 1: always this incentive to take outside risks and not realize
Speaker 1: the cost to others. And I asked all the surfers,
Speaker 1: I'm like, do you think you should be regulated? Do
Speaker 1: you think there should be a license for big wave
Speaker 1: surfing the same way there's a license for or say
Speaker 1: Scoopa diving for fishing. Yeah. Like maybe because they were
Speaker 1: very concerned about access to equipment, and they seem to
Speaker 1: think that the um vendors of equipment should take that responsibility.
Speaker 1: But I'm like, maybe it should be on the government.
Speaker 1: Maybe you can't expect individual entities to do this, and
Speaker 1: everyone hated that idea as like, you know, I don't
Speaker 1: know what their politics are, but this would be the
Speaker 1: one thing they're like no, no, to keep the government
Speaker 1: out of surfing. But I think it is a worthwhile
Speaker 1: question is as we do wonder who is the responsible
Speaker 1: to government. Is the person selling a product, like as
Speaker 1: someone selling derivative being irresponsible, as someone selling an inflatable
Speaker 1: vest or jet ski being irresponsible or should it just
Speaker 1: fall on the individual? And I don't think there's good answers.
Speaker 1: I think it really falls on everyone and sid this
Speaker 1: is a big question that's unresolved in academic finance, in industry,
Speaker 1: and even for the surfers right well, and it feels
Speaker 1: like it's unresolved even on Wall Street in the sense of,
Speaker 1: you know, we're eleven twelve years on from the financial crisis,
Speaker 1: and obviously their question that remain around, you know, whether
Speaker 1: and how people should have been punished too, you know,
Speaker 1: had a role in that crisis. But there were also
Speaker 1: so many whether this is is the right terminology or
Speaker 1: not derivative effects in terms of economic effects in a
Speaker 1: place like New York City or the Tri State area
Speaker 1: or Middle America, for that matter, as you have gone
Speaker 1: through this, how do you think we as a society,
Speaker 1: especially the United States, sort of are dealing with risk
Speaker 1: at this point? No, well, I mean one thing that
Speaker 1: really said it inspired me to write the book is
Speaker 1: I saw that we put this huge risk problem on people,
Speaker 1: not only in the retirement space, but just also in
Speaker 1: terms of everything. You know, technological change brings huge systemic,
Speaker 1: systematic risks to everyone, and we haven't really given anyone
Speaker 1: tools to think about risk because it it's sort of
Speaker 1: this very binary thing. Either you take a risk or
Speaker 1: you don't, either this cautious person or you're not. And
Speaker 1: that leads people to sort of take these sort of
Speaker 1: reckless risks of I'm a risk take or any change
Speaker 1: the way you're supposed to think about it, which is
Speaker 1: this third or middle way that takes a large range,
Speaker 1: which is you know, how to think about risk responsibly,
Speaker 1: like maybe surf that big wave, but maybe not serve
Speaker 1: the biggest wave. Maybe about surf the wave that makes
Speaker 1: that just sort of pushes your limits just a bit,
Speaker 1: and that's the best way for people to be taking risks, right.
Speaker 1: And so the book is only about a week old
Speaker 1: as we're sitting here in New York has the response
Speaker 1: And what's been the most surprising feedback you've gotten? Um?
Speaker 1: You know, I thought people I tell you how people
Speaker 1: would be negative, but I thought people would be more
Speaker 1: like financial economics. That's been disproved because people say that
Speaker 1: all the time. But people have been a lot more
Speaker 1: open than I would have thought. And do you think
Speaker 1: it's because you are giving examples like I mean, the
Speaker 1: surfing example is amazing because people get it, like people
Speaker 1: understand waves, they understand serving even as I said, if
Speaker 1: if they don't do it, I like to think so.
Speaker 1: And you know, I like to think people can see
Speaker 1: themselves in the stories and think about risk a little
Speaker 1: bit more strategically. Right, all right, So what's next for you?
Speaker 1: You've got this book, you're out selling it literally and figuratively.
Speaker 1: What what what's next for Allison trigger? You know, as
Speaker 1: I said, I don't know, yea more risk. So having
Speaker 1: written this book, are you less or more willing to
Speaker 1: take risk? Um? I guess I said it was. It's
Speaker 1: a big risk to write a book, especially you know,
Speaker 1: the opportunity cost is very large. Um. But it was
Speaker 1: just creatively something I had to do, right, So I
Speaker 1: guess I'll take it from there. Great Alison Traeger, congrats
Speaker 1: on the book. Thank you so much. Thanks for having me.
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Speaker 1: Bloomberg Radio. I'm Jason Kelly and I'm Carol Masser. This
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