An Economist Walks into a Brothel

And Other Unexpected Places to Understand Risk

[Amazon Link]

I put this book on my "get at library" list thanks to a Reason podcast interview with the author, Allison Schrager. And it came in via Interlibrary Loan from Trinity College (the one in Hartford, not Dublin).

It's a look at a topic I've been interested in for a while, risk. It mainly centers around financial risk—that's Allison's professional home base—but it occasionally slops over into risks of death or injury as well. The approach is suitable for a dabbler (like me), and Allison's writing style is jauntily accessible.

She describes what risk is, why some degree of risk is inevitable, how to maintain a rational attitude toward risk, and the various strategies people use to mitigate or avoid risk: diversification, hedging, insurance, etc. And (last but not least) the recognition of uncertainty; you can't, nearly by definition, prepare for the unpredictable. The best you can do is stay flexible and willing to adjust your strategies.

She discusses (but doesn't write down) the Black-Scholes formula for option pricing. A worked-through example would have been appreciated, but I can see that some readers closing the book, saying "I was told there would be no math."

All that could have been pretty dry, but Allison had the bright idea of illustrating her topics with real-life examples from high-risk fields. Exemplified by the book's title: she visited a (legal) cathouse in Nevada, and discusses the trade-offs involved in working in that relatively safe environment vs. freelancing in other situations.

Further chapters visit horse breeders, magicians, professional poker players, movie financiers, and more. (The chapter on horse breeding is actually more explicit than the one with the brothel.)

Good book.