Studying retirement risk took economist Allison Schrager all the way to a legal brothel in Nevada. What, you might reasonably ask, do brothels have in common with retirement risk?

Actually, they have a lot in common, according to Schrager, a Columbia University-trained economist and author of “An Economist Walks Into A Brothel.” Schrager spent two weeks at The Bunny Ranch in Nevada several years ago as part of her research on retirement.

Retirement, she told attendees at an Investments & Wealth Institute event in New York City Thursday morning, has numerous sources of risk and uncertainty. Many risks can be placed into a probability distribution, but black swan-style uncertainties are almost impossible to quantify. Many clients of advisors are finding they have to take more risks to reach their goals these days.

Understanding these trade-offs is part of what brought Schrager to accept an invitation to visit The Bunny Ranch, where 18-year-old women often negotiate with men in their 60s. The Bunny Ranch has both a high-level negotiation training program and a another strong program in financial literacy. Schrager, who studied with Nobel laureate Robert Merton, was impressed at the level of sophistication.

There are many risks involved in producing sex services. These include violence, humiliation and criminal charges in many states outside of Nevada.

By making sex services legal, Nevada manages to reduce the risks for both parties. In fact, it's almost risk-free at an establishment like The Bunny Ranch. That's why men will pay a $1,000 in that state, a 300% markup from what they'd typically pay elsewhere. The less risk you take the more you pay, Schrager observed.

Think of risk-loving, movie star Hugh Grant, who negotiated a good price from a Los Angeles prostitute. Sadly for Grant, he was too cheap to find a motel room and instead chose a car in which to make whoopee. He ended up getting arrested on quasi-minor criminal charges and his name was splattered all over the tabloids.

In retrospect, Grant, a multimillionaire, probably wished he had paid a lot more at some outfit like The Bunny Ranch. What his lady friend, Elizabeth Hurley, thought can only be imagined.

One woman at The Bunny Ranch earned $1 million a year, Schrager said. And yet she and others are willing to give 50% of their earnings to the outfit. In return, they receive protection and many other benefits such as financial literacy training. Most significantly, the brothel provides a risk-free transaction for both parties in what is often called the world's oldest profession.

In today's low-interest-rate environment, people have to pay a high price to reduce retirement risk. The price of risk-free assets, often defined as three-month Treasury bills, has gone up as yields have fallen. When it comes to retirement risk, the number of variables can be overwhelming, she noted.

Short-term Treasurys may be a great way to reduce volatility risk but people need income. Schrager noted that a 10-year Treasury bond was more closely correlated to the price of a 20-year annuity.

Schrager, who started her career at Dimensional Fund Advisors, did much of her work with Merton. She said he argued that many people—retirees, I presume—“should annuitize everything." She disagreed, saying many people might want to leave $1 million to their children or simply maintain liquidity for unexpected events like health care.

Schrager went on to discuss the work-related issues of the paparazzi. But since they are viewed as obnoxious low-life types, we'll skip them and move on to a far more exciting profession: big-wave surfers.

Like financial advisors, big wave surfers actually hold their own conferences on risk management. Unlike financial advisors, they show up in shorts and flip-flops, said Schrager, who was invited to attend one of these in Hawaii.

Surfing 60- or 70-foot waves entails a set of risks most of us can only watch. But these daredevils carefully study risk management. Technology, in the form of inflatable vests and the use of jet skis and helicopters, has made the sport far more accessible to boardriders lacking the skills of the elite surfers.

This has created its own set of problems, which some might draw parallels with today's stock market. Some people who have no business surfing giant waves are now doing so. There has even been talk of licensing or regulation, but big-wave surfers tend to be libertarian types, she noted.

Sometimes even the best surfers take risks they shouldn't. Schrager told the story of Greg Long, one of the best big-wave surfers in the world.

Big waves tend to come in groups of four or five. The problem with taking the first wave is that when you are finished you can find yourself right in the exact part of the ocean where the second 70-foot wave crashes upon you. That's not fun.

One day Long grew impatient waiting for the fourth or fifth wave, every one of which turned out to be a dud. So late in the day against his better judgment, he took the first wave—sort of like the investor who resisted investing in the tech bubble—until early 2000.

Skilled big-wave surfers like Long are trained to hold their breath for up to five minutes so they can stay under water as the big waves roll over. Nonetheless, Long decided to surface at just the wrong moment and was knocked unconscious. Fortunately, he was tied to his surfboard, which was spotted by a helicopter that rescued him.

Schrager compared the jet skis and helicopters to a variant of portfolio insurance. The problem is that it creates a moral hazard of sorts and conditions people to take risks they otherwise wouldn't.