The economics of risk taking in the workplace

Innovation Hub
A roulette wheel is spun.

Economist and journalist Allison Schrager explores how people in unexpected professions — outside the world of economics and finance — handle and understand risk management. From legal sex workers, to surfers, to papparazzi, to poker players, Schrager shares some of the valuable lessons she learned about managing risk in her new book,  “An Economist Walks Into A Brothel.”

Take Shelby Starr, one of the dozens of legal sex workers that Schrager met in a brothel in Nevada. While Starr rakes in more than $600,000 a year, she gives more than half of her earnings back to the brothel. Being a legal sex worker also means that Starr pays taxes. If Starr worked in the illegal market, she would not be divvying up her earnings. Would it be preferable then, to work illegally?

Schrager received a resounding and unanimous “no” from all the legal sex workers to whom she posed that question. In Starr’s own words, “It’s just too risky. I know I’m safe here.” 

Related: What behavioral economics tells us about human behavior

To reduce risk, you must be willing to pay a higher cost, Schrager says. While legal sex workers may not be happy about sharing a large portion of their earnings, the tradeoff is that they receive certain benefits from the arrangement that the illegal market cannot provide — a trustworthy clientele, regular medical screenings and security services. 

Schrager explains that, throughout our lives, we are always making risk-return tradeoffs. These tradeoffs may not be clear to us immediately, but recognizing them early on can help us make better risk decisions. The legal sex workers in Nevada traded their earnings in return for reduced risk in their profession. 

Similarly, we can learn different lessons about handling risk from other unusual professions, according to Schrager. When she was on the prowl for celebrities with the paparazzi, she learned that some photographers formed informal alliances with one another to increase the chances of capturing the so-called “money shot.” The tradeoff was settling for a lower ultimate reward and shared earnings, but it also allowed the paparazzi to achieve a modicum of stability in a highly volatile profession.

Related: Research suggests a new reason for teens’ risky behavior

Poker players taught Schrager how behavioral biases can undermine good risk decisions. “We suffer from something that is known as loss-aversion. When we’re down, we’re inclined to take more risks, and when we’re up we’re taking fewer risks,” explains Schrager. “In poker, when you’re losing, you play more aggressively than if you were winning.” 

But professional poker player Phil Hellmuth, also featured in Schrager’s book, has a different strategy for handling risk in the game: be consistent. Making hasty decisions while under pressure increases the chances of risk; hence, making consistent investment decisions is most likely to lead to long-term stability. 

We are living in a time where risks are relatively low in all areas of our life compared to the past, according to Schrager. “Humans innately feel a lot of risk, even if we’re not facing the serious risks we used to,” she says, but “it’s never been a better time to be alive from a risk perspective.” To effectively assess risk in our lives, Schrager believes there is only one question we need to ask ourselves, much like the legal sex workers in Nevada did: “What am I paying to reduce risk and is this worth it to me?” 

Nadia Lewis is an intern at Innovation Hub. 

This story was originally published on Innovation Hub. Read the original here

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