Transcript: Allison Schrager


The transcript from this week’s MIB: Allison Schrager, is below.

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BARRY RITHOLTZ, BLOOMBERG HOST: This week on the podcast, I have a special guest. Her name is Allison Schrager, and amongst other things, she is the author of a book that I took with me on vacation and absolutely found intriguing.

My version is just demolished, because I plowed through it on a beach in Turks and Caicos, and really despite everything going on around me I kind of ignored it, and just worked my way through the book.

I love the title, “An Economist Walks into a Brothel,” which really has nothing to do with sex and everything to do with finding ways to do risk reward analysis and really unusual places.

So whether it’s big wave surfing or horse breeding or poker playing or paparazzi, there are all these unusual situations where we don’t really think about the risk reward analysis, but really the details of that have a major impact on how these industries and these individuals progress.

And once you start looking into that, it changes the way you look at everything, from insurance to annuities to hedging to market-based portfolio. Risk permeates everything we do, and most of us just don’t give it enough time and thought to recognize the dangers and the advantages it potentially can afford us.

So if you’re at all interested in, fill in the blank, investing, insurance, understanding risk, understanding with happens in a brothel, from an economic perspective, I think you’re going to find this to be an absolutely fascinating conversation. So with no further ado, my interview with Allison Schrager.

ANNOUNCER: This is “Masters in Business” with Barry Ritholz on Bloomberg Radio.

RITHOLZ: My special guest this week is Allison Schrager. She is an economist and adjunct professor at NYU, a journalist at Quartz, co-founder of LifeCycle Finance Partners, which is a risk advisory firm. She is also the author of “An Economist Walks into a Brothel and Other Unexpected Places to Understand Risk.”

Allison Schrager, welcome to Bloomberg.


RITHOLZ: My pleasure. So let’s talk a little bit about your background. You describe, in the book, making a series of what you later called “risky career decisions,” not exactly sure what you wanted to do. Your assumption was a PhD program in economics; obviously, you’re going to become a professor.

How did that work out?

SCHRAGER: Well, in the end, I think it worked out well for me, but the path was a lot rockier than I would’ve expected. I think, like a lot of people, especially in this day and age, I fell into this idea that more education was just better and it would open up all these doors. And most of time, it does. I think that is normally a good bit, and certainly an economics PhD is a good thing to have in life.

But I had kind of rocky transition when I finished grad school, because I had invested, you know, essentially my whole 20s into learning all these skills and really being cut off from the rest of the world, and then realized what I was investing in was this idea of becoming a professor, and had this realization as I graduated, this is not what I wanted to do at all.

RITHOLZ: So undergrad at Edinburgh –


RITHOLZ: – a PhD at Columbia University. What sort of thesis were you working on there?

SCHRAGER: Really, even when I was, like, 18, I was always really fascinated by retirement, so my PhD thesis was on risk and retirement. So it was – I started around 2000, so this is as DC plans had really taken a foothold in the market, and I was doing some work in U.K. where they were taking over, so really understanding more deeply the risks in defined contribution versus defined benefit pensions.

RITHOLZ: So eventually, you come to the realization, “Hey, I’m not going to be any sort of professor,” and then you happen to have a job interview with a world-famous Nobel Prize-winning economist Robert Martin. What happened with that?

SCHRAGER: Well, I – as I said, I had this hard realization when I was finishing grad school. I didn’t want to be a professor; I didn’t want to be a government bureaucrat, all the things you’re supposed to do with an economics PhD. So I kind of had this burn it all down, do something new attitude, which also turned out to be helpful for the book.

So I was like, “I’m going to do something fun. I’ve just spent my whole 20s, while everyone else is partying, solving a math problem. So I went to The Economist, unpaid, because this was the early days of web journalism.


SCHRAGER: And they would take people who’d never written before to write for the web, back then. And –

RITHOLZ: You get what you pay for, right?

SCHRAGER: Yes. So I was just writing web stuff for The Economist for free with an ecom PhD. and then someone passed my dissertation along to Bob Martin and it turned out retirement was also his main interest. He was working on market solutions to the retirement problem.

RITHOLTZ: So — so let me interrupt you there and ask some questions here because this is really kind of fascinating. You’re wildly overqualified to churn out web based nonsense where you’re not being paid for a website and you know that treat unpaid volunteers not especially well.

And they have the same respect for their content. Who said, I know Allison’s PhD. thesis, let me give this to Bob. He’s busy, he won a Nobel Prize but he’ll like this. How on earth did that come about?

SCHRAGER: A friend of mine who — they had him when he was doing his MBA at Harvard and — because my dissertation was exactly what Bob was doing. Bob was trying to come up with financial models that took the best to (ph) define benefit plans and put them in a divine contribution structure.

And that turns out — you know as said — as much as I said burn it all down, I always had a good dissertation, which thought about risk in a clever way. So once — Bob didn’t know I’d sort of hit bottom career wise.

And you know it just goes to show where some — you feel like something can feel like it totally blew up. I was thinking I just really messed up here. You know I just wasted my — all this time.

And then my paper ended up in front of him. And he was like I really want to do this. He called me in. He’s like if you come work with me I will teach you finance.

RITHOLTZ: Let me tell you when I first was handed a book who’s title was “An Economist Walks into a Brothel,” I’m intrigued. OK. Now your thought is they’re not going in there as a customer or anything like that.

Your thought is what sort of wacky economic data are they getting to be analyzing as an economist looking at the sex trade. It’s a pretty fascinating subject. How did you find your way to Nevada and going to the BunnyRanch?

SCHRAGER: So I wrote a story for courts because I’m — I’ve always been interested in risk. Even as a journalist — you know after I started working with Bob I — before I was a macro economist I became — I learned finance, I’m like everything I know about the economy was wrong.

Risk is a much more rigorous and interesting way to understand the macro economy and every economic problem. So I was apply that in sort of this sort of (inaudible) way as a journalist and I wrote a story about a friend of a friend who was running an online brothel where her value add was screening clients. This is an illegal operation.


SCHRAGER: So when you work illegally you have to screen your clients otherwise — especially these were for submissives specifically so they get — they get tied up so they’re particularly vulnerable. So screening has especially important premium.

So she was being paid this premium to screen them. And I was like well this is pretty cool. So I wrote this story about it. It did super well, as you can imagine. And so I got a call from the BunnyRanch saying if you’re going to be writing about brothels, you should be writing about us.

And I was like well I don’t write about brothels but this is an interesting call so I’m going to continue this. And so I was talked to them and they were — I’m like how does this all work. And they’re like well the women come in and every — we don’t set prices, they negotiate every transaction.

And they — (inaudible) he said and I was like well that’s actually very interesting. So you’re telling me you have women who are about 20 years old negotiating with men in their 60s over tens of thousands of dollars.

He’s like yes. And it’s interesting you say that because most of them come here not knowing how to negotiate so we have a negotiation training program.

RITHOLTZ: So the BunnyRanch in Nevada reaches out to you and says hey, if you want to have a conversation about a brothel and about risk and analyzing numbers, come talk to us. What was your thought process when you got this phone call?

SCHRAGER: Well at first I was like, “this isn’t my thing, this isn’t what I am known for — I am a retirement economist.” But when they said the thing about we have a negotiation training program which is something I struggle with too —

RITHOLTZ: Like, you would think a car dealership has a negotiating training program, not a brothel.

SCHRAGER: Or a sales job on Wall Street, you know? And they’re like — and they even said headline, the women here don’t know their value, so we teach them to know their value and to ask for enough.


SCHRAGER: And I was like, “well I could use that.” So I talked to my editor at Quartz to sending me there to go through their negotiation training program.

RITHOLTZ: Was the immediate reaction, “this is a great story?”

SCHRAGER: Oh yeah, they sent the video crew.

RITHOLTZ: All right, so they were — they were pretty hip that this is funky and — this was freaky before “Freakonomics,” wasn’t this?

SCHRAGER: “Freakonomics,” was already out but it —


SCHRAGER: But it took it to another level because I don’t think Steve Levitt spent a lot of time in brothels.

RITHOLTZ: No, he focused young drug dealers in the inner-city and other similarly freaky stuff, but this is like right up his alley for sure. So you get to the Bunny Ranch, how receptive were the women to speaking to you about all these sorts of economic-related issues of salary and compensation and negotiation?

SCHRAGER: In the beginning some were very wary, some were very open. But once you get talking to them they open up. Because I think a lot of people go there, they don’t really take them seriously as businesswomen —


SCHRAGER: And Dennis when he was alive —

RITHOLTZ: This is the guy who was running the Bunny Ranch?

SCHRAGER: Yes. Really had a lot of good business training going on and the women there are great business women and they’re proud of what they know. So once you get them talking about that they do open up because this is a special skill a lot of them have learned, and a skill honestly I think most people could learn on their jobs (ph) and they don’t.

RITHOLTZ: So how to value the worth of your own work products relative to the marketplace and relative to customer on the other side of the desk from you?

SCHRAGER: And how to ask for it — how to feel comfortable. Especially — it’s an interesting negotiation because you have to — negotiation can be very fraught —


SCHRAGER: And afterward you’re going to have this very intimate encounter with this person.


SCHRAGER: So making that transition — which is — I mean, a more exaggerating version —

RITHOLTZ: Silicon Valley calls that the pivot.

SCHRAGER: It’s a more exaggerated version of what we all do, right? Like, we have to negotiate with someone and then we have to work with them.


SCHRAGER: So this is just that on steroids.

RITHOLTZ: And so, what is the secret? What do they do that’s somewhat different than — what did they teach you that you didn’t know going in to this?

SCHRAGER: I think I always saw negotiation as very adversarial and what learned is how to make it not so — how to just put a bunch of things out there, which apparently is a negotiation technique.

RITHOLTZ: Here’s a menu, choose A, B, or C.


RITHOLTZ: That’s really interesting.

SCHRAGER: And therefore — then it’s not adversarial, it’s just “hey, everyone feels like they’re getting what they want.” I’m customizing this experience for you.


SCHRAGER: So when I was there I learned a lot about pricing — sex pricing. And something that fascinated me was how much more they could charge than the illegal market.

RITHOLTZ: And now, the assumption is from the John’s point of view — they’re going in to a place where they know the workers have been tested for STDs, they know they’re not going to get mugged or ripped off, they know they’re not going to get arrested — that should be worth some sort of premium, shouldn’t it?

SCHRAGER: I never thought of it that way before, but that was what — always on the lookout for risk —


SCHRAGER: Fascinated me. I mean, the premium is large. When I went — I went back to the brothel for bookwork, and surveyed a lot of the women on their transactions and then it just turned out that this economist I knew scraped all the data from the erotic review (ph), which is Yelp for illegal sex work —


SCHRAGER: So I had 1.2 million illegal (ph) sex transactions, so I had really good data.

RITHOLTZ: Right, that’s a robust dataset. So I was kind of surprised in reading that chapter, that section of the book — the Bunny Ranch, to go to the Bunny Ranch, it’s a couple thousand of dollars per experience. I don’t know what to call it.

SCHRAGER: The median price I found was $1,400 a hour.

RITHOLTZ: That’s a lot of money.

SCHRAGER: Yes. It, you know, especially if you just hire a woman online even for escorting which is more high end I think equivalent to what you get at the Bunny Ranch is $300 – $400 an hour.

RITHOLTZ: That’s all?

SCHRAGER: Yes and you don’t have to go to Nevada.

RITHOLTZ: Yes, but then the risk is $400 but you might get arrested. You might get robbed. Who knows, you might get killed. So it’s worth a premium one would argue and you effectively do that in “An Economist Walks into a Brothel” that what you’re paying is – you’re paying an insurance premium to eliminate all the risks associated with the legal sex for hire transactions.

SCHRAGER: And on the other side too because you think these women, they’re getting so much money but they’re really not.

RITHOLTZ: Now what’s the payout to the woman relative to average, let’s call it $1,500 average, they’re getting what? You wrote about half goes to them?

SCHRAGER: Well not even. Half goes to the brothel. So they have to give 50 percent of their cut to the brothel.


SCHRAGER: And then they’re legal sex workers, right? So they’re 1099 employees.

RITHOLTZ: So there’s self employment tax. You got to cover that.

SCHRAGER: Yes. I mean these are high earners. They’re making you know probably at least a hundred grand a year.


SCHRAGER: So I mean a lot of them don’t live in Nevada so they might have state income taxes on top of it all, so we’re talking 30 to 40 percent after taxes.

RITHOLTZ: So do they do an IRA or a Keogh? They have to have some sort of retirement plan set up?

SCHRAGER: A lot of them do. Dennis(ph) had really good financial planners coming in giving very good financial (inaudible). Like I was talking to these women who came from households where no one had a bank account. They were like I didn’t even know what a credit score was and then they’re telling me, “Oh yes, my IRA is on index funds. Why pay the fees for active.”

RITHOLTZ: That’s just – that’s just hilarious. I have a million – a million horrific puns and I’m not going to touch a single one of them. Wait, so you’re saying they were passive investors, not active. Is that – is that what you’re saying. They were indexers right?

SCHRAGER: They are all indexers.

RITHOLTZ: That’s hilarious. That’s really hilarious. So what was the single most surprising thing that you came away from the Bunny Ranch with having interviewed all these professional legal sex workers?

SCHRAGER: The most surprising thing – I mean it sounds almost patronizing and I knew they’d be smart but I was shocked at how much I learned from them about business, about negotiation and about risk.

RITHOLTZ: So more than just smart, savvy.

SCHRAGER: Very savvy.

RITHOLTZ: Let’s talk a little bit about risk because I think different people think of risk differently. How — how can you define what risk is for the average person?

SCHRAGER: Well I think of risk – I think of it as an estimate of all the different things that could happen and how probable they are. As I said, it’s very technical definition.

RITHOLTZ: Let me ask you the same question a little bit differently then since you run a firm who’s got the words “life cycle” in its name. How does risk change over the course of a person’s lifetime?


RITHOLTZ: You have career risks, you have academic risks, you have retirement risks. I mean there has to be a million different points in one’s life where the risks that are presented to you are very different with different ramifications.

SCHRAGER: Totally. And how we are able to deal with risk and understand risk and how risk adverse we are can also change over our lifecycle which makes it even more complicated. And you know there’s all this evidence about behavioral biases but there’s also evidence as people get older, those biases tend to be less prevalent.

RITHOLTZ: Really? So is it that we get a little wiser with age or it just matters less?

SCHRAGER: I think we get a little wiser with age. There’s experience — that just as well experience really changes how you perceive risks. Like, once you’ve seen things blow up for you a couple times —

RITHOLTZ: Suddenly you become a little more risk adverse, or a little more aware of the probabilities you face.

SCHRAGER: Or take time to hedge or insure when you take risks.

RITHOLTZ: Let’s talk about that because you have a few chapters in the book on the differences between insurance and hedging. So let’s talk a little bit about hedging. Whether you’re referring to a market perspective or any other perspective, what is hedging and what should the average person use it for?

SCHRAGER: I think of hedging — and this is a distinction that a lot of people don’t — I think isn’t often made very clearly. In fact, I had lunch with the CEO of an insurance firm, who even he kept messing up insurance and hedging. So it’s a very subtle but important difference.

RITHOLTZ: And you make it clear, they’re two very distinct things (ph).

SCHRAGER: They are, and if you draw a picture of what they mean in — on a graph it’s very clear. But intuitively it’s a very hard difference. So I think of hedging as you just take less risk, so in the basic finance world that would be of a risky asset and you have a risk-free asset —


SCHRAGER: So hedging is just putting more of your portfolio in the risk-free asset.

RITHOLTZ: The typical 60-40 stock and bond portfolio, you’re not so much hedging your stocks as you’re removing some risk and putting it in to much lower risk fixed income.

SCHRAGER: Exactly, so you’re hedging your portfolio balance from (inaudible).

RITHOLTZ: So I’ve always thought of hedging as I’m willing to give up some upside and in exchange reduce my downsides.

SCHRAGER: That’s exactly it — so if you — is it — instead (ph) of 60-40 you do 50-50 that’s less upside if stocks do well —


SCHRAGER: But also less downside risk if stocks crash.

RITHOLTZ: Or conversely I’ll own XYZ stock and I’ll marry a put-to-it (ph) and that protects — it costs me something, cost me a couple of percent. But hey, if the stocks falls out of bed, the put should cover some percentage of most of that downside.
SCHRAGER: Yeah, the way I usually think of puts is like, insurance.

RITHOLTZ: A little bit more insurance, as I was saying. So now let’s talk about insurance. How do you think of insurance? What does — purpose does insurance serve?

SCHRAGER: So insurance is a little different, so rather than giving up upside, what you’re doing is your paying someone a fee — so you give up that amount of upside (ph) but it’s a set amount and you eliminate downside risk.

RITHOLTZ: So a predetermined cost and what you’re purchasing is putting that risk, or eliminating that risk from yourself, putting it on to someone else.

SCHRAGER: In a specific state of the world, yeah —


SCHRAGER: So it’s insurance (ph), which is if X happens, if this stock goes above the strike price, then I get something.

RITHOLTZ: So I’ve never owned a car where I did not have at one point in the ownership of that car, some piece of gravel or rock come up on our local crappy highways here in New York and either ding or crack the windshield.

So once I could start affording it, I always get glass insurance on the car, and I have replaced literally every single windshield I have ever owned, is that a good use of insurance, or am I just padding their profits and wasting money?

SCHRAGER: It sounds like it. I mean, if you’re claiming it.

RITHOLTZ: Well, but you know — a car you have three, four, five years at least — and you’re paying whatever it is $100. I guess what I’m really paying for is hey, I don’t know if I have to worry about whether or not I break a window — somebody else is responsible for that. Is that a fair definition of insurance, even though you’re paying a fixed amount that stress and worry goes away?

SCHRAGER: Exactly, because now the stress of breaking the window is on the insurance company. I mean, you have to still go through the rigmarole of replacing it, but the financial risk is borne by someone else.

RITHOLTZ: So let’s talk a little bit about the book and some of the other things you describe outside of the Bunny Ranch. You spoke to a number of poker players who had some kind of surprising statistics


RITHOLTZ: Recover from that loss.

SCHRAGER: Only when you’re down and this is the interesting, you know, sort of deviation from what economist normally think is when you’re down you’ll talk that extra risk to get back.

RITHOLTZ: So tell us a little bit about how we should be thinking about risk in the stock market?

SCHRAGER: Well, actually I mean my background to approach risk is from financial economics, which is the study of the stock market. I think in a lot of ways the stock market’s the perfect place to think about risk because you just have so much data.

And what financial markets are doing is just finding ways to price and move risk around. So I think anyone who is in the stock market is someone who’s naturally thinking about risk all the time.

RITHOLTZ: And — and we’re making more data every day. Don’t we?

SCHRAGER: Yes, I think — again, you — you do get people who get away from — you know as I said if they’re down they — you know there’s all this evidence that people won’t sell losers but they’ll sell winners.

And you know how — you know that’s usually not a good idea. If a stock’s going down, it might — probably will keep going down as opposed to why would you sell your winners and keep a loser. But that’s supposed to be some version — loss aversion people think.

RITHOLTZ: So there was a study that had come out towards the end of 2018 that had looked at portfolio managers and rather than compare them to a benchmark, what they did instead was let’s — instead of selling what the portfolio manager sold, we’re going to randomly sell anything else from their portfolio and then compare and see how they did.

And it turned out that random sales outperformed manager sales by 100 basis points over the next year. Now when they looked at what was being sold they found two broad categories that accounted for most of the underperformance.

One is stocks that had gone up a lot and therefore were benefitting from momentum. Managers had a tendency to sell those but also stocks that had collapsed a lot, rather than selling them when they were small losers they waited till they were giant losers and effectively had become devalue plays and they were selling them.

And those two categories were determined to be the behavior areas that we’re — we’re driving portfolio loses. So all that aside, let’s — let’s think of — of the stock market in terms of individual investors embracing of risk.

Are most people overly invested in the stock market and are they embracing too much risk or do you perceive the (inaudible) — do you perceive risk amongst individual investors as just not taking enough of it especially in the early stages of a market and not embracing it until the very latter stages of the market?

SCHRAGER: I think it’s hard to say. I mean the rate stock allocation really depends on an individual and where they are in their lifecycle. I think people don’t appreciate — a lot of people don’t appreciate how risky the stock market is.

Like my mother is nearing retirement and she expects her portfolio to like double every year. And I’m like sure but you’re going to have to take on a lot or risk for that to happen. And she doesn’t seem to internalize that if you want more return that comes with something.

And you know and stocks are a great investment. They’re a great way — especially an index fund to get risk exposure cheaply and efficiently.


SCHRAGER: But you know — you know there’s no guarantees.

RITHOLTZ: So we noticed that when the housing markets are booming, people have this same overly optimistic expectations about how fast their home prices are appreciating. I’m assuming your mom is not a big bit coin investor. Why does she think her stock — her portfolio should double every year given long term returns between 8 and 10 percent?

SCHRAGER: Well, to some degree it’s also you know errors in how we perceive risk. I mean I think people often assume there’s serial correlation where there is none. So if the housing prices have gone up the last 20 years, people assume they’ll stay doing that. I think people also make that assumption around interest rates that you know they’ve been nothing but go down for the last 30 years.


SCHRAGER: So I know it’s questionable if they can keep doing that because how negative can yields get?

RITHOLTZ: So this was kind of an interesting aspect of the book that resonated with me personally because we’re always trying to teach clients to think about portfolios in terms of a way that’s easily understandable. And if you say to somebody, “hey there’s a 70,” or here there’s a lot of software that can project you out to retirement. There’s 95 percent probability that you’ll hit your retirement goals, assuming inflation stays under 4 percent and you continue making your regular contributions.

I don’t know what a 95 percent confidence interval does for most people, but if you were to say to them, “hey, in 19 out of 20 situations we can show you — you’ll hit your target goals. It’s only 1 out of 20 that you don’t make it.” Why is that so much easier to understand than percentile?

SCHRAGER: Yeah, well I’m not a psychologist but the research psychologist I spoke to has said just something about the way our brains are programmed is frequencies just resonate with us more. We are —

RITHOLTZ: So 19 out of 20 is a better phrase than 95 percent?

SCHRAGER: Yes, and it makes a big difference. Because we are programmed as humans, we’re not like, complete like — supposed to be disasters with risk. Risk is something that humans have been facing as long as we’ve been on the Earth. But probabilities are a fairly modern invention. They only really came along on the renaissance with a lot of sort of brainy people.

RITHOLTZ: Right, Bernoli (ph) and a whole run of different folks —

SCHRAGER: Yeah I’m just calling all these people. So I mean it’s not surprising that we aren’t just born having this natural intuitive sense of probabilities. I mean, we both work in this area all the time, and they often don’t mean that much to me either.

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RITHOLTZ: So for the average person how best should we quantify risk?

SCHRAGER: Well you want to — as you say convert it, if you’re thinking — except when I defined risk to you, and I was like it’s all the things that you can measure happening that probably are (ph) — that is a probability distribution.

It’s a whole distribution of things that aren’t intuitive to us. So I mean, part me of (ph) is sort of getting more comfortable with those concepts — but it’s also when you think of probabilities converting them to frequencies.

RITHOLTZ: The book was really interesting, it reads really well. It’s sort of like — like, as I started reading it I immediately thought of “Against the Gods,” because it’s also so risk-focused. But from a historical perspective this is really a 21st Century perspective on risk.

SCHRAGER: I love “Against the Gods,” it was my favorite book. And I was actually partially inspired by that because as much as I love it, I wouldn’t say everyone wants to read it, I mean it’s a —

RITHOLTZ: Oh no, everybody should read that book, it’s amazing.

SCHRAGER: Everyone should, but not a lot of people will. I mean, it is dense.

RITHOLTZ: He is a very detailed writer, and every page is filled with lots and lots of stuff. Which is why P.S. if you go back and reread it 20 years later it’s still fresh, and — I mean, that is a masterwork.

SCHRAGER: It’s beautiful. I mean, I love everything about that book and I also love “Capital Ideas,” I like his — everything he’s done. But you know, your mom’s —

RITHOLTZ: Peter Bernstein (ph) you’re talking about.

SCHRAGER: You know, your mom’s probably not going to read it — and I felt like everyone needs to know what’s in “Against the Gods,” and that’s partially what inspired this book is I wanted to take those ideas that were so resonant and I felt everyone needed to understand, and make them accessible to an even broader audience.

RITHOLTZ: So obviously the whole BunnyRanch Brothel section is hilarious and must have been a ton of fun to do. What else did you do in your research that was kind of fun and — and surprising?

SCHRAGER: It was all fun and surprising. I had — I had — I mean I was afraid to write a book for a long time because my dissertation was such a horrible slog.

RITHOLTZ: See, I think of my book as — as my PhD. dissertation and it was a horrible slog.

SCHRAGER: I think maybe you have to do that first big research project. It just has to be horrible.


SCHRAGER: So I was like if I’m going to do this I’m going to have a lot of fun, which was the other way I wanted to approach the book. So I just was like I’m going to have all these adventures. It’s an excuse to go places. I went to a risk conference for big wave surfers in Hawaii.

RITHOLTZ: Right. That was a whole fascinating segment. The guys who invented jet skiing their way on to 80 foot waves. Before you couldn’t even get on — on to a 50 foot wave. You just weren’t able to get out there fast enough. What was that like? You spoke to some really interesting big surf names.

SCHRAGER: Yes. And you know they have these — this regular conference where they talk about risk and it’s like going to a pension risk conference, although everyone’s you know better looking and tanner.

RITHOLTZ: Right. Everyone’s tan and blonde. Right.

SCHRAGER: Yes. Like I was in the worst shape in the room. But you know it is — it is a conference where they’re very thoughtful about risk and debating regulatory function and who bares the responsibility of risk when your behavior impacts other people.

And you know it was an intellectual discussion as I’ve seen anywhere. And the guy who I profile, Brian Keaulana, is the one who brought jet skis to big wave surfing. And much like a lot of financial derivatives initially supposed to be insurance.


SCHRAGER: But as you mentioned, you can also use them to lever up and take on more risk and take even bigger waves because anything that can reduce risk can also be flipped around to exacerbate risk.

RITHOLTZ: We — we see a plateauing and even an increase in the annual automobile fatality rates. And the discussion in your book and elsewhere has been well, how much of the confidence that people feel about airbags and crumble zones and — and antilock brakes is leaving them to drive faster and engage in more dangerous behavior without these safety provisions. What — what are your thoughts on that?

SCHRAGER: Yes, well I mean that is I felt like an important thing to include in any book on risk telling you how to — how there’s all these tools that can reduce your risk because then you have to be mindful of not feeling so safe that you can then go and take whatever risk you want.

Because nothing makes the world truly risk. You know we’re all — risk is all still an estimate of something that’s immeasurable. So you know and you’re — you’re basing your risk strategy on something — you know it’s better than doing nothing.

Just because it’s not perfect doesn’t mean you shouldn’t do it but you also have to be aware of the limitations. So even if you have every safety device in the world and you’re going to surf an 80 foot wave, it’s still not going to be safe. There’s nothing to make that risk pay (ph).

RITHOLTZ: And — and you specifically refer to a number of big name surfers who died even after or perhaps because of some of these safety innovations being brought in.

SCHRAGER: Yes. And when I went to the big wave surf risk conference, you know they — every innovation resurfaces this issue. Initially it was leashes because …

RITHOLTZ: Which everybody hated when they first came out.

SCHRAGER: Totally. Because — I — I don’t know anything about surfing and I’ve never done it but apparently before there were leashes, if you wiped out you lost your board and you had to swim to shore and that could be maybe 20 miles. So you — like they were like amazing swimmers. Now you can be a pretty mediocre swimmer and still surf the waves (ph).

RITHOLTZ: Right. You’re sending people out who really, if they get into trouble, can’t swim a half mile back to shore.

SCHRAGER: Yes. And then it was worse with jet skis because now you can have a jet ski you know pushing not only a 80 foot wave but if you only belong in a five foot wave, now you can go in a 20 foot wave. And you pose risk to other people when that happens if you need to be rescued. And now the big debate is on something called these inflatable vest.

RITHOLTZ: Right. When you go under and they don’t always inflate but it gives people a sense that all right, I’m OK, I can do anything now.

SCHRAGER: Yes. And so this — because they’re new and just starting to be sold, I think I mentioned Greg Long, this famous surfer, whose inflatable vest didn’t open, that was — I think he had sort of an early version. But now they’re being widely sold and this is really tearing up the surf community of who should be allowed to buy these. Is it irresponsible to allow anyone to have these vests?

RITHOLTZ: So in other words, we don’t want to give people a false sense of confidence, send down an amateur with no skills and minimal swimming ability out into a dangerous area, and they feel because they have this inflatable vest, that they can surf with the big boys, so to speak.

SCHRAGER: But then the flip side to that is, this is potentially a piece of technology. Are you going to deny people buying it? I mean, it’s — there aren’t easy answers to this, which is why there’s so much debate. But you know, if you go to a finance conference and you debate systemic risk, there are no easy answers there either.

RITHOLTZ: What else do you recall from your research that was, if not quite as buff, really interesting and surprising? Because you cover a lot of ground in your book.

SCHRAGER: I’ve had (ph) horse breeding.

RITHOLTZ: That was kind of fascinating also.

SCHRAGER: Yes, again, I kind of went after things I didn’t really have much knowledge of before. I’ve never been like, a horsey person — I wasn’t like one of these little girls who rode horses.


SCHRAGER: So I didn’t realize after 1986, the tax reform changed the whole dynamics of horse breeding and the economics of horse breeding.

RITHOLTZ: And all sorts of other (inaudible) as these things had been devised as a way to hide money from Uncle Sam, and suddenly, now they have to stand on their own feet. They can’t just be a foe (ph) investment.

SCHRAGER: Exactly. So the fact that there’s less return to long term capital gains and they want to realize the return from their risk earlier, means now that everyone sells a horse when its one year, when they don’t have to feed information about how good a racer it’s going to be. The only information you have is who its parents are. So this has led to this increase in in-breeding.

RITHOLTZ: So we have all these horses that are sprinters, not long distance runners, because that’s the first thing that will show and that will help sell a one year old horse. It seems like the incentives are kind of weird and not properly aligned.

SCHRAGER: No, because what you really want is, you want a horse — well actually, the real money in horses is not winning races, it’s from the breeding, the stud piece (ph). But a good race career is necessary for that. But none of those things are necessarily correlated with — there’s been studies on this — on the prices that you sell for as a year old yearling.

RITHOLTZ: So as I was reading through the whole horse section, and I rode in college, so I was kind of fascinated by that; I’m not a fan of horse racing and betting, but I enjoy riding, I was reminded of a book I read 100 years ago by William Goldman who was the screenwriter Butch Cassidy and the Sundance Kid, Princess Bride and Marathon Man — his screen list are insane. And his book was called Adventures in the Screen Trade, but a quote of his that I’ve used repeatedly when writing about markets is, nobody knows anything. And he refers to all the studios that passed on Star Wars, all the studios that wanted nothing to do with Raiders of the Lost Ark.

And he uses example after example after example of these people who are supposed to be in the film industry, and they’re throwing darts. And I’m reading your write-up about the various horses that later go on to story career, that were picked up for pennies because nobody recognized their value, and all of these very story-stud married to these mares who were great runners, and the horses, nobody — they don’t win anything, they don’t — so is it the same sort of situation –


RITHOLZ: – when it comes to horse breeding? Nobody knows anything?

SCHRAGER: Well, I think it’s that the incentives are kind of – are off. So what people – when they breed a horse, they’re looking for something that’s going to sell after one year, which is very difficult from a horse that’s going to win a Kentucky Derby.

RITHOLZ: You would think that there’s so much money in winning these big races that at least some subsection of the breeding community would say, “Hey, if you want to buy a horse to sell in a year, don’t come to us. We’re trying to breed triple-crown competitive racers.” How come that hasn’t happened?

SCHRAGER: Well, to some degree, you’re right, that it is just impossible to know. I mean you’re getting more information now with technology because you’re able to do the genetic profiling of the horses, which gives you some information. Like, you can tell, you know, I guess, the horses that are best suited for a Kentucky Derby or sort of these hybrid half-sprinter, half-distance runners.


SCHRAGER: And you can test for that.

RITHOLZ: Right. You also referenced – and there’s a really fascinating story, I’m trying to remember where I saw it, about the size of one of the ventricles in the horse’s heart.


RITHOLZ: You referenced they’re looking for horses with, not metaphysical, that horse that has heart, but genuine larger cardiac pumps.

SCHRAGER: Yes, although you have to be careful, because every – you know, a horse, it’s like everything to be, like, a racer, sort of this freakish combination of factors have to come together. It’s like being a Nobel Prize-winning supermodel. It’s like you just need all these genetic components in perfect alignment.

RITHOLZ: That’s the – I’m sure it’s an urban myth, but the Einstein/Marilyn Monroe –


RITHOLZ: – back and forth, you may not get the qualities you want from each of the sires of the horse.

SCHRAGER: Yes, you may get the worse qualities of both. So you know, if you get – I feel (ph) this one guy explained to me, “It’s like getting like that perfect heart in the wrong horse. It could be like having the dimension for a Ferrari in a Subaru (ph).” So it’s really hard to predict.

So this is why that chapter’s about modern portfolio theory.

RITHOLZ: Right. By the way, that is the Subaru WRX. They’ve done that, and it’s been a very successful car.

SCHRAGER: I don’t anything about cars.

RITHOLZ: So – but that was really – that was really a fascinating discussion, and I really enjoyed that. Last question about the book: Anything else sort of stood out as “wow that was really weird and unusual that I was not expecting?”

SCHRAGER: You know, there was – every chapter sort of, I guess, had those moments. I mean there was certainly when – the time I spent following around the paparazzi, where I’m like –

RITHOLZ: Also, a fascinating story.

SCHRAGER: – “This is weird,” you know? I was telling someone, it’s like – as I’m like crouching behind a garbage can, waiting for Alec Baldwin, I’m like, “This is just not what I expected when I went to grad school,” you know, “to end up here of all places.” But you know, again, they also have a fascinating risk story that’s going on behind the scenes.

You would never know, because, as you can imagine, they face just crazy amounts of idiosyncratic risk. The risk that you’re going to get that one money shot and any one day is so large, they have to form these complex alliances to share tips and sometimes royalties. Essentially it’s pooling, so you’re getting rid of your idiosyncratic risk, but because all the money in celebrity photography has been getting an exclusive, they also have this incentive to always cheat.

So these alliances are inherently very unstable. So they’re reforming and breaking up these alliances, so they all hate each other. So this is something, you see the paparazzi on the street and you’re like, “This is much more interesting story that’s going on with this lineup of paparazzi than you would ever know.”

RITHOLZ: Then – the paparazzi are more interesting than a catching a celebrity that takes their kid out for ice cream?

SCHRAGER: Yes, they’d always be surprised, because they’d (ph) wait for these celebrities for, like, six or eight hours. And after like maybe an hour or two, I’ll just get bored and I’m like, “Well, I’ve had a good story here. I’m going to go home.” And they’d be shocked. They’re like, “But Gigi hasn’t appeared yet.” I’m like, “Well, I’m here for you.”

RITHOLZ: The supermodel, Gigi, who was friends with somebody else – one of the Kardashians.

SCHRAGER: Kendall Jenner.

RITHOLZ: Yes, that’s how suddenly she blew up on Instagram.

SCHRAGER: Yes, well, the celebrities who do well the paparazzi also play the game with them.

RITHOLTZ: Huh, quite interesting. You also have been writing regularly on Vox for some time —

SCHRAGER: Of course.

RITHOLTZ: And some of the columns you’ve done sort of tangentially involve risk in surprising ways. So everybody today is focused on the Amazon HQ2 disaster that blew up earlier this year. But you looked at it from the context of the U.S. has a talent problem, and that presents a risk to corporations — explain that.

SCHRAGER: Well, so — this is as the Richard Florida (ph) argument, that you need — you know — any way you think anyone would want to work for Amazon, they still — the — the competition for sort of really good talent is still very stiff and it is — does occur globally.

RITHOLTZ: And we’re talking about engineers and programmers, not necessarily the serfs (ph) that they have enslaved in their warehouses.

SCHRAGER: Yeah the high-skill tech workers, I mean, they’re kings of the labor market.


SCHRAGER: And they compete a lot of it, which is one of the reasons why Amazon probably wanted to come to New York. It wasn’t just the tax incentives, it was that you could get talent who wanted to move here. It’s really hard to get a cluster of talented young people to want to move to the middle of the country.

RITHOLTZ: And that’s why Brooklyn is so hot these days?

SCHRAGER: Yeah well, and you can see why because if you are talented — I mean, human capital is something you have to work towards your whole career. You don’t just go to Harvard and then you’re just set for life, you have to manage a network, you have to keep your skills sharp — and that’s why you want to be around, not just be limited to your own company, be around other people (inaudible) companies that way you keep your skills fresh, you have the option of changing jobs, that’s always a very valuable option.

I mean, if Amazon moved to a place where there were no other good jobs, you’re kind of stuck at Amazon and you give up the option of job-switching —


SCHRAGER: That’s — you have to compensate people for that.

RITHOLTZ: (Inaudible) towns are problematic for that reason.

SCHRAGER: Yeah, I mean it worked before when you had people who were more middle skill, and also back before when you had — technology was such before that the skills you would learn would be very idiosyncratic to the company you worked for.

RITHOLTZ: And now they’re very transferable.

SCHRAGER: Exactly, so if you want to maintain competitively in the labor market, you have to be part of — sort of these clusters of people that allow you to move around.

RITHOLTZ: And Google announced their doubling their New York workforce from 7,000 to 14,000. Apple has dramatically expanded its presence. So if you’re an Amazon worker theoretically in New York they’re competing for your skills with some of the biggest companies in the world.

SCHRAGER: Yeah but — and you know, they don’t like that. I used to work for a company that was far outside my cluster and they kept trying to get me to move there, and I’m like, “but you’re asking me to give up a very valuable option, you’re going to have to compensate me for it.” That never really resonated with them, but it seems counterintuitive that Amazon would want to be closer to their job competition, but it’s also what they need to do to attract talent.

RITHOLTZ: It’s why cities haven’t disappeared despite the best predictions of people half a century ago. What about — I thought this was an interesting headline, “What is the real reason people regret not saving more?”

SCHRAGER: Risk. So people think about saving as something that they’re going to often — or something that’s going to happen in the future that they want to do. But when they looked at people at the end of their life or in retirement, the reason why they think they wish — had more money, they don’t wish they could have gone on better vacations when they retired, they wished they could have had a better lifestyle — it was, I didn’t realize that divorce would blow all my savings.

RITHOLTZ: Right, it’s not a luxury goal, it’s a hey, things happen that are just unexpected and I failed to plan for that.

SCHRAGER: Yeah, and people — I mean, like $400 for emergency saving figure is a little controversial, but I don’t think it is a stretch to say people really don’t make emergency savings enough of a priority.

RITHOLTZ: Right, that’s pretty fair. Let’s talk about charities, what’s the best way to get people to donate to charity?

SCHRAGER: So I think it was John List who I mentioned earlier did a study of — of Alaska. You know Alaska is just ripe for a lot of economic studies because they get the dividend payment.

RITHOLTZ: From the — from all the oil reserves that they’re selling to or licensing and leasing out to the big public oil companies.

SCHRAGER: Yes, so they have a program where you can give some of that money to charity. And they had — they did a study where you — yes, they came with a card and one said you know warm you heart, the other is like improve Alaska, and the other just was nothing. And they found the warm the heart group donated the most and were most likely to donate.

RITHOLTZ: So in other words they made the charitable donation about the person as opposed to the recipient.

SCHRAGER: Exactly.

RITHOLTZ: So appeal — appeal to ego. So over the past year or two we’ve gone through this giant Me Too Movement and I know that amongst my colleagues we’ve had debates about what do you do with an artist who turns out to be a less than nice guy.

And the Michael Jackson HBO documentary just came out. I have yet to see it but I know Michael Jackson fans are kind of split. Some are defending him and others are a little bereft. I was always a big fan of Louis C. K., not happy with — with what he did.

Go down the list. You know it ranges from offensive to criminal and everything in between. You raised the question what do you do when a brilliant economist is accused of sexually harassing his research assistance. So what’s the solution?

SCHRAGER: Well, I — I don’t know because the thing about — I was writing about Roland Fryer who’s been accused but not found guilty.

RITHOLTZ: But there — he’s been accused by a number of his research assistants, some of whom have credibly claimed that he thwarted their careers for their refusing to succumb to his charms.

SCHRAGER: So which is hard …

RITHOTLZ: Which is a terrible way to say it.

SCHRAGER: This is terrible. But — and in his — what he always defended himself with and this is a valid point, although it doesn’t excuse his behavior in any way is I do research that’s socially critical.


SCHRAGER: And he was the economist who was leading the charge of understand why a lot of minority students don’t do well in school. So this is …

RITHOLTZ: It’s important but what does it have to do with whether or not he’s a pig.

SCHRAGER: So here’s the question, is if someone’s doing research that’s socially important or suppose they’re on the verge of a cure for cancer and we find out their a pig, you know do we — should they still have a career. You know if there’s all these other positive externalities for society.

RITHOLTZ: I could — so you just had the bishop six years prison sentence in Australia. You can see throughout history that the powerful will say look, there have been some bad behavior but we’re literally doing God’s work and therefore we should be exempt from this.

You know pick a person. John Lennon was supposed to be a bit of a hard ass and you don’t want to go through the history of literature to find out how big a jerk half the writers out there are.

If we — but — and then artists and paintings and things like that, if we’re going to have a moral purity test on that stuff, your museums will be empty and they’ll be nothing on the airwaves.

However, it doesn’t mean they shouldn’t suffer the ramifications from — so should we separate the value of the art from the artist, but that doesn’t give them a free pass in their career.

SCHRAGER: Not at all. And I — I didn’t honestly know the answer so I spoke to a philosopher which was just — I love talking to philosophers because they always remind you you know nothing about anything.

And he pointed out that if you are doing important work, like scientific works by either economics or like hard science and you’re on the verge of really making the world important is actually the more — the pressure on you to behave well is even higher because you’re letting down — especially no good work happens alone. You’re letting down everyone’s effort, and it’s — not everyone gets the opportunity and resources to perform research like this. And so if you’re threatening it with your behavior, actually, you should be held to an even higher standard.

RITHOLTZ: So the question is, according to the philosopher then, once this bad behavior is identified, do you stop the person from doing research, or do you just put a higher level of H.R. scrutiny and sit that person down and say, you are putting millions of people’s lives at risk because you’re this close to a cure for cancer, and if you keep your hands off your research assistant, here’s what’s going to happen. I mean, how do you — how do you resolve that?

SCHRAGER: Well, he was more in favor of just jettisoning them. I — I — I…

RITHOLTZ: Jettisoning the assistants?

SCHRAGER: No, the researcher.

RITHOLTZ: The philosopher said, just fire the guy, or whoever it is.

SCHRAGER: Yes, he’s like, we need to have standards, and as he said, yes might have — we might have a longer wait for a cure for cancer, but what about the behavior all along? Maybe somebody could have come up with a cure for cancer even earlier and he discouraged them, and maybe we’d had cancer cure 15 years ago.

RITHOLTZ: His behavior. So — so you can’t use that as an excuse, bad behavior has to be punished because you don’t know what sort of — that’s a — I love a classic counter-faction, that’s a perfect one. Last one before we get to our favorite questions — actually there are two here that are fascinating. Let’s start with this one. Are millennials the wealthiest generation?

SCHRAGER: They could be. I think — you know, I’m tired…

RITHOLTZ: Eventually, maybe. But today, they certainly don’t feel that way.

SCHRAGER: Well, I’m a life-cyclist. So when I think about wealth…

RITHOLTZ: Is that like (inaudible)?

SCHRAGER: I think about all your assets. So I think of human capital, which in life-cycle economics, is the value of your future earnings.


SCHRAGER: So for me, the idea that people don’t — millenials don’t own houses, and instead they have student debt, doesn’t seem to me like they’ve made a huge investment in their future earnings. And education, it’s not perfect, is correlated with much higher lifetime earnings.

RITHOLTZ: True, but the issue that they appropriately, you were at NYU, it’s the most expensive tuition in America, $63,000 or something a single year. I went to a state school, I went to Stony Brook, my tuition was $450 a semester. Even today it’s like $5,000 a semester, which seems like a bargain. Students today are paying prices for education that are just so vastly out of whack with what they were like 40, 50, 60 years, or even 25 years ago. It was much, much cheaper relative to the total cost of living to go to school. So are they going to get the same return on their investment in education, or have things just completely run amuck (ph)?

SCHRAGER: Well, definitely they’re getting — well, it’s hard to say; I mean, we can’t predict the future. I mean, so far, it does seem — I mean, I’m not sure if there’s much value in going to a $60,000 school over Stony Brook, probably you’re — you’re going to do just as well going to a good public school.

RITHOLTZ: P.S., I couldn’t get into Stony Brook today with my grades back then. I was in a little bit of a valley between the Boomers and the Gen-Xers and the same thing with grad school, I couldn’t get into grad school — to my grad school Y.U., that I got into way back when. So some of it is just dumb luck when you’re born, but the other aspect is, what — what sort of return are these current graduates — what should they expect going forward. Explain why you say potentially they’re the wealthiest generation.

SCHRAGER: Well, I think when people look at the outcome from education; they are too short-sighted. Because you don’t — like, I mean, I didn’t enter the labor market like really officially until I finished grad school. I was almost 30.


SCHRAGER: And my earnings — well actually my first job was unpaid, you know weren’t that great. But we were looking — when you think of the pay off from human capital, it’s your lifetime earnings. And often out of school you’re going earn less than someone who didn’t go to college but the trajectory of your earnings is it follows a much steeper path.

RITHOLTZ: So they’ve — they’ve been working for a few years they have a series of raises. You’re staring up below them but you’re going to — as a college or grad student, you’re going to accelerate way pass them.

SCHRAGER: And you also face less risk. I mean the unemployment rates for college grads is much, much lower.

RITHOLTZ: I’m sensing a them with you. I don’t know what it is. So I only have you for another 10 minutes. Let’s jump to my favorite questions. These are what we ask all of our guest. Tell us the first car you ever owned; year, make, and model.

SCHRAGER: Well, I’ve never actually technically owned a car but in high school I did drive an 84’ Honda Prelude.

RITHOLTZ: OK. I love that car.

SCHRAGER: It last — it had 200,000 miles, which in the 90s was a really big deal.

RITHOLTZ: That was a little two seater. They were — you couldn’t — you couldn’t destroy them.

SCHRAGER: It was great.

RITHOLTZ: It wasn’t the fastest car in the world. You could get them with a stick shift which was nice back then. That …

SCHRAGER: It was a stick shift.

RITHOLTZ: There you go. So you drive — by the way, today I call stick shifts millennial anti-theft devices because that’s what they effectively are. So what’s the most important thing we don’t know about Allison Schrager?

SCHRAGER: Well you wouldn’t know it from the book title but I’m just really a risk nerd. I mean I guess I don’t know if that’s surprising.

RITHOLTZ: No, that’s not a shocker. I — you read the book and it’s like, this is — it should say Allison Schrager, PhD. risk nerd. So that’s not a big surprise. That you think of yourself as a risk nerd, maybe that’s a surprise.

SCHRAGER: Well, I guess I also — I wasn’t always — like in college I had a job in Alaska selling incense.

RITHOLTZ: Incense in Alaska. Why would they need incense in Alaska, is there that much — you would think of — if anything smells like the great outdoors …

SCHRAGER: Well, it was a fishing village.

RITHOLTZ: Say no more.


RITHOLTZ: That’s very — that’s very funny. So I know the answer to this but I have to ask who were your early mentors?

SCHRAGER: Obviously Bob Merton.

RITHOLTZ: So tell us a little bit about what he taught you because he’s clearly a fascinating and story person.

SCHRAGER: Well, he just taught me finance, which you know I went to — I did an ecom. PhD. so it wasn’t like I wasn’t exposed to it but my program it was very empirical. So I just thought financial economist just crunched datas looking for a deviations via efficient market hypothesis.


SCHRAGER: And I thought it was not very interesting and sort of corrupt. But then when I met Bob and learned what financial theory was, it really turned me on to theory too in a way I was always much more empirically oriented of how to think about the world and how to see the world in terms of a risk lens and how to see risk problems everywhere and how they’re driving all markets, not just financial markets.

RITHOLTZ: So he was really like your post doc work.

SCHRAGER: He was a very sort of long and tense post doc. I had good training as a graduate student too but it sort of readied me to really fully embrace all of his lessons.

RITHOLTZ: So let’s talk about investors and others who influence the way you look at the world of risk who you’d consider to be important thinkers that affected the way you perceive the world.

SCHRAGER: Investors.

RITHOLTZ: Investors or anyone really. You mention Peter Bernstein. Who — who affected the way you perceive the world of risk.

SCHRAGER: Certainly Peter Bernstein. Also I would say that I worked at DFA for a number of years. So David Booth.

RITHOLTZ: When did you work at DFA?

SCHRAGER: 2010 to 2013.

RITHOLTZ: So really that was in fairly — they were already fairly developed and running hundreds of billions of dollars by then.

SCHRAGER: And it was — that was a great experience for me because I was working on a project that they were all very interested in so every two weeks I would have these meetings with Eugene Fama, Ken French, Merton, David Booth, and Eduardo Repetto who was the — and we would just — because we were having to calibrate this very complicated interest rate model I was working on, and we would just debate the path of interest rates. And I learned – and that’s where I learned a lot of my finance, was just seeing Gene and Bob go at it and, you know, with the influences of David Booth, who’s just a real market guy.

RITHOLZ: And this was pre – were you there when Fama won the Nobel or was this before? I think it was –


RITHOLZ: Yes, something like that.

SCHRAGER: So right before.

RITHOLZ: Quite, quite – that’s some collection of mentors and influencers.

SCHRAGER: It’s interesting because they’re smart in such different ways.

RITHOLZ: So we mentioned “Against the Gods.” What are some of your other favorite books?

SCHRAGER: Well, obviously, anything Peter Bernstein writes, but I also just – love memoirs.

RITHOLZ: Really?


RITHOLZ: Give us an example.

SCHRAGER: I love “Just Kids” by Patti Smith. I just read “Educated,” which I hate loving popular books, but I really love that.

RITHOLZ: Who wrote “Educated?”

SCHRAGER: Was it Tara Westover?

RITHOLZ: Don’t ask me.

SCHRAGER: Yes, it’s just –

RITHOLZ: That’s outside of my –

SCHRAGER: – so beautifully written.

RITHOLZ: Oh, no kidding? What other memoirs have you read that really resonated with you? By the way, I read two books on vacation, yours was one of them, and McCullough’s “The Wright Brothers” was quite fascinating. If you’re interested in flight and/or – it’s really less of a memoir, more of a biography. All right, skip that.


RITHOLZ: Give us one more book. So you mentioned – you mentioned (inaudible). By the way, this is the question – I get more e-mail about this one (ph). What was that book the president mentioned on – I get more e-mail about this than anything else?

SCHRAGER: It’s a stressful question, because I feel like it’s so personal and revealing, and –

RITHOLZ: Yes, that’s what makes it so good.

SCHRAGER: And especially because I read a lot of crap, because, you know –

RITHOLZ: Do you finish crappy books?

SCHRAGER: You know, when I was doing book research, I had this idea that Kris Jenner was this risk mastermind, because look at what she’s built.


SCHRAGER: And I – so I read her biography, thinking maybe I’ll include her, and it turns out she didn’t have a good risk strategy, so I couldn’t.

RITHOLZ: Right place, right time, is that all it was?

SCHRAGER: She takes advantage. I mean –


SCHRAGER: And it’s like this extreme level of diversification, where she literally – any opportunity that comes her way, she seizes on it, and she does work hard. There’s nothing like strategic. It’s sort of – it’s sort of, as well, like a Donald Trump thing. It’s like, “Well, if this blows up, I have something else to distract people with because I’ve got 90 gazillion things going.”

So it’s like, “We have our debit card that ripped poor people off, but oh, look, here’s a sex tape,” you know? So – but I remember I was reading her book on the subway, and I had this realization, like, “I’ve never read Anna Karnim (ph), but I’ve read this.”

RITHOLZ: I’m going to say you probably picked the wrong one of the two. Just hypothesizing. All right, so here’s a question that also is personal and probing. Tell us about a time you failed and what you learned from the experience. And by the way, you detailed some personal failures in your book.

SCHRAGER: Oh, yes. I fail a lot.

RITHOLZ: You don’t – you don’t shy away from that.

SCHRAGER: No, I mean my first year of grad school I think I failed almost all my comps. I mean largely because I was doing a quantitative PhD with no math background.


SCHRAGER: And it was the hardest failure I’ve ever gone through, because it was the biggest intellectual achievement I had ever done, which is I taught myself six years worth of math myself, in my free time, my first year of grad school. I never intellectually had growth so much from anything. I never achieved so much. And I still – you know, at the end of the day, you’re still taking a math exam, and you’re being judged against a Korean math champion. No matter how much math you learn quickly, you’re not going to stack up, so you’re going to fail.

RITHOLZ: Meaning the rest of the student was hardcore math people?

SCHRAGER: Yes, and I was just reading math textbooks in my free time, which wasn’t all that much. I wasn’t sleeping; I was just reading, working through entire math textbooks to try to do my homework.

RITHOLZ: That sounds horrible.

SCHRAGER: And yes, it was horrible. I was such an unhappy person. I kind of started developing weird social ticks, and then I went through all of this. Never slept for a year, just working through math textbooks and I still just failed everything. I mean that was –obviously — I was devastated.

RITHOLTZ: I’m going to blame the lack of sleep, because that effects cognitive functioning —

SCHRAGER: You know, it was — like, I had time to — you get to retake them, and when I got to finally rest and have all that knowledge sort of marinate in me, I realized how much I knew. And I mean — I think what I learned from that experience is if you really want something — you know, there’s a point you have to cut loose —


SCHRAGER: Is you just — you can’t take the first failure. Because no one remembers that you failed your first year exam, all they remember is that you graduated.

RITHOLTZ: That’s an interesting observation. So now let me ask you the flip question, what do you do for fun? What do you do when you’re not failing math exams?

SCHRAGER: I play Bridge.



RITHOLTZ: My mother plays Bridge, my wife plays Bridge — this has become like a giant thing now.

SCHRAGER: I’m part of this great Bridge group of all these intellectuals — there’s a field medal winner at the last one. But (inaudible) it’s a sort of very humble, low-key group.

RITHOLTZ: Really quite interesting. What are you most excited about in the future direction of the risk industry?

SCHRAGER: (Inaudible) technology.


SCHRAGER: I mean, everyone else is sort of scared of it, but I think it’s going to sort of take us to some interesting places.

RITHOLTZ: Interesting, I don’t necessarily disagree. So if a millennial or recent college student came up to you and asked you for career advice about going in to economics, risk, or academia — what sort of advice would you give them?

SCHRAGER: Find the smartest person you can, and attach yourself to them.

RITHOLTZ: It’s funny you say that, that was my father’s advice to me when I went to grad school.

SCHRAGER: Did it work?

RITHOLTZ: More or less — actually it began as joining track in high school, find the fastest guy, keep up with him and then when I went to grad school he said, “hey remember the advice I gave you about track? I’m going to give you the same exact advice — find the smartest,” and I’m like, “dad I’m way ahead of you — I already had thought about that.”

So how does that manifest itself for a millennial or a college graduate, how would they actually go about doing that?

SCHRAGER: Well when you’re in a job — instead of finding the smartest person in the room, and it should never be you — or there’s something wrong. And try to get them to mentor you — and be open to it.

And you know, anyway, contrary to all these perceptions of millennials being know-it-alls, I find that the millennials that I work with are always looking to learn. Maybe I’ve just been lucky.

RITHOLTZ: I don’t know if know-it-alls is the right description. They’re definitely hardworking and they have areas that they have great strengths in, and I think the biggest knock is their weaknesses — they’re not interested in working on.


RITHOLTZ: But I think they’ve gotten a bad — having worked with them for five years in a firm, do you think they’ve gotten a bad wrap (ph)?

SCHRAGER: Yeah, I think they’re the same as every other generation. You get some noisy outliers and I think with social media, the noisy outliers voices are amplified —

RITHOLTZ: That’s a great observation.

SCHRAGER: But I think on average they’re just like everyone else.

RITHOLTZ: That makes perfect sense. Although they’re — they grew up in such a unique — like, think about what you grew up in and then what people born 10 or 20 years after you grown up in.

Technology is this thing that’s kind of cool on the side — they’re immersed in it from birth, it’s a whole different headspace.

SCHRAGER: It’s a whole — yeah, I mean it’s very different. And their brains probably formed differently to some degree. But again — and again, I think ultimately even college students, the ones I’ve interacted with from teaching are also really open to debate in new ideas, and even uncomfortable ideas. Again, it’s just the noisy outliers.

RITHOLTZ: That’s quite fascinating. And our final question, what do you know about the world of risk and economics today, that you wish you knew 15, 20 years ago when you were just graduating?

SCHRAGER: Well that’s when I was starting grad school and you know I chose macro. And macro traditionally has not incorporated risk at all. I didn’t realize how fundamental that it was to the economy.

I thought you know I was studying sort of either the neoclassical, Keynesian, or new Keynesian models where you know if you do government spending this is what happens where if I was doing finance I would think of how does that impact markets, what are the range of things that happen. So I — I wish I knew about risk because I didn’t really.

RITHOLTZ: So I’m shocked to even hear that. I don’t have an economics background, it’s just I play an economist on T.V. How — how is it possible that macroeconomics does not incorporate any analysis the (ph) study of risk. That seems shocking.

SCHRAGER: It is. It is actually — you know people don’t talk about this because other things get attention but I just went to a conference two or three weeks ago that Lars Hansen and Andy Lo put on about how can we incorporate finance into macro.

How can we put risk into macro models. And I think this was amongst academics the big take away from the financial crisis that a lot of macro models have no meaningful role for financial sectors so how are you even going to capture systemic risk.

So this is really where like hardcore economist (inaudible) they’ve been working on post crisis and it’s a hard problem because any economic model has to make choices and once you bring risk in, they get more complicated.

It is a controversial thing to say — I mean not going to sound sexy to most people but to a small group of economist is I now feel strongly, although I don’t think anyone agrees with me that finance — basic finance should be part of basic economic straining because it is such a fundamental part of understanding how the economy works.

RITHOLTZ: Meaning basic finance plus an understanding of risk.

SCHRAGER: Well, yes. Well you — you get a basic understanding of risk if you learn finance because finance is all the principles of risk because finance and economics is just how economist study risk. It just happens to be in financial markets because that’s where the data is. So I think it should be undergraduate macro/micro finance.

RITHOLTZ: Quite fascinating. We have been speaking to Allison Schrager. She is the author of “An Economist Walks into a Brothel,” as well as co-founder of the LifeCycle Financial Partners and an Adjunct professor at NYU and journalist at Quartz.



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