An Economist Walks Into a Brothel by Allison Schrager is an interesting look at important financial concepts such as risk measurement and management, hedging, insurance, and options, but is written for a broad, popular audience much like you would expect from a book by Neil Degrasse Tyson. As the scintillating title suggests, Schrager uses atypical examples such the legal sex-trade in Nevada, World Series poker, and thoroughbred horse breeding to illustrate her examples. Schrager writes,
“I search for unusual places that can teach me more about risk and how to manage it.”
The opening chapter is probably the most crisp, comparing data from the legal Nevada sex trade to that from illegal sex workers in other parts of the country, to illustrate how you can identify and price risk.
“(Legal) Brothel work is what is known in finance as a hedge: giving up some of your potential earnings in exchange for reducing risk.”
In other chapters she uses the careers of Kat Cole, former president of Cinnabon, and Arnold Donald, CEO of Carnival to illustrate the upside potential of taking risk and the importance of protecting the downside. About Donald, Schrager writes,
“He often tempers his ambitions and is willing to take slightly less to maximize the probability that things will work out.”
Unfortunately, Schrager’s book falls short for me. Conceptually, I’m aligned with her attempt to make financial concepts accessible and useful for a very broad audience. I even like most of the stories used to illustrate her points. However, her attempt to have each chapter focus on a specific financial area, Chapter 5 uses the paparazzi to describe idiosyncratic versus systematic risk, is muddied as she often mixes concepts across chapters without acknowledging doing so. The paparazzi are shown to “manage their idiosyncratic risk by spreading it around.” Fair enough, but that’s diversification which is actually Chapter 8.
Even worse, in many cases Dr. Schrager asserts points that are at best poorly worded and at worst, simply wrong. Back in the paparazzi chapter she writes,
“Images of Gigi are like a stock: their value varies based on factors unique to Gigi and a particular photographer getting the right shot at the right time.”
A photo of Gigi isn’t like a stock at all. Stocks have value because of the expectation that the underlying business will create a return for its holder in the future in the form of earnings and dividends. This would be a perfectly fine thing for Dr. Schrager to explain to her readers, but that isn’t what happens. In reality, that photo of Gigi has no intrinsic value at all and would better compared to Bit-coin than a stock. Neither one have any real market value and they’ll both be forgotten eventually.
In Chapter 8 Schrager writes,
“A racehorse is an exceptional creature – a living, breathing investment portfolio.”
Again, not so. The sentence works if you drop the word “portfolio”, but portfolio has a specific definition that Dr. Schrager certainly knows. It implies more than one asset, perhaps many assets, grouped together. The analogy works if we’re talking about a thoroughbred stable but it doesn’t work with one horse.
Ultimately, I think An Economist Walks Into a Brothel is an interesting, well researched book that was poorly written. It feels rushed and in need of an editor that understands the material and can help craft it for the intended audience. So much criticism, both deserved and undeserved, has been heaped upon the finance industry in the last many years. I believe that people who derive their incomes from that industry should do everything they can to provide accuracy and transparency, myself included. Allison Schrager’s book seeks to do that but misses the mark in a disappointing way.
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