Risk Management – A Brothel in Nevada, Race Horses in Kentucky & Iraq War


As experts are warnings us, the year 2024 is likely to be a choppy year with a lot of volatility, a fancy word for risk. What else is new? Isn’t warning readers to watch for risks & chaotic events the most riskless thing many “experts” do? 

That brings us to a student & a talented story teller of risk – Allison Schrager, an economist, journalist and a consultant to international organizations, including the OECD and the IMF. That is a background of many in our neck of the concrete woods named New York City. What makes Ms. Schrager interestingly different is that she learnt how to look at risk & analyze risk from Nobel Prize Winner Robert C. Merton who himself came close to blowing up Wall Street despite calling their fund as Long Term Capital Management. As she writes in her book, his teachings “changed how” Ms. Schrager, “saw everything“.

And, as her book shows, Ms. Schrager saw & learnt a lot about managing risk in a variety of spheres from the success of buyer-seller risk management at a brothel in Nevada to breeding racing champions in Kentucky, to making hit movies in Hollywood and to the decisions of a famous General in the Iraq war.

These cases make the book interesting reading while teaching basic risk management concepts that fit literally most walks of life including marriage. For example, she points out that if “simply getting married is the goal“, then “it is a risk-free choice to wed the first person who loves” you. But if the goal is “being married“, then “settling is a high-risk choice“. 

What is buyer-seller risk management in a brothel, you ask? A man named Dennis Hof with experience in selling time-shares bought the Moonlite Brothel in Nevada and decided to approach sex work the same way he sold time-shares. What was the key? As Ms. Schrager writes,

  • Hof didn’t get rich by forcing young women into dangerous situations. Just the opposite. He made his money by enabling a safe transaction between a sex worker  and her client. Each of them was willing to pay for that safety. That is where Hof took his cut.”  

Ms. Schrager tells us that one of his top earners grossed more than $600,000 a year and handed over half of her earnings to the brothel. That to her was well worth the risk management of her work.  

The other extreme of Ms. Schrager’s case studies is the Battle of 73 Easting in Iraq in February 1991. It was the first GPS war & freed a unit called US Eagle Troop from relying on traditional roads. That also led to the Eagle Troop surprising Iraqi troops. Then “Twenty-three minutes of the most dramatic and decisive battle of the Gulf War followed“. Instead of stopping at 70 Easting crossing as he was told to do by a lieutenant from command, Captain McMaster said “Tell them I’am sorry” and continued on. Shortly after they stopped a little shy of 74 Easting. As Ms. Schrager tell us,

  • Eagle Troop suffered no casualties and defeated an entire battalion of Iraq’s best soldiers, a much larger force with more than ten times the number of tanks. This battle … became known as “one of the most decisive victories in the Gulf War.” 

The aftermath teaches us the other side of successful risk management. As Ms. Schrager writes,

  • “In the years following the Gulf War, a dominant school of thought emerged; it assumed that America’s superior technology could remove risk from warfare. … McMaster recalled people at the Pentagon saying the American military was so strong, no country would dare challenge it. McMaster told me he’d even heard the top brass use a market analogy: They’d say we priced other armies out of the market.””

To paraphrase Ms. Schrager, “risk models are valuable but they can backfire if you assume the unpredictable has become completely predictable” and it leads to an “overconfidence in certainty“. Allow us to digress from Ms. Schrager’s book to share our own thoughts below about how “over-confidence in certainty” convictions about “complete predictability” can lead to unforeseen crisis:  

  • We have all seen what has happened between Israel & Hamas. Recall the months of intense civil-war like protests that enveloped Israel between pro & anti Netanyahu factions; recall how parts of the Defense forces refused to fight. We recall reading thoughts from Arab leaders who were absolutely stunned by what they were seeing. They were mystified how Israel was destroying itself when they had given up any hopes of competing with Israel. 
  • We feel relatively certain based on our reading that Israeli leaders did not even suspect that they would face an external attack so sure they were about Israel’s military superiority. And then, in a few months, came the most successful & heinous attack inside Israel by Hamas. Would Israel have been caught napping so had they been not so engrossed in a civil war and assumed that “the unpredictable had actually become completely predictable“? 

Ms. Schrager tells us that the concept of “risk” is derived from rhizikon, an ancient Greek seafaring term that describes a dangerous hazard. She also highlights quotes from notables to highlight topics of her chapters :

  • Reward – “If you don’t know where you are going, you might wind up someplace else” – Yogi Berra
  • Taking a Risk – “The dangers of life are infinite and among them is safety” – Goethe
  • Hollywood’s Quest for Certainty – “Il n’est pas certain que tout soit incertain” – “It is not certain that everything is uncertain“. – Blaise Pascal
  • Secret Lives of the Paparazzi – “Dream, diversify – and never miss an angle” – Walt Disney
  • Tilting toward Rationality – “Victory is fleeting. Losing is forever” – Billie Jean King
  • Risk Misperception – “The poet should prefer probable impossibilities to improbable possibilities” – Aristotle
  • Diversify – “Put all your eggs in one basket … the handle’s going to break. Then all you’ve got is scrambled eggs” – Nora Roberts 
  • Art of the Hedge – “It is only by being bold that you get anywhere. If you are a risk-taker, then the art is to protect the downside” – Richard Branson
  • Insurance – “Fun is like life insurance; the older you get, the more it costs” – Frank McKinney “Kin” Hubbard
  • Moral Hazards – “Only those who will risk going too far can possibly find out how far one can go” – T.S. Eliot
  • The Fog of War – “Plans are worthless, but planning is everything” – Dwight D. Eisenhower

The above is just a glimpse into this light but smart book. We enjoyed it & thought we would share that feeling with you. 


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