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Allison Schrager Discusses Monetary Policy · Masters in Business

0:02
Speaker 1: This is Masters in Business with Barry Ridholts on Bloomberg
0:06
Speaker 1: Radio this weekend. On the podcast, I have a special guest.
0:10
Speaker 1: Her name is Alison Schraeger, and amongst other things, she
0:15
Speaker 1: is the author of a book that I took with
0:17
Speaker 1: me on vacation and absolutely found intriguing. My my version
0:22
Speaker 1: is just demolished because I plowed through it on a
0:25
Speaker 1: beach uh in Turks and Caicos, and really, despite everything
0:30
Speaker 1: going on around me, I kind of ignored it and
0:32
Speaker 1: just worked my way through the book. I love the
0:35
Speaker 1: title and economists walks into a brothel, which really has
0:39
Speaker 1: nothing to do with sex and everything to do with
0:43
Speaker 1: finding ways to do risk reward analyzes in really unusual places.
0:48
Speaker 1: So whether it's big wave surfing or horse breeding, or
0:52
Speaker 1: poker playing or paparazzi, there are all these unusual um
0:58
Speaker 1: situations where we don't really think about the risk reward analysis,
1:03
Speaker 1: but really the details of that have a major impact
1:06
Speaker 1: on how these industries and these individuals progress. And and
1:11
Speaker 1: once you start looking into that, it changes the way
1:15
Speaker 1: you look at everything from insurance to annuities to hedging
1:21
Speaker 1: to market based portfolios. Risk permanent permeates everything we do
1:27
Speaker 1: and most of us just don't give it enough time
1:30
Speaker 1: and thought to recognize the dangers and advantages it potentially
1:37
Speaker 1: can afford us. So, if you're at all interested in
1:41
Speaker 1: filling the blank investing, insurance, understanding risk, understanding what happens
1:47
Speaker 1: in a brothel from an economic perspective, I think you're
1:51
Speaker 1: gonna find this to be an absolutely fascinating conversation. So,
1:54
Speaker 1: with no further ado, my interview with Alison Traeger. This
2:01
Speaker 1: is Masters in Business with Barry Ridholts on Bloomberg Radio.
2:05
Speaker 1: My special guest this week is Alison Schreeger. She is
2:09
Speaker 1: an economist and adjunct professor at n y U, a
2:12
Speaker 1: journalist at Courts, co founder of life Cycle Finance Partners,
2:17
Speaker 1: which is a risk advisory firm. She is also the
2:21
Speaker 1: author of An Economist Walks Into a Brothel and Other
2:25
Speaker 1: Unexpected Places to Understand Risk. Alison Schreeger, Welcome to Bloomberg.
2:30
Speaker 1: Thank you for having me. My pleasure. So, so let's
2:32
Speaker 1: talk a little bit about your um backgrounds. You describe
2:38
Speaker 1: in the book making a series of what you later
2:41
Speaker 1: called risky career decisions, not exactly sure what you wanted
2:46
Speaker 1: to do. Your assumption was, hey, PhD program and economics.
2:50
Speaker 1: Obviously you're gonna become a professor. How did that work out? Um? Well,
2:56
Speaker 1: in the end, I think it worked out well for me,
2:58
Speaker 1: but the path was a lot rocky year than I
3:00
Speaker 1: would have expected. I think, like a lot of people,
3:03
Speaker 1: especially in this day and age, I fell into this
3:06
Speaker 1: idea that more education was just better and it would
3:09
Speaker 1: open up all these doors. And most of the time
3:10
Speaker 1: it does. I think that is normally a good bet,
3:12
Speaker 1: and certainly an economics PhD is is a good thing
3:15
Speaker 1: to have in life. But I had kind of a
3:19
Speaker 1: rocky transition when I finished grad school because I had
3:22
Speaker 1: invested essentially my whole twenties into learning all these skills
3:26
Speaker 1: and really being cut off from the rest of the world,
3:28
Speaker 1: and then realized what I was investing in was this
3:32
Speaker 1: idea of becoming a professor, and had this realization as
3:35
Speaker 1: I graduated, this was not what I wanted to do
3:36
Speaker 1: at all. So undergrad it and Edinburgh PhD at Columbia University.
3:43
Speaker 1: What sort of thesis were you working on that? Um? Weirdly,
3:47
Speaker 1: even when I was like eighteen, I was always really
3:49
Speaker 1: fascinated by retirement. Uh So my PhD thesis was on
3:55
Speaker 1: risk in retirement, so it was I started around two
3:59
Speaker 1: thousand and so this is as DC Plans had really
4:02
Speaker 1: taken a foothold in the market and I was doing
4:04
Speaker 1: some work in the UK where they were taking over,
4:06
Speaker 1: so really understanding more deeply the risks and define contribution
4:10
Speaker 1: versus define benefit pensions. So eventually you come to the realization, hey,
4:15
Speaker 1: I'm not going to be any sort of professor. And
4:19
Speaker 1: then you happened to have a job interview with a
4:23
Speaker 1: world famous Noble Prize winning economist, Robert Martin. What happened
4:29
Speaker 1: with that? Well, I uh, as I said, I had
4:33
Speaker 1: this hard realization when I was finishing grad school. I
4:35
Speaker 1: didn't want to be professor. I didn't want to be
4:37
Speaker 1: a government bureaucrat all the things you're supposed to do
4:39
Speaker 1: with an economics PhD. So I kind of had this
4:41
Speaker 1: burn it all down, do something new attitude, which also
4:45
Speaker 1: turned out to be helpful for the book. So I
4:48
Speaker 1: was like, I'm gonna do something fun. I've just spent
4:50
Speaker 1: my whole twenties while everyone else was partying solving a
4:52
Speaker 1: math problem. So I went to the economist unpaid, because
4:56
Speaker 1: this is early days with web journalism, and they would
4:59
Speaker 1: take people who had never written before to write for
5:01
Speaker 1: the web back then and what you pay for right,
5:06
Speaker 1: So I was just writing web web stuff for the
5:08
Speaker 1: economists for free with any com PhD. And then someone
5:11
Speaker 1: passed my dissertation along to Bob Merton and turned out
5:15
Speaker 1: retirement was also his main interest. He was working on
5:19
Speaker 1: market solutions to the retirement problem. So so let me
5:22
Speaker 1: interrupt you there and ask some questions here, because this
5:25
Speaker 1: is really kind of fascinating. You're wildly overqualified to turn
5:30
Speaker 1: out web based nonsense where you're not being paid for
5:33
Speaker 1: a website, and you know they treat unpaid volunteers not
5:38
Speaker 1: especially well, and they have the same respect for their content.
5:42
Speaker 1: Who said, oh, I know Allison's pH d thesis. Let
5:46
Speaker 1: me give this to Bob. He's busy, he want a
5:49
Speaker 1: Nobel prize, but he'll like this. How on earth did
5:52
Speaker 1: that come about? Um a friend of mine who I
5:55
Speaker 1: think had him when he was doing his NBA at Harvard.
5:58
Speaker 1: And because my dissertation, that is exactly what Bob was doing.
6:01
Speaker 1: Bob was trying to come up with financial models that
6:04
Speaker 1: took the best to define benefit plans and put them
6:06
Speaker 1: in a defined contribution structure, and that turns out, you know,
6:09
Speaker 1: as I said, as much as I said burn it
6:10
Speaker 1: all down, I always had a good dissertation which I
6:13
Speaker 1: thought about risk in a clever way. So once Bob
6:16
Speaker 1: didn't know, i'd sort of hit bottom career wise. You know,
6:20
Speaker 1: it just goes to show where something you feel like
6:22
Speaker 1: something can feel like it totally blew up. I was thinking,
6:24
Speaker 1: I just really messed up here, you know, I just
6:26
Speaker 1: wasted all this time. And then my paper ended up
6:30
Speaker 1: in front of him and he was like, I really
6:32
Speaker 1: want to do this. He called me in. He's like,
6:34
Speaker 1: if you come work with me, I will teach you finance.
6:37
Speaker 1: Let me tell you when I first was handed a
6:39
Speaker 1: book whose title was an economist walks into a brothel.
6:44
Speaker 1: I'm intrigued. Okay, now, your your thought is they're not
6:48
Speaker 1: going in there as a customer or anything like that.
6:51
Speaker 1: You thought is what sort of wacky economic data are
6:55
Speaker 1: they going to be analyzing? As an economist looking at
6:58
Speaker 1: the sex trade, it's pretty fast spending subject. How did
7:01
Speaker 1: you find your way to Nevada and going to the
7:05
Speaker 1: bunny ranch? So I wrote a story for courts because
7:10
Speaker 1: I'm it's interesting. I've always been in shouting risk even
7:12
Speaker 1: as a journalist. You know, after I started working with Bob,
7:16
Speaker 1: before I was a macro economist, I became I learned finance.
7:18
Speaker 1: I'm like, everything I know about the economy, I was wrong.
7:21
Speaker 1: Risk is a much more rigorous and interesting way to
7:25
Speaker 1: understand the macro economy and every economic problem. So I
7:29
Speaker 1: was applying that in sort of this freakonomics see way
7:32
Speaker 1: as a journalist, and I wrote a story about uh,
7:36
Speaker 1: a friend of a friend who was running an online
7:39
Speaker 1: brothel where her value add was screening clients. This is
7:44
Speaker 1: an illegal operation, so when you work illegally, you have
7:48
Speaker 1: to screen your clients otherwise, especially these were first submissives specifically,
7:52
Speaker 1: so they get they get tied up, so they're particularly vulnerable.
7:55
Speaker 1: So screening has especially important premium. So she was being
7:59
Speaker 1: paid this memium to screen them, and I was like, well,
8:01
Speaker 1: this is pretty cool. Uh. So I wrote the story
8:04
Speaker 1: about it did super well, as you can imagine, And
8:06
Speaker 1: so I got a call from the Bunny ranch saying,
8:09
Speaker 1: if you're gonna be writing about brothels, you should be
8:11
Speaker 1: writing about us, and all, well, I don't write about brothels,
8:15
Speaker 1: but this is an interesting call, So I'm gonna continue
8:19
Speaker 1: this um and so I was talking to them and
8:24
Speaker 1: they were I'm like, how does this all work? They're like, well,
8:26
Speaker 1: the women come in and every we don't upset prices.
8:30
Speaker 1: They negotiate every transaction and they kind of another throwaway
8:33
Speaker 1: thing he said. And I was like, well, that's actually
8:35
Speaker 1: very interesting. So you're telling me you have women who
8:37
Speaker 1: are about twenty years old negotiating with men in their
8:39
Speaker 1: sixties over tens of thousands of dollars. He's like yeah,
8:42
Speaker 1: and it's interesting you say that because most of them
8:45
Speaker 1: come here not knowing how to negotiate. So have a
8:47
Speaker 1: negotiation training program. So the Bunny Ranch in Nevada reaches
8:52
Speaker 1: out to you and says, hey, if you want to
8:54
Speaker 1: have a conversation about a brothel and about risk and
8:58
Speaker 1: analyzing numbers, come to to us. What was your thought
9:02
Speaker 1: process when you got this phone call? Well, at first
9:05
Speaker 1: I was like, this isn't my thing, this isn't what
9:07
Speaker 1: I'm like known for. I'm a retirement economist. But when
9:11
Speaker 1: they said the thing about we have a negotiation training program,
9:15
Speaker 1: which is something I struggle with. Two, Like, you would
9:17
Speaker 1: think a car dealership has a negotiating training program, not
9:21
Speaker 1: a brothel or sales job on Wall Street, you know
9:24
Speaker 1: they and they're like well, and then he even said
9:26
Speaker 1: the headline, the women here don't know their value, so
9:29
Speaker 1: we teach them to know their value and to ask
9:31
Speaker 1: for enough. And I was like, well, I could use that.
9:34
Speaker 1: So I talked to my editor at Courts to sending
9:36
Speaker 1: me there to go through their negotiation training program. It
9:39
Speaker 1: was the immediate reaction, this is a great story. Oh yeah,
9:41
Speaker 1: they send a video crew, all right, so they were
9:45
Speaker 1: they were pretty hip that, hey, this is funky and
9:48
Speaker 1: on you. This was freaky before fre economics, wasn't this
9:51
Speaker 1: freakonomics is already out, but okay, it took it to
9:53
Speaker 1: another level because I don't think Steve Levitt's spent a
9:55
Speaker 1: lot of time in brothels. Now he focused on young
9:58
Speaker 1: drug dealers in the inner city and other similarly freaky stuff.
10:02
Speaker 1: But this is like right up his alley for sure.
10:05
Speaker 1: So you get to the Bunny ranch. How receptive were
10:09
Speaker 1: the women to speaking to you about all these sorts
10:14
Speaker 1: of economic related um issues of of salary and compensation
10:18
Speaker 1: and negotiation and the beginning Some some are very very wary,
10:21
Speaker 1: some are very open, but once you get talking to them,
10:24
Speaker 1: they open up because I think a lot of people
10:27
Speaker 1: go there and they don't really take them seriously as
10:29
Speaker 1: business women. And okay, uh, Dennis when he was alive,
10:34
Speaker 1: this is the guy who was running the bunny ranch. Yes,
10:37
Speaker 1: uh really had a lot of good business training going on.
10:41
Speaker 1: And the women they're are great business women and they're
10:43
Speaker 1: proud of what they know. So once you get them
10:45
Speaker 1: talking about that, they do open up. Because this is
10:47
Speaker 1: a special skill a lot of them have learned, and
10:50
Speaker 1: a skill honestly, I think most people could learn on
10:52
Speaker 1: their jobs and they don't. So how to value the
10:56
Speaker 1: worth of your own work products relative to the mare
11:00
Speaker 1: could place and relative to customer on the other side
11:02
Speaker 1: of the desk from you, and how to ask for it,
11:05
Speaker 1: how to feel comfortable. Especially it's an interesting negotiation because
11:09
Speaker 1: you have to negotiation can be very fraught and afterward
11:12
Speaker 1: you're gonna have this very intimate encounter with this person.
11:15
Speaker 1: So making that transition, which is I mean a more
11:18
Speaker 1: exaggerated version how Valley calls that the pivot, it's a
11:23
Speaker 1: more exactitary vision of what we all do, right, Like,
11:25
Speaker 1: we have to negotiate with someone and we have to
11:26
Speaker 1: work with them. So this is just that on steroids? Huh?
11:31
Speaker 1: And and so what is the secret? What did they
11:33
Speaker 1: do that's somewhat different than what or what did they
11:37
Speaker 1: teach you that you didn't know going into this? I
11:41
Speaker 1: think I always saw negotiation is very adversarial, and what
11:46
Speaker 1: I learned is how to make it not so, how
11:48
Speaker 1: to just put a bunch of things out there, which
11:50
Speaker 1: apparently is a negotiation technique. Here's a here's a men,
11:54
Speaker 1: you choose a be your sake. That's really interesting, and
11:58
Speaker 1: therefore then it's not adversarial. It's just, hey, you know,
12:01
Speaker 1: everyone feels like they're getting what they want. I'm customizing
12:04
Speaker 1: this experience for you. So when I was there, I
12:07
Speaker 1: learned a lot about pricing, sex pricing, and something that
12:10
Speaker 1: fascinated me was how much more they could charge than
12:13
Speaker 1: the illegal market. And now the assumption is, from the
12:18
Speaker 1: John's point of view, they're going into a place where
12:21
Speaker 1: they know the workers have been tested for STDs, they
12:25
Speaker 1: know they're not going to get mummeda, ripped off, they
12:28
Speaker 1: know they're not going to get arrested. That should be
12:31
Speaker 1: worth some sort of premium, shouldn't it. I never thought
12:34
Speaker 1: of it that way before, but that was what always
12:36
Speaker 1: on the lookout for risk fascinated me because I mean,
12:39
Speaker 1: the premium is large. When I went, I went back
12:42
Speaker 1: to the brothel for bookwork and surveyed a lot of
12:44
Speaker 1: the women on their transactions. And then it just turned
12:48
Speaker 1: out that this economist I knew, scraped all the data
12:51
Speaker 1: from the Erotic Review, which is yelped for a legal
12:53
Speaker 1: sex work. So I had one point two million legal
12:57
Speaker 1: sex transactions. So i'd really good robust data set. So
13:01
Speaker 1: I was kind of surprised in reading that chapter, that
13:04
Speaker 1: section of the book the Bunny Ranch. To go to
13:07
Speaker 1: the Bunny Ranch, it's a couple of thousand dollars per
13:13
Speaker 1: um experience. I don't know what's called. The median price
13:17
Speaker 1: I found was four hundred dollars an hour. That's a
13:20
Speaker 1: lot of money. Yeah, uh, you know, especially if you
13:25
Speaker 1: just hire a woman online, even for escorting, which is
13:29
Speaker 1: more high end. I think equivalent to what you get
13:31
Speaker 1: at the Bunny Ranch is three or four hundred dollar
13:33
Speaker 1: an that's all. Yeah, and you don't have to go
13:36
Speaker 1: to Nevada. Yeah, but then the risk is four dollars.
13:40
Speaker 1: But you might get arrested, you might get robbed, you
13:43
Speaker 1: might who knows. You might get killed, so it's worth
13:46
Speaker 1: a premium, one would argue, And you effectively do that
13:50
Speaker 1: in an economist walks into a brothel. Uh that what
13:53
Speaker 1: you're paying is you're paying an insurance premium to eliminate
13:59
Speaker 1: all of the risk associated with legal sex for higher transactions.
14:04
Speaker 1: And on the other side too, because you think these
14:06
Speaker 1: women they're getting so much money, but they're really not. Now,
14:09
Speaker 1: what's the payout to the woman relative to at Ridge.
14:13
Speaker 1: Let's call it fifteen hundred dollar average. They're getting what
14:16
Speaker 1: you wrote about half goes to them, Well, not even
14:19
Speaker 1: half goes to the brothel. So they have to give
14:21
Speaker 1: fifty of their cut to the brothel. And then, uh,
14:25
Speaker 1: they're legal sex workers, right, so they ten ninety nine employees,
14:29
Speaker 1: so the self employment tax together cover that. And I
14:33
Speaker 1: mean these are high earners. They're making, you know, probably
14:36
Speaker 1: at least a hundred grand a year, so I mean
14:38
Speaker 1: a lot of them don't live in Nevadas. They might
14:40
Speaker 1: have stayed income taxes on top of it all. So
14:41
Speaker 1: we're talking. So do they do an I RA A
14:44
Speaker 1: or a KYO. They have to have some sort of
14:46
Speaker 1: retirement friends. So Dennis had really had really good financial
14:50
Speaker 1: planners coming in and give them very good financial literacy.
14:52
Speaker 1: I was talking to these women who came from households
14:55
Speaker 1: where no one had a bank account. They're like, I
14:56
Speaker 1: didn't even know the credit score was. And then they're
14:58
Speaker 1: telling me, oh, yeah, my ra is on index funds.
15:01
Speaker 1: You know, why pay the fees for active That's just
15:04
Speaker 1: that's just hilarious. I have a I have a million,
15:07
Speaker 1: a million horrific puns, and I'm not going to touch
15:10
Speaker 1: a single one of them. Wait, so are you saying
15:13
Speaker 1: they were passive investors not active? Is that? Is that
15:17
Speaker 1: what you're saying? They were indexers? Right, They're they're all indexers.
15:21
Speaker 1: That's hilarious. That's that's really hilarious. So what was the
15:26
Speaker 1: single most surprising thing that you came away from the
15:30
Speaker 1: Bunny Ranch with having interviewed all these professional legal sex workers.
15:36
Speaker 1: The most surprising thing? I mean, I know it's sounds
15:39
Speaker 1: almost patronizing, and I knew they'd be smart, but I
15:42
Speaker 1: was shocked at how much I learned from them about business,
15:46
Speaker 1: about negotiation, and about risk. So more than just smart savvy,
15:50
Speaker 1: very savvy. Let's talk a little bit about risk, because
15:54
Speaker 1: I think different people think of risk differently, How can
15:59
Speaker 1: you define what risk is for the average person. Well,
16:04
Speaker 1: I think of risk. I think of it as an
16:06
Speaker 1: estimate of all the different things that could happen and
16:09
Speaker 1: how probable they are. As I say, it's a very
16:11
Speaker 1: technical definition. Let me ask you the same question a
16:15
Speaker 1: little bit differently, then, Since you run a firm who's
16:18
Speaker 1: got the words life cycle in its name, how does
16:22
Speaker 1: risk change over the course of a person's lifetime. Well, um,
16:27
Speaker 1: you have career risk, you have academic risk, you have
16:30
Speaker 1: retirement risk. I mean there has to be a million
16:32
Speaker 1: different points in one's life where the risks that are
16:37
Speaker 1: presented to you are very different with different ramifications. Totally,
16:41
Speaker 1: and how we are able to deal with risk and
16:44
Speaker 1: understand risk and how risk averse we are can also
16:46
Speaker 1: change over a life cycle, which makes it even more complicated.
16:50
Speaker 1: You know, there's all this evidence about behavioral biases, but
16:52
Speaker 1: there's also evidence as people get older those biases tend
16:56
Speaker 1: to be less prevalent. Really, so, is it that we
16:59
Speaker 1: get a little wiser with age or it just matters less?
17:03
Speaker 1: Have we get a little wiser with age? There's experience
17:05
Speaker 1: that just as well. Experience really changes how you perceive risk. Like,
17:09
Speaker 1: once you've seen things blow up for you a couple
17:11
Speaker 1: of times, suddenly you become a little more risk averse
17:14
Speaker 1: or a little more aware of the probabilities you face,
17:16
Speaker 1: or take time to hedge or ensure when you take risks.
17:19
Speaker 1: Let's talk about that, because you have a few chapters
17:21
Speaker 1: in the book on the differences between insurance and hedging.
17:26
Speaker 1: So let's talk a little about hedging, whether we're referring
17:29
Speaker 1: to a market perspective or any other perspective. What is
17:33
Speaker 1: hedging and what should the average person use it for?
17:36
Speaker 1: I think of hedging and is it This is a
17:38
Speaker 1: distinction that a lot of people don't. I think asn't
17:41
Speaker 1: often made very clearly. In fact, I had lunch with
17:44
Speaker 1: the CEO of an insurance firm who even he kept
17:47
Speaker 1: we kept messing up insurance and hedging. So it's it's
17:50
Speaker 1: a very subtle but important difference, and you make it clear.
17:53
Speaker 1: They're two very distinct things. They are, and if you
17:57
Speaker 1: draw a picture of what they mean in on a graph,
18:00
Speaker 1: it's very clear. But intuitively it's a very hard difference.
18:04
Speaker 1: So I think of hedging as you just take less risk.
18:07
Speaker 1: So in basic finance world, that would be of a
18:11
Speaker 1: risky asset and you have a risk free asset. So
18:14
Speaker 1: hedging is just putting more of your portfolio and the
18:17
Speaker 1: risk free asset, the typical sixty stock and bond portfolio.
18:21
Speaker 1: You're not so much hedging your stocks as you're removing
18:24
Speaker 1: some risk and putting it into much lower risk fixed
18:27
Speaker 1: income exactly, So you're you're hedging your portfolio balance. So
18:32
Speaker 1: I've always thought of hedging as I'm willing to give
18:36
Speaker 1: up some upside and an exchange reduce my downside. That's
18:42
Speaker 1: exactly it. Okay, So if you is it, If you
18:45
Speaker 1: in some sixty you do fifty fifty, that's a less
18:48
Speaker 1: upside of stocks do well, but also less downside risk
18:51
Speaker 1: of stocks crash. Or conversely, I'll own X y Z
18:55
Speaker 1: stock and I'll marry a put to it, and that
18:58
Speaker 1: protects it. It costs me something, cost me a couple
19:01
Speaker 1: of percent, but hey, if the stock falls out of bed,
19:04
Speaker 1: the put should cover some percentage of most of that downside. Yeah,
19:08
Speaker 1: they usually think of puts assure a little bit more insurance,
19:11
Speaker 1: as I was saying it. So, so now let's talk
19:13
Speaker 1: about insurance. How do you think of insurance? What? What
19:16
Speaker 1: does purpose does insurance serve. So insurance is a little different.
19:20
Speaker 1: So rather than giving up you know, upside, what you're
19:24
Speaker 1: doing is you're paying someone a fee, So you give
19:26
Speaker 1: up that amount of upsite, but it's a set amount
19:28
Speaker 1: and you eliminate downside risk, So a predetermined costs, and
19:33
Speaker 1: what you're purchasing is putting that risk or eliminating that
19:37
Speaker 1: risk from yourself, putting it onto someone else in a
19:40
Speaker 1: specific state of the world. Yeah, so it's insurance, which
19:43
Speaker 1: is if if X happens, if this, if this stock
19:46
Speaker 1: goes above the strike price, then I get something. So
19:51
Speaker 1: I've never owned a car where I did not have
19:55
Speaker 1: at one point in the ownership of that car, uh,
19:58
Speaker 1: some piece of gravel of rock mo up on our
20:00
Speaker 1: local crappy highways here in New York and either ding
20:04
Speaker 1: or crack the windshield. So once I could start affording it,
20:09
Speaker 1: I always get glass insurance on the car, and I
20:11
Speaker 1: have replaced literally every single windshield I've ever owned. Um
20:17
Speaker 1: is that a good use of of insurance or am
20:20
Speaker 1: I just padding their profits and wasting money? It sounds
20:23
Speaker 1: like it. I mean, if you're if you're if you're
20:25
Speaker 1: claiming it. Well, but you know, a car you have three,
20:28
Speaker 1: four or five years at least UM, and you're paying
20:31
Speaker 1: whatever it is, a hundred bucks that I guess what
20:34
Speaker 1: I'm really paying for is, Hey, I don't have to
20:36
Speaker 1: worry about whether or not I break a window of
20:38
Speaker 1: somebody else. Somebody else is responsible for that. Is that
20:41
Speaker 1: a fair definition of insurance? Even though you're paying a
20:44
Speaker 1: fixed amount, that stress and worry goes away exactly because
20:48
Speaker 1: now the stress of breaking the window is on the
20:51
Speaker 1: insurance company. I mean, you have to still go through
20:53
Speaker 1: the rigamarole replacing it, but the financial risk is borne
20:56
Speaker 1: by someone else. So let's talk a little bit about
20:59
Speaker 1: the book and some of the other things, um you describe.
21:03
Speaker 1: Outside of the Bunny Ranch, you spoke to a number
21:06
Speaker 1: of poker players who had some kind of surprising statistic.
21:11
Speaker 1: The one player whose name escapes me, but was notorious
21:14
Speaker 1: for having yes for having these sort of hissy fits
21:18
Speaker 1: when he either wasn't happy with his own play or
21:21
Speaker 1: what have you. He said, he should really only be
21:25
Speaker 1: playing a very small percentage of hands. And I would
21:28
Speaker 1: have guessed what percentage does he play? It's twelve percent,
21:34
Speaker 1: twelve percent. That's in a one out of eight hands,
21:37
Speaker 1: so seven out of eight hands he's not participating in. Yeah,
21:41
Speaker 1: and there's a lot of poker terminology, which is new
21:42
Speaker 1: for me because I'm not a player, and they call
21:44
Speaker 1: that patient. I don't know if that's specific to poker,
21:48
Speaker 1: but you would think if you're passing on seven out
21:51
Speaker 1: of eight hands, there's a lot of patients with that,
21:53
Speaker 1: especially for someone who struck me as so volatile and
21:56
Speaker 1: out of control. Now is how much of that is
21:58
Speaker 1: real and how much of that is just to get
22:00
Speaker 1: into the heads of the other players. I think it's
22:02
Speaker 1: a combination of both. I think that's his natural temperament
22:05
Speaker 1: and he's noticed it's also an asset. So in the
22:09
Speaker 1: beginning it wasn't an asset. It was a bit of
22:11
Speaker 1: a problem for him. How did he manage to deal
22:14
Speaker 1: with that risk and turn it into a positive Well,
22:18
Speaker 1: he tells stories of just being so emotionally overwhelmed by
22:21
Speaker 1: trying to keep him in check your pass out. But
22:24
Speaker 1: when you really delve into it, you realize, you know,
22:27
Speaker 1: this is the classic behavioral bias we called loss a version,
22:31
Speaker 1: which is when you're losing, you know you hate you
22:34
Speaker 1: hate losses so much more than you value gains that
22:37
Speaker 1: you'll take double down and take extra risk to avoid
22:40
Speaker 1: a loss. And so this is often shows up a
22:44
Speaker 1: lot in poker and why people play too many hands.
22:47
Speaker 1: So he has to do is anyway, even though he's down,
22:49
Speaker 1: is still not play the hands. So he has to
22:51
Speaker 1: stay rational and like overcome this bias. And my found
22:55
Speaker 1: is behind the scenes he's doing all these things so
22:59
Speaker 1: he feels like there's less set steak so he can
23:01
Speaker 1: stay more rational. He does things like he gets he
23:04
Speaker 1: called steaked, which is someone else is an investor in
23:07
Speaker 1: him and takes a percentage of the winnings exactly. So anyway,
23:10
Speaker 1: he claims to be incredibly wealthy, um, he only puts
23:14
Speaker 1: in ten tho dollars of his own money in any
23:16
Speaker 1: poker tournament. The other thing he does so it's effectively hedging.
23:21
Speaker 1: And the other thing he does is he sort of
23:23
Speaker 1: gets this weird insurance, which is where he's in the
23:26
Speaker 1: in a major game and he takes the other player
23:29
Speaker 1: aside and they cut these little back deals, which is
23:31
Speaker 1: apparently allowed. And so in other words, some of these
23:35
Speaker 1: tournaments are winner takes all and if you come in
23:38
Speaker 1: second you get nothing. So in one one of these
23:41
Speaker 1: tournaments he pulled someone aside and said, here's the deal.
23:44
Speaker 1: Let's agree to split um a million dollars each of
23:48
Speaker 1: the purse, and whoever wins gets the balance. So so
23:52
Speaker 1: if you lose, you take half a million, and I
23:55
Speaker 1: think it was like two point two millions something like
23:57
Speaker 1: that for the winner. So there's a little bit of
23:59
Speaker 1: a hedge there as well. Yeah, so he does all
24:01
Speaker 1: these things to take a little risk off the table
24:03
Speaker 1: and that keeps him rational. What about the concept of
24:06
Speaker 1: a player who, after they lose a few hands, instead
24:11
Speaker 1: of being patient, has a tendency to try and get
24:14
Speaker 1: back to break even. There's something about that concept of
24:17
Speaker 1: I gotta get back to break break even. Stock traders
24:20
Speaker 1: do the same thing. Hey, I know this stock is
24:22
Speaker 1: a piece of junk, but dear Lord, if I get
24:24
Speaker 1: back to break even, I swear I'll sell that sort
24:27
Speaker 1: of attitude. Poker players do the same thing. They do um,
24:31
Speaker 1: but the successful ones are the ones. This is what
24:33
Speaker 1: I was saying about. There's evidence as you get older
24:35
Speaker 1: and wiser, you are less prey to these behavioral issues.
24:39
Speaker 1: And I think it's John List is this economist who
24:42
Speaker 1: studies loss of version how impacts behavior? Uh, because the
24:46
Speaker 1: break even effect is just sort of a corollary of
24:48
Speaker 1: loss a version, which is, when you're down, you're so
24:51
Speaker 1: determined to win back, so you didn't experience a loss,
24:53
Speaker 1: you double down and take extra risk risky would have
24:56
Speaker 1: never taken if you were up. It seems almost opposite
24:58
Speaker 1: of risk aversion. You're embracing so much risk I guess
25:02
Speaker 1: to try and recover from that loss only when you're down.
25:05
Speaker 1: And this is the interesting, you know, sort of um
25:08
Speaker 1: deviation from what economists normally think is when you're down,
25:10
Speaker 1: you'll take that extra risk to get back. So tell
25:14
Speaker 1: us a little bit about how we should be thinking
25:16
Speaker 1: about risk in the stock market. Well, actually, I mean
25:21
Speaker 1: my background to approach risk is from financial economics, which
25:25
Speaker 1: is the study of the stock market. I think in
25:27
Speaker 1: a lot of ways, the stock markets the perfect place
25:29
Speaker 1: to think about risk because you just have so much data,
25:32
Speaker 1: and what financial markets are doing is just finding ways
25:35
Speaker 1: to price and move risk around. So I think anyone
25:39
Speaker 1: who is in the stock market is someone who's naturally
25:41
Speaker 1: thinking about risk all the time. Huh. And and we're
25:45
Speaker 1: making more data every day, don't we. Yeah, I think again,
25:49
Speaker 1: you you do get people who get away from you know,
25:52
Speaker 1: as I said, if they're down there, like, there's all
25:54
Speaker 1: this evidence that people won't sell losers, but they'll sell winners.
25:58
Speaker 1: And you know how, you know that usually not a
26:00
Speaker 1: good idea. The stocks going down, it might probably keep
26:02
Speaker 1: going down, is supposed to you know, why would you
26:04
Speaker 1: sell your winners and keep a loser. But that's supposed
26:07
Speaker 1: to be some version of loss of version people think.
26:09
Speaker 1: So there was a study that had come out towards
26:11
Speaker 1: the end of eighteen that had looked at portfolio managers
26:16
Speaker 1: and rather than compare them to a benchmark, what they
26:18
Speaker 1: did instead was, let's instead of selling what the portfolio
26:23
Speaker 1: manager sold, we're gonna randomly sell anything else from their
26:26
Speaker 1: portfolio and then compare and see how they did. And
26:29
Speaker 1: it turned out that random sales outperformed manager sales by
26:34
Speaker 1: a hundred basis points over the next year. And when
26:36
Speaker 1: they looked at what was being sold, they found two
26:40
Speaker 1: broad categories that accounted for most of the underperformance. One
26:44
Speaker 1: is stocks that had gone up a lot and therefore
26:47
Speaker 1: we're benefiting from momentum. Managers had a tendency to sell those,
26:51
Speaker 1: but also stocks that had collapsed a lot, rather than
26:54
Speaker 1: selling them when they were small losers. They waited till
26:57
Speaker 1: they were giant losers and effectively had become deep value
27:00
Speaker 1: plays and they were selling them. And those two categories
27:04
Speaker 1: were Um, we're determined to be the behavioral errors that
27:09
Speaker 1: we're we're driving portfolio losses. So hold that aside. Let's
27:14
Speaker 1: let's think of of the stock market in terms of
27:17
Speaker 1: individual investors embracing of risk. Are most people overly invested
27:25
Speaker 1: in the stock market and the embracing too much risk?
27:28
Speaker 1: Or do you perceive the actual Do you perceive risk
27:33
Speaker 1: amongst individual investors as just not taking enough of it,
27:37
Speaker 1: especially in the early stages of a market, and not
27:39
Speaker 1: embracing it until the very latter stages in the market.
27:43
Speaker 1: I think it's hard to say. I mean, the rate
27:45
Speaker 1: stock allocation really depends on an individual and where they
27:48
Speaker 1: are in their life cycle. Um, I think people don't
27:51
Speaker 1: appreciate a lot of people don't appreciate how risky the
27:54
Speaker 1: stock market is. Like my mother is nearing retirement and
27:58
Speaker 1: she expects her portfolio to like double every year, and
28:00
Speaker 1: I'm like, sure, but you're gonna have to take on
28:03
Speaker 1: a lot of risk for that to happen. And she
28:05
Speaker 1: doesn't seem to internalize that. If you want more return
28:08
Speaker 1: that comes with something, and you know, in stocks are
28:10
Speaker 1: a great investment. They're a great way, especially an index fund,
28:13
Speaker 1: to get UH risk exclosure cheaply and efficiently. But you
28:18
Speaker 1: know there's you know, there's no guarantees. So we noticed
28:22
Speaker 1: that when housing markets are booming, people have the same
28:26
Speaker 1: overly optimistic expectations about how fast they are home prices
28:30
Speaker 1: are appreciating. I'm assuming your mom is not a big
28:33
Speaker 1: big bit clemon investor. Um, why does she think her
28:37
Speaker 1: stock her portfolio should double every year given long term
28:41
Speaker 1: returns between eight and well disundegrade. It's also you know,
28:46
Speaker 1: errors and how we perceive risk. I mean, I think
28:49
Speaker 1: people often in assume there's serial correlation where there is none.
28:54
Speaker 1: So you know, if if housing prices have gone up
28:57
Speaker 1: the last twenty years, people assume they'll stay doing that.
29:00
Speaker 1: I think people also make that assumption around interest rates
29:03
Speaker 1: that you know, they've been nothing but go down for
29:05
Speaker 1: the last thirty years. So I though, it's questionable if
29:09
Speaker 1: they can keep doing that, because how negative canields get.
29:11
Speaker 1: So this was kind of an interesting um aspect of
29:15
Speaker 1: the book that resonated with me personally because we're always
29:18
Speaker 1: trying to teach clients to think about portfolios in terms
29:23
Speaker 1: of a way that's easily understandable. And if you say
29:27
Speaker 1: to somebody, hey, there's the seventy or here here, there's
29:32
Speaker 1: a lot of software that can project you out to retirement.
29:35
Speaker 1: There's a probability that you'll hit your retirement goals, assuming
29:41
Speaker 1: inflation stays under four percent and you continue making your
29:45
Speaker 1: regular contributions. I don't know what a confidence interval does
29:50
Speaker 1: for most people, but if if you were to say
29:53
Speaker 1: to them, hey, in nineteen out of twenty situations, we
29:57
Speaker 1: can show you you'll hit your target goals. It's only
30:00
Speaker 1: one out of twenty that you don't make it. Why
30:02
Speaker 1: is that so much easier? Don't understand than percentile? Yeah.
30:05
Speaker 1: I'm not a psychologist, but the research psychologist I talked
30:07
Speaker 1: to and said just something about the way our brains
30:09
Speaker 1: are programmed. His frequencies just resonate with us more. We
30:12
Speaker 1: are so twenty is a better phrase, Yeah, and it
30:18
Speaker 1: makes a big difference because we are programmed as humans were,
30:20
Speaker 1: not complete like it's supposed to be. Disasters with risk.
30:23
Speaker 1: Risk is something that's humans have been facing, you know,
30:25
Speaker 1: as long as we've been on the earth. But you know,
30:28
Speaker 1: probabilities are a fairly modern invention. They only really came
30:32
Speaker 1: along on the Renaissance with a lot of sort of
30:33
Speaker 1: brainy people Bernoulli and a whole run of difference calling
30:37
Speaker 1: all these people. So, I mean, it's not surprising that
30:40
Speaker 1: we aren't just born having this natural intuitive sense of probabilities.
30:43
Speaker 1: I mean, we both work in this area all the time,
30:46
Speaker 1: and they often don't mean that much to me either.
30:48
Speaker 1: So so for the average person, how best should we
30:51
Speaker 1: quantify risk? Well, you want to, um, I say converted
30:57
Speaker 1: if you're thinking, except when I defined risk to you
30:59
Speaker 1: and I was like, it's all the things that you
31:00
Speaker 1: can measure happening and now probable they are. That is
31:02
Speaker 1: a probability distributions the whole distribution of things that aren't
31:07
Speaker 1: intuitive to us. Um So, I mean, part of it
31:10
Speaker 1: really is sort of getting more comfortable with those concepts,
31:13
Speaker 1: but it's also when you think of probabilities converting them
31:15
Speaker 1: to frequencies. The book was really interesting. It reads really well.
31:20
Speaker 1: It's sort of like like as I started reading it,
31:23
Speaker 1: I immediately um thought of against the Gods because it's
31:29
Speaker 1: also so risk focused, but from a historical perspective. This
31:34
Speaker 1: is really a twenty one century perspective on risk. I
31:38
Speaker 1: love Against the Gods. It was my favorite book, and
31:42
Speaker 1: I was actually partially inspired by that because as much
31:45
Speaker 1: as I love it, I wouldn't say everyone wants to
31:47
Speaker 1: read it. I mean it's oh no, everybody should read
31:49
Speaker 1: that book. It's amazing. Everyone should, but not a lot
31:51
Speaker 1: of people will. I mean it is dense, um. He
31:56
Speaker 1: is a very detailed or in. Every page is filled
32:01
Speaker 1: with lots and lots of stuff, which is why ps
32:05
Speaker 1: if you go back and reread it twenty years later,
32:07
Speaker 1: it's still fresh, and I mean, that is a master work.
32:11
Speaker 1: It's beautiful. I mean, I love everything about that book,
32:14
Speaker 1: and I also love capital ideas. I like his everything
32:17
Speaker 1: he's done. But you know your mom's probably talk about
32:22
Speaker 1: you know, your mom is probably not going to read it.
32:24
Speaker 1: And I felt like everyone needs to know what's in
32:26
Speaker 1: Against the Gods. And that's partially what inspired this book
32:29
Speaker 1: is I wanted to take those ideas that we're so resonant,
32:33
Speaker 1: and I felt everyone needed to understand and make them
32:36
Speaker 1: accessible to even broader audience. So obviously the whole Bunny
32:41
Speaker 1: Ranch brothel section is hilarious. And must have been a
32:44
Speaker 1: ton of fun to do. Um, what else did you
32:48
Speaker 1: do in your research that was kind of fun and surprising?
32:52
Speaker 1: It was all fun and surprised I had. I had
32:54
Speaker 1: a I mean I was afraid to write a book
32:55
Speaker 1: for a long time because my dissertation was such a
32:57
Speaker 1: horrible slog. See. I think of my book as as
33:00
Speaker 1: my PhD dissertation, and it was a horrible slob. I
33:03
Speaker 1: think maybe you have to do that first big research
33:05
Speaker 1: project just has to be horrible. Uh So I was like,
33:08
Speaker 1: if I'm gonna do this, I'm gonna have a lot
33:10
Speaker 1: of fun, which was the other way I wanted to
33:12
Speaker 1: approach the book. So I just was like, I'm gonna
33:15
Speaker 1: have all these adventures. It seems ceased to go places.
33:17
Speaker 1: I went to a risk conference for big wave surfers
33:20
Speaker 1: in a y right. That was the whole fascinating segment.
33:24
Speaker 1: The guys who invented jet skiing their way onto eighty
33:27
Speaker 1: foot waves that before you couldn't even get onto a
33:30
Speaker 1: fifty footwave. You just weren't able to get out there
33:34
Speaker 1: fast enough. Um, what was that like? You spoke to
33:36
Speaker 1: some really interesting big surf names. Yeah, and you know
33:40
Speaker 1: they have these this regular conference where they talk about risk,
33:43
Speaker 1: and it's like going to a pension risk conference, although
33:46
Speaker 1: everyone's better looking everyone Yeah, like I was in the
33:50
Speaker 1: worst shape in the room. Um, but but you know
33:54
Speaker 1: it is a it is a conference where they're very
33:56
Speaker 1: thoughtful about risk in debating uh, you know, regulatory function
34:01
Speaker 1: and who bears the responsibility of risk when your behavior
34:04
Speaker 1: impacts other people? And you know, it was as intellectual
34:07
Speaker 1: discussion as I've seen anywhere. And the guy who I profile,
34:11
Speaker 1: Brian cu Lana, is the one who brought jet skis
34:14
Speaker 1: to big wave surfing. And much like a lot of
34:16
Speaker 1: financial jurve that is initially supposed to be insurance, but
34:20
Speaker 1: as you mentioned, you can also use them to lever
34:22
Speaker 1: up and take on more risk and take even bigger waves.
34:26
Speaker 1: Because anything that can reduce risk can also be flipped
34:28
Speaker 1: around to exacerbate risks. We see a plateau ng and
34:32
Speaker 1: even an increase in the annual automobile fatality rates, and
34:37
Speaker 1: the discussion in your book and and elsewhere has been, well,
34:41
Speaker 1: how much of the confidence that people feel about air
34:45
Speaker 1: bags and crumple zones and and anti lick breaks is
34:49
Speaker 1: leaving them to drive faster and engage in more dangerous
34:52
Speaker 1: behavior without these safety provisions. What what are your thoughts
34:56
Speaker 1: on that? Yeah, I mean that is I felt like
34:58
Speaker 1: an important thing to include an any book on risk
35:00
Speaker 1: telling you how to how there's all these tools that
35:03
Speaker 1: can reduce your risk, because then you have to be
35:05
Speaker 1: mindful of not feeling so safe that you can then
35:08
Speaker 1: go and take whatever risks you want, because nothing makes
35:11
Speaker 1: the world truly risk free. You know, we're all risk
35:15
Speaker 1: is all still an estimate of something that's immeasurable. So
35:19
Speaker 1: you know, and you're you're basing your risk strategy on
35:21
Speaker 1: something you know it's better than doing nothing. Just because
35:24
Speaker 1: it's not perfect doesn't mean you shouldn't do it. But
35:26
Speaker 1: you also have to be aware of the limitations. So
35:30
Speaker 1: even if you have every safety device in the world
35:34
Speaker 1: and you're going to surf an eighty foot wave, it's
35:36
Speaker 1: still not going to be safe. There's nothing to make
35:38
Speaker 1: that risk free. And you specifically refer to a number
35:41
Speaker 1: of big name surface who died even after or perhaps
35:45
Speaker 1: because of some of these safety innovations being brought in. Yeah,
35:50
Speaker 1: and when I went to the Big Wave Surf Risk Conference,
35:53
Speaker 1: you know, they every innovation resurfaces this issue Initially it
35:58
Speaker 1: was leashes because you're already hated when they first came
36:01
Speaker 1: out totally because I don't know anything about surfing and
36:03
Speaker 1: I've never done it. But apparently before there were leashes,
36:06
Speaker 1: if you wiped out, you lost your board and you
36:08
Speaker 1: had to swim to shore, and that could be maybe
36:09
Speaker 1: twenty miles. So you think they were like amazing swimmers.
36:13
Speaker 1: Now you can be a pretty mediocre swimmer and still surf. Right,
36:15
Speaker 1: we're sending people out who really, if they get into trouble,
36:18
Speaker 1: can't swim a half mile back to shore. Yeah. And
36:21
Speaker 1: then it was worse with jet skis because now you
36:23
Speaker 1: can have a jet ski, you know, push you not
36:25
Speaker 1: only an eighty foot wave, but if you only need
36:26
Speaker 1: to belong on a five foot wave, Now you can
36:28
Speaker 1: go on a twenty foot wave, and you pose risk
36:30
Speaker 1: to other people when that happens, if you need to
36:32
Speaker 1: be rescued. And now the big debate is on something
36:35
Speaker 1: called these inflatable vests right when you go under, and
36:38
Speaker 1: they don't always inflate, but it gives people a sense
36:42
Speaker 1: that all right, I'm okay, I could do anything now. Yeah,
36:44
Speaker 1: And so this because they're new and just starting to
36:47
Speaker 1: be sold. I think I mentioned Greg Long this dame
36:50
Speaker 1: a surfer who's inflatable fest and open that was I
36:52
Speaker 1: think he had a sort of an early version. But
36:55
Speaker 1: now they're being widely sold and this is really tearing
36:59
Speaker 1: up the surf community of who should be allowed to
37:01
Speaker 1: buy these? Is it irresponsible to allow anyone to have
37:04
Speaker 1: these vests? So, in other words, we don't want to
37:06
Speaker 1: give people a full sense of confidence. Send down an
37:09
Speaker 1: amateur with no skills and no minimal swimming ability out
37:14
Speaker 1: into a dangerous area, and they feel because they have
37:16
Speaker 1: this inflatable vest that they can serve with the big boys,
37:21
Speaker 1: so to speak. But then the flip side of that
37:23
Speaker 1: is what this is a potentially life saving piece of technology.
37:25
Speaker 1: Are you going to deny people buying it? I mean
37:28
Speaker 1: it's there aren't easy answers to this, which is why
37:32
Speaker 1: they think it's just such debate. But you know, if
37:33
Speaker 1: you go to a finance conference and you debate systemic risk,
37:36
Speaker 1: there s the answers there. Either what what else do
37:40
Speaker 1: you recall from your research that was um, if not
37:43
Speaker 1: quite as buff um, really interesting and surprising because you
37:48
Speaker 1: cover a lot of ground in the book. I've got
37:50
Speaker 1: horse breeding, um that was kind of fascinating. Also, yeah,
37:54
Speaker 1: I didn't. Again, I kind of went after things I
37:56
Speaker 1: didn't really have much knowledge of before. Um and I
38:00
Speaker 1: never been like a horsey person. I wasn't like when
38:01
Speaker 1: these little girls who rode horses. Uh, I was so
38:07
Speaker 1: I didn't realize that after the tax reform changed the
38:12
Speaker 1: whole dynamics of horse breeding and the economics of horse breeding,
38:15
Speaker 1: and and all sorts of other tax shelters. These things
38:18
Speaker 1: had been devised as a way to hide money from
38:21
Speaker 1: Uncle Sam, and suddenly now they have to stand on
38:23
Speaker 1: their own feet. They can't just be a foe investment exactly.
38:27
Speaker 1: So the fact that there's less return to long term
38:29
Speaker 1: capital gains and they want to realize the returns from
38:32
Speaker 1: their risk earlier means now that everyone solds a horse
38:35
Speaker 1: after when it's one year old, when they don't have
38:37
Speaker 1: complete information about how good a racer it's going to be.
38:41
Speaker 1: The only information you have is who its parents are.
38:44
Speaker 1: So this has led to this increase in inbreeding. So
38:47
Speaker 1: we have all these horses that are sprinters, not long
38:50
Speaker 1: distance runners, because that's the first thing that will show
38:53
Speaker 1: and that will help sell a one year old horse.
38:55
Speaker 1: It seems like the incentives are kind of weird and
38:58
Speaker 1: not properly aligned. No, because what you really want is
39:01
Speaker 1: you want a horse. Well, actually the real money and
39:03
Speaker 1: horses is not winning races. It's from the breeding, the
39:07
Speaker 1: stud fees. But you know a good race career is
39:10
Speaker 1: necessary for that. But none of those things are necessarily
39:13
Speaker 1: correlated with There's been studies on this, on the prices
39:16
Speaker 1: that you sell for as a year old yearling. So
39:19
Speaker 1: as I was reading through the whole horse section, and
39:21
Speaker 1: I rode in college, so I was kind of fascinated
39:24
Speaker 1: by that. And I'm not a big fan of horse
39:27
Speaker 1: racing and betting, but but I enjoy riding. Um, I
39:32
Speaker 1: was reminded of a book I read a hundred years
39:35
Speaker 1: ago by William Goldman, who was the screenwriter for Butchcasting
39:42
Speaker 1: and Sundance Kid, Princess Bride, and Marathon Man Hit. His
39:46
Speaker 1: Screenless are Insane and his book was called Adventures in
39:51
Speaker 1: the Screen Trade. But a quote of his that I've
39:54
Speaker 1: used repeatedly when writing about markets is nobody knows anything.
40:00
Speaker 1: And he refers to all the studios that passed on
40:04
Speaker 1: Star Wars, all the studios that wanted nothing to do
40:07
Speaker 1: with raiders, of the lost art, and he uses example
40:09
Speaker 1: after example after example of these people who are supposed
40:14
Speaker 1: to be in the film industry and they're throwing darts.
40:17
Speaker 1: And I'm reading your right up about the various horses
40:23
Speaker 1: that later go on to storied career that were picked
40:26
Speaker 1: up for pennies because nobody recognized their value. And all
40:30
Speaker 1: of these very storied stud married to uh, these mayors
40:36
Speaker 1: who were great runners, and the horses nobody they don't
40:40
Speaker 1: win anything, they don't. So is it the same sort
40:43
Speaker 1: of situation when it comes to horse breeding nobody knows anything? Well,
40:47
Speaker 1: I think it's that the incentives are kind of are off.
40:50
Speaker 1: So you know what, people when they breed a horse,
40:53
Speaker 1: they're looking for something that's gonna sell after one year,
40:55
Speaker 1: which is very different from a horse that's going to
40:57
Speaker 1: win a Kentucky Derby. You would think that there's so
41:00
Speaker 1: much money in winning these big races that at least
41:04
Speaker 1: some subsection of the breeding community would say, hey, if
41:08
Speaker 1: you want to buy a horse to sell in a year,
41:10
Speaker 1: don't come to us. We're trying to bread triple crown
41:14
Speaker 1: competitive racers. How come that hasn't happened? Well, does some degree?
41:18
Speaker 1: You're right that it is just impossible to know. I mean,
41:21
Speaker 1: you're getting more information now with technology because you're able
41:25
Speaker 1: to do the genetic profiling of the horses, which gives
41:28
Speaker 1: you some information, like you can tell, you know, I
41:31
Speaker 1: guess the horses that are best suited for like the
41:32
Speaker 1: Kentucky Derby or so of these hybrid half sprinter half
41:36
Speaker 1: distance runners, and you can test for that also reference. Um.
41:40
Speaker 1: And there's a really fascinating story I'm trying to remember
41:42
Speaker 1: where I saw it about the size of one of
41:45
Speaker 1: the ventricles and the horses hard you reference. You're they're
41:48
Speaker 1: looking for horses with not metaphysical of that horse as hard,
41:52
Speaker 1: but genuine larger cardiac pumps. Yeah, although you have to
41:57
Speaker 1: be careful because everything you know, horse like everything to
42:00
Speaker 1: be like a racer, so of this freakish combination of
42:03
Speaker 1: factors have to come together. It's like being a Nobel
42:06
Speaker 1: Prize winning supermodel. It's like you just need all these
42:09
Speaker 1: genetic components in perfect alignment. Um. That that's the I'm
42:13
Speaker 1: sure it's an urban myth, but the Einstein Marilyn Monroe,
42:17
Speaker 1: back and forth. You may not get the qualities you
42:20
Speaker 1: want from each of the sires of the of the horse. Yeah,
42:24
Speaker 1: you may get the worst qualities of both. So you know,
42:27
Speaker 1: if you uh, if it was one guy explained to me,
42:28
Speaker 1: it's like getting like that perfect heart in the wrong
42:32
Speaker 1: um horse could be like having of them mentioned Ferrari
42:34
Speaker 1: and a super U. So it's it's really hard to predict.
42:39
Speaker 1: So this is why that chapter is about about modern
42:41
Speaker 1: portfolio theory. By the way, that that is the super
42:44
Speaker 1: super U w r X. They've done that and it's
42:47
Speaker 1: been a very successful car. I don't know anything about cars,
42:50
Speaker 1: so but that was really that was really a fascinating discussion,
42:53
Speaker 1: and I I really enjoyed that last question about the book.
42:57
Speaker 1: Anything else sort of stood out it is Wow, that
43:01
Speaker 1: was really weird and unusual that I was not expected.
43:05
Speaker 1: You know, there was every chapter sort of I guess
43:08
Speaker 1: had those moments. I mean there were certainly when the
43:11
Speaker 1: time I spent following around the paparazzi, I'm like, also
43:14
Speaker 1: a fascinating story. This is weird. You know, I was
43:17
Speaker 1: telling someone would say, you know, as I'm like crouching
43:19
Speaker 1: behind a garbage can waiting for Alec Baldwin, I'm like,
43:22
Speaker 1: this is just not what I expected when I went
43:23
Speaker 1: to go out school, you know, to end up here
43:26
Speaker 1: of all places. But you know again, they also have
43:28
Speaker 1: a fascinating risk story that's going on behind the scenes.
43:31
Speaker 1: You would never know because, as you can imagine, they
43:33
Speaker 1: faced just crazy amounts of idiosyncratic risk. At the risk
43:37
Speaker 1: that you're going to get that one money shot in
43:39
Speaker 1: any one day is so large. They have to form
43:43
Speaker 1: these complex alliances to share tips and sometimes royalties. It's
43:47
Speaker 1: especially its pooling, so you're getting rid of your idiosyncratic risk.
43:50
Speaker 1: But because all the money in celebrity photography is from
43:52
Speaker 1: getting an exclusive, they also have this incentive to always
43:55
Speaker 1: cheat to These alliances are inherently very unstable, so they're
43:59
Speaker 1: always reef warming and breaking up these alliances, so they
44:02
Speaker 1: all hate each other. So this is something you see
44:04
Speaker 1: the paparazzi on the street and you're like, this is
44:07
Speaker 1: a much more interesting story that's going on with this
44:09
Speaker 1: this lineup of paparazzi than you would ever know. Then
44:12
Speaker 1: the paparazzi a more interesting than catching a celebrity takes
44:15
Speaker 1: their kid out for ice cream. Yeah, they'd always be surprised.
44:18
Speaker 1: Can you me wait for these celebrities for like six
44:20
Speaker 1: or eight hours and after maybe an hour or two.
44:22
Speaker 1: I'll just get bored and I'm like, I've had a
44:23
Speaker 1: good story here. I'm gonna go home. And they'd be shocked.
44:26
Speaker 1: They're like, but she has an ampauty. I'm like, well,
44:28
Speaker 1: I'm here for supermodel g who was friends with somebody else?
44:32
Speaker 1: Want that? That's how suddenly she blew up on on Instagram. Yeah. Well,
44:38
Speaker 1: the celebrities who do well with the paparazzi also play
44:41
Speaker 1: the game with them. Huh. Quite interesting. You You also
44:45
Speaker 1: have been writing regularly on Vox for some time, and
44:50
Speaker 1: and some of the columns you've done sort of tangentially
44:56
Speaker 1: involved risk in surprising ways. So everybody today is focused
45:02
Speaker 1: on the Amazon HQ two disaster that blew up earlier
45:06
Speaker 1: this year. Um, but but you looked at it from
45:10
Speaker 1: the context of the US has a talent problem and
45:14
Speaker 1: that presents a risk. Two corporations explain that. Well, so
45:20
Speaker 1: this is as the Richard Florida argument that you need,
45:23
Speaker 1: you know, anyway you think anyone would want to work
45:25
Speaker 1: for Amazon. They still it's the the competition for sort
45:29
Speaker 1: of really good talent is still very stiff, and it
45:32
Speaker 1: is does occur globally. And we're talking about engineers and programmers,
45:36
Speaker 1: not necessarily the surfs that they have enslaved in their
45:40
Speaker 1: in their warehouse. Yeah, on the high skill tech workers.
45:43
Speaker 1: I mean, they're kings of the labor market and they
45:46
Speaker 1: compete a lot for it, which is one of the
45:47
Speaker 1: reasons why Amazon probably wanted to come to New York.
45:50
Speaker 1: It wasn't just the tax incentives. It was that you
45:53
Speaker 1: could get talent who wanted to move here. It's really
45:55
Speaker 1: hard to get a cluster of talented young people to
45:58
Speaker 1: want to move to, uh, the middle of the country,
46:02
Speaker 1: and that's why Brooklyn is so hot these days. Yeah. Well,
46:04
Speaker 1: and you can see why because if you are talented,
46:07
Speaker 1: I mean human capital, you know, is something you have
46:10
Speaker 1: to work towards your whole career. You don't just go
46:12
Speaker 1: to Harvard and then you're just set for life. You
46:14
Speaker 1: have to manage a network. You have to keep your
46:18
Speaker 1: skills sharp, and that's why you want to be around
46:20
Speaker 1: and not just be limited to your own company, be
46:23
Speaker 1: around other people, intelligent companies. That way, you keep your
46:26
Speaker 1: skills fresh. You have the option of changing jobs. That's
46:29
Speaker 1: always a very valuable option. I mean, if if Amazon
46:32
Speaker 1: moved to a place where there were no other good jobs.
46:35
Speaker 1: You're kind of stuck at Amazon and you give up
46:36
Speaker 1: the option of job switching, that's you have to compensate
46:39
Speaker 1: people for that. Towns are problematic for that reason. Yeah,
46:42
Speaker 1: I mean it worked before when you have people who
46:45
Speaker 1: are more middle skill. And also back before when you
46:48
Speaker 1: had technology was such before where the skills you would
46:52
Speaker 1: learn would be very idustocratic to the company you worked for,
46:54
Speaker 1: and now they're very transferable exactly. So if you want
46:57
Speaker 1: to maintain competitive competitive really in the labor market, you
47:02
Speaker 1: have to be part of sort of these clusters of
47:04
Speaker 1: people that allow you to move around. And and Google
47:07
Speaker 1: announced they're doubling their New York workforce from seven thousand
47:10
Speaker 1: and fourteen thousand. Apple has dramatically expanded its presence. So
47:14
Speaker 1: if you're an Amazon work or theoretically in New York,
47:17
Speaker 1: they're competing for your skills with some of the biggest
47:20
Speaker 1: companies in the world. Yeah, but and you know, they
47:23
Speaker 1: don't like the ice work for a company that was
47:25
Speaker 1: far outside my cluster, and they kept trying to get
47:28
Speaker 1: me to move there, And I'm like, but you're asking
47:30
Speaker 1: me to give up a very valuable option. You're gonna
47:32
Speaker 1: have to compensate me for it. That never really resonated
47:34
Speaker 1: with them. But um, it seems counterintuitive that Amazon would
47:39
Speaker 1: want to be close to their job competition, but it's
47:41
Speaker 1: also what they need to do to attract talent. It's
47:43
Speaker 1: why cities haven't disappeared despite the best predictions of people
47:47
Speaker 1: half a century ago. What about I thought this was
47:50
Speaker 1: an interesting headline. What is the real reason people regret
47:54
Speaker 1: not saving more risk? So, you know, people think about
48:00
Speaker 1: saving as something that they're gonna, you know, often for
48:02
Speaker 1: something that's gonna happen in the future that they want
48:04
Speaker 1: to do. But when they looked at people at the
48:06
Speaker 1: end of their life or in retirement, the reason why
48:09
Speaker 1: they think they wish had more money. They don't wish
48:11
Speaker 1: they could have gone on better vacations when they retired.
48:13
Speaker 1: They wish they could have a better lifestyle. It was
48:15
Speaker 1: I didn't realize that divorce would blow all my savings.
48:18
Speaker 1: It's not a luxury goal. It's a Hey, things happen
48:22
Speaker 1: that are just unexpected and I failed to plan for that. Yeah,
48:25
Speaker 1: and people, I mean the the like FOURG dollar for
48:27
Speaker 1: emergency saving figure is a little controversial, but I don't
48:30
Speaker 1: think it is a stretch to say people really don't
48:32
Speaker 1: make emergency savings enough of a priority. Right, that's pretty fair. Um,
48:36
Speaker 1: let's talk about charities. What's the best way to get
48:39
Speaker 1: people to donate to charity? So I think it was
48:41
Speaker 1: John List, who I mentioned earlier, did a study of
48:44
Speaker 1: the of Alaska. You know, Alaska is just right for
48:47
Speaker 1: a lot of economic studies because they get the dividend
48:49
Speaker 1: payment from the from all the oil reserves that they're
48:53
Speaker 1: selling to or licensing and leasing out to the big
48:56
Speaker 1: public oil companies. Yeah, so they have a program where
48:59
Speaker 1: you can give some of that money to charity. And
49:01
Speaker 1: they had they did a study where you they they
49:05
Speaker 1: came with a card and one said, you know, warm
49:08
Speaker 1: your heart. The other is like improve Alaska. On the
49:10
Speaker 1: other just was nothing. And they found the warm the
49:12
Speaker 1: heart group donated the most and we're most likely to donate. So,
49:15
Speaker 1: in other words, they made the charitable donation about the
49:19
Speaker 1: person as opposed to the recipient exactly. So appeal appeal
49:23
Speaker 1: to ego. So over the past year or two, we've
49:26
Speaker 1: gone through this giant me too movement. Um, and I
49:31
Speaker 1: know that amongst my colleagues we've had debates about what
49:36
Speaker 1: do you do with an artist who turns out to
49:39
Speaker 1: be a less than um nice guy. Uh. And the
49:44
Speaker 1: Michael Jackson HBO documentary just came out. I have yet
49:47
Speaker 1: to see it, but I know Michael Jackson fans are
49:50
Speaker 1: kind of split. Some are defending him and others are
49:53
Speaker 1: a little bereft. I was always a big fan of
49:55
Speaker 1: Louis c K. I'm not happy with with what he did.
49:59
Speaker 1: Go down the list, you know, it ranges from offensive
50:03
Speaker 1: to criminal and everything in between. You raised the question,
50:08
Speaker 1: what do you do when a brilliant economist is accused
50:11
Speaker 1: of sexually harassing his research assistance? So what's the solution? Well,
50:17
Speaker 1: I don't know because the thing about I was writing
50:20
Speaker 1: about Rolling Fire, who has been accused but not found guilty. Um.
50:24
Speaker 1: But there He's been accused by a number of research assistants,
50:28
Speaker 1: some of whom have incredibly claimed that he awarded their
50:32
Speaker 1: careers for They're refusing to succumb to his charms. So
50:38
Speaker 1: which is hard. It's a terrible way to say. Is
50:40
Speaker 1: this is terrible? But and in his what he always
50:44
Speaker 1: defended himself with and this is a valid point, although
50:46
Speaker 1: doesn't excuse his behavior in any way. Is I do
50:49
Speaker 1: research that socially critical. He was the economist who was
50:54
Speaker 1: leading the charge of understanding why a lot of minority
50:57
Speaker 1: students don't do well in school. So this it's important.
51:00
Speaker 1: But what does that have to do with whether or
51:02
Speaker 1: not he's a pig. So here's the question is if
51:05
Speaker 1: someone is doing research that's socially important, are supposed they're
51:08
Speaker 1: on the verge of a cure for cancer and we
51:10
Speaker 1: find out they're a pig, you know, do we should
51:13
Speaker 1: they still have a career? You know, if there's all
51:15
Speaker 1: these other positive externalities for society. I could so you
51:20
Speaker 1: just had the bishop six years prison sentence in Australia.
51:24
Speaker 1: You could see throughout history that the powerful will say, look,
51:28
Speaker 1: there have been some bad behavior, but we're literally doing
51:31
Speaker 1: God's work and therefore we should be exempt from this. Um.
51:37
Speaker 1: You know, pick a person. Um. John Lennon was supposed
51:43
Speaker 1: to be a bit of a hardass, and you don't
51:46
Speaker 1: want to go through the history of literature to find
51:48
Speaker 1: out how big a jerk half the writers out there are.
51:52
Speaker 1: If we but and then artists and paintings and things
51:56
Speaker 1: like that, if we're gonna have a moral purity test
51:59
Speaker 1: on that stuff, your museums will be empty and there'll
52:01
Speaker 1: be nothing on the air waves. However, it doesn't mean
52:05
Speaker 1: they shouldn't suffer the ramifications from So should we separate
52:08
Speaker 1: the value of the art from the artist. But that
52:11
Speaker 1: doesn't give them a free pass in their career, not
52:13
Speaker 1: at all. And I didn't honestly know the answer, so
52:15
Speaker 1: spoke to philosopher, which was just I love talking to
52:18
Speaker 1: philosophers because they always remind you know nothing about anything um.
52:23
Speaker 1: And he pointed out that if you are doing important work,
52:26
Speaker 1: like scientific works, but either economics or hard science, and
52:30
Speaker 1: you're on the verge of really making the world important,
52:32
Speaker 1: it's actually the more the pressure on you to behave
52:35
Speaker 1: well is even higher because you're letting down especially no
52:38
Speaker 1: good work happens alone. You're letting down everyone's effort, and
52:41
Speaker 1: it's you know, not everyone gets the opportunity and resources
52:44
Speaker 1: to perform research like this, and so if you're threatening
52:48
Speaker 1: it with your behavior, it actually should be held to
52:50
Speaker 1: an even higher standard. So the question is, according to
52:54
Speaker 1: the philosopher, then once this bad behavior is identified, do
52:58
Speaker 1: you stop the person from doing research or do you
53:02
Speaker 1: just put a higher level of HR scrutiny in and
53:05
Speaker 1: sit that person down and say you were putting millions
53:08
Speaker 1: of people's lives at risk because you're this close to
53:10
Speaker 1: a cure for cancer. And if you can't keep your
53:12
Speaker 1: hands off your research assistant, here's what's going to happen.
53:15
Speaker 1: I mean, how do you how do you resolve that? Well,
53:17
Speaker 1: he was more in favor of just jettising them, I know,
53:21
Speaker 1: jetting the assistance. No, the researcher, Um, the philosopher said
53:27
Speaker 1: just fire the guy. Yeah, it's like whoever it is. Yeah,
53:29
Speaker 1: he's like, we need, we need to have standards, and
53:31
Speaker 1: you know, as he said, you know, yeah we might
53:34
Speaker 1: have we might have a longer wait before a cure
53:37
Speaker 1: for cancer. But he's like, but what about the behavior
53:40
Speaker 1: he did all along? Maybe some would have come up
53:41
Speaker 1: with a cure for cancer even earlier and he discouraged them,
53:44
Speaker 1: and maybe we'd have had a cancer fifteen years ago
53:47
Speaker 1: his behavior. So so you can't use as an excuse.
53:51
Speaker 1: Bad behavior has to be punished, because you don't know
53:53
Speaker 1: what sort of that's the I love a classic counterfaction
53:57
Speaker 1: on that. That's a perfect one. Um, last one before
54:02
Speaker 1: we get to our favorite questions. Actually there are two here.
54:05
Speaker 1: They're fascinating. Um, let's start with this one. Are millennials
54:09
Speaker 1: the wealthiest generation? They could be I think, you know,
54:13
Speaker 1: I'm tired eventually maybe, but today they certainly don't feel
54:17
Speaker 1: that way. Well, I'm a life cyclist, right, so when
54:19
Speaker 1: I think about wealth lifecle, I think about all your assets.
54:27
Speaker 1: So I think of human capital, which in life cycle
54:31
Speaker 1: economics is the value of your future earnings. So for me,
54:34
Speaker 1: the idea that people don't millennials don't own houses and
54:38
Speaker 1: instead they have student debt doesn't seem to me like
54:41
Speaker 1: they've made a huge investment in their future earnings and education.
54:45
Speaker 1: It's not perfect. Is correlated with much higher lifetime earnings, true,
54:49
Speaker 1: but the issue that they've appropriately raised you're an n
54:53
Speaker 1: y U. It's the most expensive tuition in America sixty
54:56
Speaker 1: three thousand dollars or something insane a year. UM. I
55:00
Speaker 1: went to a state school. I want Stony Brook. My
55:02
Speaker 1: tuition was four fifty semester. Even today it's like five
55:06
Speaker 1: thousand a semester, which seems like a bargain. Um. Students
55:10
Speaker 1: today are paying prices for education that are just so
55:15
Speaker 1: vastly out of whack with what they were like forty fifty,
55:20
Speaker 1: sixty years or even twenty five years ago, it was
55:23
Speaker 1: much much cheaper relative to the total cost of living
55:27
Speaker 1: to go to school. So are they going to get
55:30
Speaker 1: the same return on their investment in education or have
55:34
Speaker 1: things just completely run them up? Well, definitely they're getting Uh. Well,
55:39
Speaker 1: it's hard to say. I mean, we can't predict the future.
55:41
Speaker 1: I mean, so far it does seem I mean, I'm
55:44
Speaker 1: not sure if there's much of value in going to
55:46
Speaker 1: school over Stonybrook. Probably you're you're gonna do just as
55:51
Speaker 1: well going to a good public school. Yes, I couldn't
55:54
Speaker 1: get into stony Brook today with my grades. Back then
55:58
Speaker 1: I was in a little bit of the value between
56:01
Speaker 1: the boomers and the gen xers. And the same thing
56:03
Speaker 1: with grad school. I couldn't get into grad school. Uh
56:06
Speaker 1: with to my grad school. Uh, y you that I
56:10
Speaker 1: got into way back when. So some of it's just
56:13
Speaker 1: dumb luck when you're born. But the other aspect of
56:16
Speaker 1: is what, um, what sort of return are are are
56:21
Speaker 1: these current graduates? What should they expect going forward? Explain
56:25
Speaker 1: why you say potentially they're the wealthiest generation. Well, I
56:28
Speaker 1: think when people look at the outcome firm education, they
56:32
Speaker 1: are too shortsighted because you don't often like I mean,
56:35
Speaker 1: I didn't enter the labor market really officially until I
56:38
Speaker 1: finished grad school was almost thirty. And my earnings well,
56:41
Speaker 1: actually my first job is unpaid. Um, you know, weren't
56:45
Speaker 1: that great. But when you're looking, when you think of
56:46
Speaker 1: the payoff from human capital, it's your lifetime earnings. And
56:50
Speaker 1: often out of school, you're gonna earn less than someone
56:52
Speaker 1: who you know didn't go to college. But the trajectory
56:55
Speaker 1: of your earnings as follows a much steeper path. So
56:57
Speaker 1: they've they've been working for a few years, they have
57:00
Speaker 1: of a series of raises. You're starting up below them,
57:03
Speaker 1: but you're gonna as a college or grad student, you're
57:06
Speaker 1: gonna accelerate way past them. And you also face less risk.
57:09
Speaker 1: I mean, the unemployment rates for college grads is much
57:11
Speaker 1: much lower. I'm sensing a theme with you. I don't
57:13
Speaker 1: know what it is, so I only have you for
57:15
Speaker 1: another ten minutes. Let's jump to my favorite questions. These
57:19
Speaker 1: are what we ask all of our guests. Um, tell
57:23
Speaker 1: us the first car you ever owned? Year making model? Well,
57:26
Speaker 1: I've never actually technically owned a car, but in high
57:29
Speaker 1: school I did drive Inde Okay, I love that car.
57:33
Speaker 1: Oh it lasts when two thousand miles, which in the
57:35
Speaker 1: nineties was a really big deal. That was a little
57:38
Speaker 1: two seater. They were you couldn't you couldn't destroy them.
57:41
Speaker 1: It wasn't the fastest car in the world. You could
57:43
Speaker 1: get them with a stick shift, which was nice back
57:45
Speaker 1: then that it was a stick st Oh there you go,
57:48
Speaker 1: so you drive by the way Today. I call stick
57:50
Speaker 1: shifts millennial anti theft divience because that's what they effectively are.
57:55
Speaker 1: So what's the most important thing we don't know about
57:59
Speaker 1: Alison shre ag Um, well, you wouldn't know from the
58:03
Speaker 1: book title. But I'm just really a risk nerd. I mean,
58:06
Speaker 1: I guess I don't know if that's not surprising. Um No,
58:08
Speaker 1: that's not a shocker. You read the book and it's
58:11
Speaker 1: like this is it should say Alison Schraeger comma PhD
58:17
Speaker 1: risk nerd. So that that's not a big surprise that
58:20
Speaker 1: you think of yourself as a risk nerd. Maybe that's
58:23
Speaker 1: a well, I guess. I also I wasn't always Like
58:25
Speaker 1: in college, I had a job in Alaska selling incense.
58:30
Speaker 1: Incense in Alaska? Why would they need incense in Alaska?
58:34
Speaker 1: Is there that much you would think of if anything
58:36
Speaker 1: smells like the Great Outdoor was a fishing village. Oh
58:40
Speaker 1: say no more. Yeah, that's very that's very funny. So
58:44
Speaker 1: I know the answer to this, but I have to
58:46
Speaker 1: ask who are your early mentors. Obviously Bob Merton, So
58:50
Speaker 1: tell us a little bit about what he taught you,
58:52
Speaker 1: because he's clearly fascinating and storied person. Well, he just
58:57
Speaker 1: taught me finance, which you know I went to I
59:00
Speaker 1: did an eCOM PhD, so it wasn't like I wasn't
59:02
Speaker 1: exposed to it, but my program it was very empirical,
59:06
Speaker 1: So I just thought financial economists just crunch data is
59:09
Speaker 1: looking for deviations of the efficient markets hypothesis, and I
59:12
Speaker 1: thought it was not very interesting and sort of corrupt.
59:15
Speaker 1: But then when I met Bob and learned what financial
59:18
Speaker 1: theory was, it really turned me onto theory too. In
59:20
Speaker 1: a way. I was always much more empirically oriented of
59:23
Speaker 1: how to think about the world and how to see
59:25
Speaker 1: the world in terms of a risk lens, and how
59:29
Speaker 1: to see risk problems everywhere and how they're driving all markets,
59:32
Speaker 1: not just financial markets. So he was really like your
59:35
Speaker 1: post doc work. He was. It was a very sort
59:37
Speaker 1: of long, intense postdoc I had good training as an
59:40
Speaker 1: as a graduate student too, but it sort of readied
59:43
Speaker 1: me to really fully embrace all of his lessons. So
59:46
Speaker 1: let's talk about investors and others who influenced the way
59:50
Speaker 1: you look at the world of risk. Who who do
59:52
Speaker 1: you consider to be UM important thinkers that affected the
59:57
Speaker 1: way you perceived the world um, investors, investors, or or anyone.
1:00:01
Speaker 1: Really you mentioned Peter Bernstein, who who affected the way
1:00:05
Speaker 1: you perceive UM the world of risk? Certainly? Peter Bernstein
1:00:09
Speaker 1: also said I worked at d f A for a
1:00:10
Speaker 1: number of years. So David Booth, Um, when did you
1:00:14
Speaker 1: work at d f A two thousand ten? Oh? So
1:00:20
Speaker 1: really that was in fairly They were already fairly developed
1:00:23
Speaker 1: and running hundreds of billions of dollars by then, and
1:00:25
Speaker 1: it was it was a great experience for me because
1:00:27
Speaker 1: I was working on a project that they were all
1:00:29
Speaker 1: very interested in. So every two weeks I would have
1:00:32
Speaker 1: these meetings with Gene Fama, Ken French Merton, David booth
1:00:36
Speaker 1: and EDWARDA. Rippetto who is the U and we would
1:00:39
Speaker 1: just because we were having to calibrate this very complicated
1:00:42
Speaker 1: interest rate model I was working on, and we would
1:00:45
Speaker 1: just debate the path of interest rates, and I learned
1:00:48
Speaker 1: That's where I learned a lot of my finance was
1:00:49
Speaker 1: just seeing obviously Geene and Bob go at it and
1:00:52
Speaker 1: you know, with the influences of David Booth, who's just
1:00:55
Speaker 1: a real market guy. And this was pre uh will
1:00:59
Speaker 1: you when when Fama won the Nobel was just before
1:01:06
Speaker 1: so right before quite quite. That's some collection of mentors
1:01:10
Speaker 1: and inflot It's interesting because they're smart in such different ways. Huh.
1:01:15
Speaker 1: So we mentioned Um Against the Gods. What are some
1:01:20
Speaker 1: of your other favorite books? Well, that obviously anything in
1:01:23
Speaker 1: Peter Bernstein writes, but I also just I love memoirs. Really, yeah,
1:01:27
Speaker 1: give us an example. I love just kids like Patti Smith.
1:01:30
Speaker 1: I just read Educated, which I hate write loving popular books,
1:01:33
Speaker 1: but I really loved that wrote Educated. Was it, Tara Westover?
1:01:38
Speaker 1: Don't ask me. Yeah, it's just it's outside of mine.
1:01:40
Speaker 1: It's just just so beautifully written. Oh no kidding. What
1:01:44
Speaker 1: What other memoirs have you read that really resonated with you?
1:01:47
Speaker 1: By the way, I read two books on vacation. Yours
1:01:50
Speaker 1: was one of them, and then McCullough's Um The Right
1:01:54
Speaker 1: Brothers was quite fascinating. If you're if you're interested in
1:01:58
Speaker 1: flight and or um, that's really less of a memoir
1:02:02
Speaker 1: more of a biography. All right, skip that, give us
1:02:05
Speaker 1: one more book. So you mentioned you mentioned two, Um
1:02:09
Speaker 1: hit hit us with the third. By the way, this
1:02:11
Speaker 1: is the question. I get more email about this point.
1:02:13
Speaker 1: What was that book? The person I mentioned on? I
1:02:16
Speaker 1: get more email about this than anything. It's a stressful
1:02:18
Speaker 1: question because I feel like it's so personal and revealing. Yes, um,
1:02:23
Speaker 1: and what makes it so good? And especially because I
1:02:25
Speaker 1: read a lot of crap because you know you finished crap.
1:02:29
Speaker 1: You know. When I was doing book research, I had
1:02:32
Speaker 1: this idea that Chris Jenner was this risk mastermind because
1:02:34
Speaker 1: look at what she's built. And I so I read
1:02:37
Speaker 1: her biography thinking maybe I'll include her, and it turns
1:02:39
Speaker 1: out she didn't have a good risk strategy, so I
1:02:41
Speaker 1: couldn't um right place, right time? Is that all about?
1:02:44
Speaker 1: She takes advantage? I mean, and it's like this extreme
1:02:47
Speaker 1: level of diversification where she literally any opportunity that comes
1:02:50
Speaker 1: her away, she seizes on it and she does work hard.
1:02:53
Speaker 1: There's nothing like strategic. It's sort of or if it's
1:02:55
Speaker 1: sort of as well, like a Donald Trump thing. It's
1:02:57
Speaker 1: like well, if this blows up, I have something else
1:02:59
Speaker 1: to distry people with, because I've got ninety gazillion things going.
1:03:02
Speaker 1: So it's like we have a debit card that pour
1:03:04
Speaker 1: people off. Oh look, here's a sex tape, you know.
1:03:07
Speaker 1: But I remember I was reading her book on the
1:03:10
Speaker 1: subway and I had this realization, like I've never read
1:03:13
Speaker 1: Anna Karna, but I've read this. Um. I'm gonna say
1:03:17
Speaker 1: you probably picked the wrong one of the two, just
1:03:21
Speaker 1: just to hypothesize it. Um. Alright, so here's here's a
1:03:25
Speaker 1: question that also is uh personal and probing. Tell us
1:03:29
Speaker 1: about a time you failed and what you learned from
1:03:31
Speaker 1: the experience. And by the way, you detailed some personal failures. Yeah,
1:03:36
Speaker 1: I fell a lot. You don't. You don't show away
1:03:38
Speaker 1: from that, No, I mean my first year of grad school,
1:03:40
Speaker 1: I think I failed almost all my comps. I mean
1:03:42
Speaker 1: largely because I was doing a quantitative PhD with no
1:03:45
Speaker 1: math backgrounds UM. And it was the hardest failure I've
1:03:48
Speaker 1: ever gone through because it was the biggest intellectual achievement
1:03:51
Speaker 1: I'd ever done, which is I taught myself six years
1:03:54
Speaker 1: worth of math myself in my free time. My first
1:03:57
Speaker 1: year of grad school, I never intellectually had grown so
1:04:00
Speaker 1: much from anything and never achieved so much. And I still,
1:04:03
Speaker 1: you know, at the end of the day, you're still
1:04:04
Speaker 1: taking a math exam and you're being judged against Korean
1:04:07
Speaker 1: math champion. No matter how much math you learned quickly,
1:04:11
Speaker 1: you're not going to stack up, so you're going to fail.
1:04:14
Speaker 1: Meaning the rest of the student base was hardcore math people. Yeah,
1:04:19
Speaker 1: and I was just reading math textbooks in my free time,
1:04:21
Speaker 1: which wasn't all much. I wasn't sleeping. I was just reading,
1:04:25
Speaker 1: working through entire math textbooks to try to do my homework.
1:04:28
Speaker 1: That sounds horrible, and yeah, it was horrible. I was
1:04:30
Speaker 1: such an unhappy person. I kind of started developing weird
1:04:33
Speaker 1: social tics. And then I went through all of this,
1:04:36
Speaker 1: never slept for a year, just working through math textbooks,
1:04:38
Speaker 1: and I still just failed everything. And I mean that
1:04:41
Speaker 1: was obviously just I was devastated. I'm gonna blame the
1:04:45
Speaker 1: lack of sleep because that affects God want to function it,
1:04:47
Speaker 1: you know. And it was like I had time to
1:04:50
Speaker 1: get to retake them. And when I got to finally
1:04:52
Speaker 1: rest and have all that knowledge should have marinate in me,
1:04:56
Speaker 1: I realized how much I knew and I mean, I
1:04:58
Speaker 1: think what I learned from that experience is, you know,
1:05:02
Speaker 1: if you really want something, you know, I mean, there's
1:05:04
Speaker 1: a point you have to cut cut loose, you just
1:05:07
Speaker 1: you you can't take the first failure because you know,
1:05:10
Speaker 1: no one remembers that you failed your first year exam.
1:05:14
Speaker 1: All they remembers that you graduated. Huh. That's that's an
1:05:18
Speaker 1: interesting observation. So now let me ask you the flip question.
1:05:22
Speaker 1: What do you do for fun? When do you do
1:05:23
Speaker 1: when you're not failing math exams? I play bridge? Really yeah,
1:05:28
Speaker 1: my mother plays bridge, my wife plays bridge. This has
1:05:31
Speaker 1: become like a giant thing. Now I'm part of this
1:05:34
Speaker 1: great bridge group of all these intellectuals. There's a Field
1:05:38
Speaker 1: medal winner, last of the last one, but mixed it.
1:05:40
Speaker 1: But it's just a very humble, low key group. H
1:05:43
Speaker 1: really quite quite interesting. Um what are you most excited
1:05:47
Speaker 1: about in the future direction of the risk industry? I
1:05:52
Speaker 1: hank technology. I mean everyone else is sort of scared
1:05:56
Speaker 1: of it, but I think it's gonna sort of take
1:05:58
Speaker 1: us to some interesting places. Interest interesting. I don't necessarily disagree. Um,
1:06:04
Speaker 1: So if a millennial or recent college student came up
1:06:06
Speaker 1: to you and asked you for career advice about going
1:06:10
Speaker 1: into economics, risk or academia. What what sort of advice
1:06:15
Speaker 1: would you give them? Find the smartest person you can
1:06:17
Speaker 1: and attach yourself to them. It's funny you say that
1:06:20
Speaker 1: that was my farthest advice to me when I went
1:06:22
Speaker 1: to gratz. Did it work? Um? More or less? Actually
1:06:26
Speaker 1: it began as joining track in high school. Find the
1:06:30
Speaker 1: fastest guy, keep up with him. And then when I
1:06:33
Speaker 1: went to grad school, he said, Hey, remember the advice
1:06:35
Speaker 1: I gave you about track. I'm going to give you
1:06:38
Speaker 1: the same exact advice, find the smartest And I'm like, Dad,
1:06:41
Speaker 1: I'm way ahead of you. I already I already had
1:06:43
Speaker 1: thought about that. So how does that manifest itself for
1:06:47
Speaker 1: millennial or college graduate? How would they actually go about
1:06:50
Speaker 1: doing that? When you're in a job, I said, find
1:06:52
Speaker 1: the smartest person in the room and it should never
1:06:54
Speaker 1: be you, um or there's something wrong um, and try
1:06:59
Speaker 1: to get them to mentor you and be open to it.
1:07:02
Speaker 1: And you know, anyway, contrary all these perceptions of millennials
1:07:04
Speaker 1: being no it alls, I find that the millennials I
1:07:06
Speaker 1: work with are always looking to learn. Um. Maybe I've
1:07:10
Speaker 1: just been lucky. I don't know if no it alls
1:07:11
Speaker 1: is the right, uh right description. They're definitely hard working,
1:07:16
Speaker 1: and they have areas that they have great strengths in,
1:07:20
Speaker 1: and I think the the biggest knock is their weaknesses.
1:07:23
Speaker 1: They're not interested in working on UM. But I think
1:07:28
Speaker 1: they've gotten a bad having worked with them for five
1:07:31
Speaker 1: years in a firm, H do you think they've gotten
1:07:34
Speaker 1: a bad rap. Yeah. I think they're the same as
1:07:36
Speaker 1: every other generation. You got some noisy outliers, and I
1:07:39
Speaker 1: think with social media the noisy outliers voices are amplified.
1:07:42
Speaker 1: That's a great observation. I think on average, they're just
1:07:44
Speaker 1: like everyone else. That that makes perfect sense. UM. Although
1:07:48
Speaker 1: there they grew up in such a unique like think
1:07:52
Speaker 1: about what you grew up in and then what people
1:07:54
Speaker 1: born in ten or twenty years after you growing up
1:07:56
Speaker 1: in technology is this thing that's kind of cool on
1:07:59
Speaker 1: this id. They're immersed in it from birth. It's a
1:08:02
Speaker 1: whole different headspace. So yeah, I mean it's it's very different.
1:08:06
Speaker 1: I think their brains probably formed differently to some degree.
1:08:08
Speaker 1: But again and again, I think ultimately even college students,
1:08:11
Speaker 1: the ones I've interacted with from teaching are also really
1:08:14
Speaker 1: open to debate in new ideas and even uncomfortable ideas. Again,
1:08:18
Speaker 1: it's just the noisy outliers. That's that's quite fascinating. Um
1:08:23
Speaker 1: and our final question, what do you know about the
1:08:26
Speaker 1: world of risk and economics today that you wish you
1:08:30
Speaker 1: knew fifteen twenty years ago when you were just graduating. Well,
1:08:35
Speaker 1: that's when I was starting grad school, and you know,
1:08:39
Speaker 1: I chose macro, and macro traditionally has not incorporated risk
1:08:44
Speaker 1: at all. I didn't realize how fundamental that it was
1:08:47
Speaker 1: to the economy. I thought, you know, I was studying
1:08:49
Speaker 1: sort of either the neo classical Kensie or new Kynsian models,
1:08:52
Speaker 1: where you know, if you do government spending, this is
1:08:55
Speaker 1: what happens. Where if I was doing finance, I would
1:08:57
Speaker 1: think of how does that impact markets? What are the
1:08:59
Speaker 1: range of things that happened. So I wish I knew
1:09:02
Speaker 1: about risk because I didn't really, So, Matt, I'm shocked
1:09:05
Speaker 1: to even hear that I don't have an economics background.
1:09:09
Speaker 1: It's just I play an economist on TV. How how
1:09:14
Speaker 1: is it possible that macro economics does not incorporate any
1:09:19
Speaker 1: analysis or study of risk? That seems shocking. It is
1:09:23
Speaker 1: is actually, you know, people don't talk about this because
1:09:25
Speaker 1: other things get attention. But I just went to a
1:09:28
Speaker 1: conference two or three weeks ago that Lars Hanson and
1:09:30
Speaker 1: Antilope put on about how can we incorporate finance into
1:09:34
Speaker 1: macro how can we put risk into macro models? And
1:09:37
Speaker 1: I think this was amongst academics, the big takeaway from
1:09:39
Speaker 1: the financial crisis. Then law macro models have no meaningful
1:09:43
Speaker 1: rule for financial sector, so how are you gonna even
1:09:45
Speaker 1: capture systemic risk? So this is really where like hardcore economists,
1:09:50
Speaker 1: but they've been working on post crisis, and it's it's
1:09:52
Speaker 1: a hard problem because any economic model has to make
1:09:55
Speaker 1: choices and once you bring risk in, they get more complicated.
1:09:58
Speaker 1: This is a controversial thing to say. I mean, I'm
1:10:00
Speaker 1: not gonna sound sexy to most people, but to small
1:10:03
Speaker 1: group economist is I now feel strongly I don't think
1:10:06
Speaker 1: anyone agrees with me that finance basic finance should be
1:10:10
Speaker 1: part of basic economics training because it is such a
1:10:13
Speaker 1: fundamental part of understanding how the economy works. Meaning basic
1:10:16
Speaker 1: finance plus an understanding of risk. Well yeah, well you
1:10:19
Speaker 1: you get a basic understanding of risk if you learn
1:10:22
Speaker 1: finance because finance is all the principles of risk, because
1:10:25
Speaker 1: finance and economics is just howcom study risk. It just
1:10:28
Speaker 1: happens to be in financial markets because that's where the
1:10:30
Speaker 1: data is. So I think it should be, you know,
1:10:33
Speaker 1: undergraduate macro micro finance. Quite fascinating. We have been speaking
1:10:39
Speaker 1: to Alison Schraeger. She is the author of An Economist
1:10:44
Speaker 1: Walks Into a Brothel, as well as co founder of
1:10:48
Speaker 1: the life Cycle Financial Partners UH and an adject professor
1:10:53
Speaker 1: at n y U and journalists at Courts. If you
1:10:58
Speaker 1: enjoy this conversation, we'll be sure look up an Inch
1:11:00
Speaker 1: or down an inch on Apple iTunes, UH, Stitcher, Overcast,
1:11:04
Speaker 1: Bloomberg dot com, wherever you find your favorite podcast. We
1:11:08
Speaker 1: love your comments, feedback and suggestions right to us at
1:11:13
Speaker 1: m IB podcast at Bloomberg dot net. Be sure and
1:11:16
Speaker 1: go to Apple iTunes and give us a delightful review
1:11:19
Speaker 1: for sharing all this time and information with you. I
1:11:22
Speaker 1: would be remiss if I did not thank the crack
1:11:25
Speaker 1: staff that helps put together UH these weekly conversations UH.
1:11:31
Speaker 1: Attica Valburon is our project manager. Michael Batnick is my
1:11:35
Speaker 1: head of research. I'm Barry Riholts. You've been listening to
1:11:39
Speaker 1: pastors of business on Bloomberg Radio.