An Economist Walks Into a Brothel: And Other Unexpected Places to Understand Risk

by Allison Schrager

For example, suppose you decide to become a commercial crab fisherman, one of the world’s most dangerous jobs. The odds of getting killed or disabled are much higher than they are for accountants. But all the risk can pay off. You can make up to $50,000 a month during crab season, more than most accountants get paid in a year. Hedging risk in this case would be avoiding the most dangerous fishing areas, like the Bering Sea, which has the roughest weather and also the biggest crabs. You take on less risk and also give up the potential for big earnings; maybe you make only $30,000 a month instead of $50,000 but you reduce the risk of being maimed or killed. Insurance deals with risk in a different way. You buy life or disability insurance because providing for your family matters most to you. If something bad happens to you on the dangerous seas, your family will still have income, but at the same time you preserve the potential to reap big returns in the most perilous waters.