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.