The science of risk I'm referring to comes from financial economics. While you might be imagining men with slicked-back hair and fancy suits trying to make money—or take yours—most of what goes on in financial markets is simply buying and selling risk. Risk in finance is an estimate of everything that might happen to an asset—say, the odds of a stock going up 2 percent or 20 percent, or dropping 60 percent. Once risk is measured it can be bought or sold: people can choose to increase risk or reduce it, according to their preference.
Financial economics studies risk in financial markets, but its lessons can be applied to any market or decision we encounter in our lives.
For example, like any risk scholar, I would never take a New York City crosstown bus, because travel time is totally unpredictable: it takes thirty minutes on average to cross the island of Manhattan via bus, but commutes of more than an hour or as short as fifteen minutes are possible, depending on the day or time. If I walk, it takes thirty-five minutes—every time. When I walk, I don't have to worry about excessive traffic or lots of stops to let people on and off the bus.
Walking crosstown is almost perfectly predictable, and for me takes just about as long as riding the bus. To put it in terms of financial economics: if you need to decide between two portfolios with similar returns, choose the one that is less risky.
These lessons from financial economics can be useful whenever we need to make a risky decision, but most of us never learn them. I have a PhD in economics, but I didn't learn much about finance until I finished graduate school. I had assumed financial economics was simply the study of how people try to beat the stock market to get rich. While that's part of it, because increasing risk offers the possibility of making more money, financial economics is more than that: it is the study of risk.
As I learned more about financial economics, I started to see how its market-based lessons on risk could translate into a new way to understand and see the wider world. Knowing how to use these tools would empower us to make better complex risky decisions every day, from deciding to go back to school or take a job at a start-up, to allocating an amount of time to work on a project or determining how much to bid on a dream house.
The economics of risk are everywhere. When writing this book, I did something economists rarely do. Rather than sit at my desk at home and just look at data, I spent many hours in the company of noneconomists, far from Wall Street, and asked them how they manage risk in their lives and careers.
Everyone I interviewed has found clever ways to identify and manage risk in a rapidly changing economy. Their stories illustrate the most important principles of financial economics better than any story about the stock market ever could.
The owner of the Moonlite BunnyRanch when I visited was Dennis Hof, a large, slightly hunched, bald man in his seventies who had an imposing presence. He often wore a bowling shirt and khaki pants and walked the halls of the brothel flanked by young blondes vying for his attention and approval. Hof died in October 2018 at the age of seventy-two, found in his luxury suite at one of the brothels by porn star Ron Jeremy.
Hof grew up a beloved only child in Arizona. In high school he worked at a gas station, knocked up his girlfriend, and married her. Soon after, Hof started buying gas stations; he sold gas illegally during the 1970s energy crisis and pocketed a small fortune. He had a series of affairs and his marriage fell apart. Hof moved to San Diego, started a business selling time-shares, and befriended people in the porn industry. He also became a regular customer at Nevada's legal brothels.
The only places in the United States where selling sex is lawful are a handful of counties in Nevada, where the industry is heavily regulated. Licit sex workers must work out of a licensed brothel, be regularly screened for sexually transmitted diseases, and undergo extensive background checks.
In the 1980s, when Hof and his friends frequented the brothels, they were dingy, sad places—often a trailer in the desert where women were expected to perform any sex act the customer wanted for whatever price the house set. The women weren't allowed to leave for days at a time.
In 1993, Hof bought the Moonlite brothel in a small town just outside Carson City and decided to approach sex work the same way he sold time-shares. He abolished set prices and let the women choose what services they wanted to provide and to whom. He set up the business so every woman at the brothel worked as an independent contractor who could come and go as she pleased and negotiate the terms of each transaction herself. This gave her more autonomy and an incentive to hustle and ask for more money. By the time he died, Hof had bought six other brothels in Nevada; I visited four of them.