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Behind the Big Wave

Schrager told me that she thinks of financial models “as parables—stylized versions of how the world works, which you take away to figure out some sort of deeper lesson or relationship.” The whole concept of the book, she says, was “the idea that I would retell financial models in a traditional parable structure.”

Of all of the book’s sources, the big wave surfers had a relationship with risk that most closely mirrors financial specialists, she says. We spoke about how surfers are so much like actuaries, and the good and bad ways that more certainty can shape our relationship with risk.

HF: How did you hear about the Big Wave Risk Assessment Group Safety Summit?  

AS: I was pretty deep into the book [research], and looking at creative good stories around risk, when I went to a talk at Patagonia and heard a surfer say something really insightful about risk; he put me in touch with Greg Long, who is known as the risk fanatic in big wave surfing. Usually I had to convince people that this was a thing: “I’m an economist, and I study retirement and i want to talk with you about horse breeding.”  But when I talked with Greg’s manager, in the middle of my preamble, he just said, “You made the right call.” 

As we were trying to connect—big wave surfers aren’t always good at returning their emails—I Googled “big wave surfer risk,” and I found the Big Wave Risk Assessment Group (BWRAG) Safety Summit. I thought: Why not? 

When I got there, it was spot-on: Everyone was a lot better looking and tanner and in better shape than I was, but really, other than that, it was just like going to a finance conference.

If you go to a macroeconomics conference, the talk is about systemic risk. I didn’t expect that to be the biggest controversy in surfing too.

HF: How so? 

If you go to a macroeconomics conference, the talk is about systemic risk. I didn’t expect that to be the biggest controversy in surfing too, but if you aren’t responsible, and you end up surfing a wave that you have no business being on, you have to be rescued; you can hurt someone else. 

The big question [surfers are] focusing on is the same one that we are. In finance we have all this new technology. We have robo, and all these new fancy derivatives … on balance I don’t think there’s any doubt that they reduce risk, but they can also be used to create these much bigger systemic risks. The same is true in surfing: The conference was about safety, but I think we spent just as much or even more time talking about responsibility of technology. How do you use technology responsibly, and where should the line be drawn?  

HF: Can you talk a bit about the Peltzman effect, or what some of the surfers called the “double-edged sword” of risk?

People look at all the innovation we have [in finance], and the first thing they say is, “Oh, we should go back to the 1950s when there was no technology… maybe we’ll keep the ATMs but this has all been for naught.” When I talked with Brian [Keaulana] and [Melvin] “Uncle Mel” [Pu’u] about that, they talked about how back in the day, when Buffalo, Brian’s dad, was a surfer, they only had five guys out there, but they all swam super well because they didn’t even have leashes. And I was like, “Should we go back there?”

They thought that was a really good question. (They think that I’m so smart, but really i used all the dialogue we have in finance and applied it to surfing and it makes me seem incredibly insightful!) They said they wouldn’t go back, even though we do have all these risks, because the sport is so much bigger, and we reach so many more people and so many more opportunities for all, in terms of sponsorship and visibility.

They’re not realizing: I’m solving a significantly harder risk problem every time I go out in the water than I would be with my 401(k).

I was surprised that their answer was very similar to finance: People say they would go back, but I think if they really knew what was at stake, they wouldn’t: Risk reduction has really encouraged more investment in emerging markets, which has led to a reduction in poverty. Robo has democratized financial advice that has traditionally been a very expensive service. These are huge benefits that have really made the economy in a lot of ways a lot more inclusive.

HF: Can you talk about the impact of technology on certainty as it relates to risk in the insurance space? 

It’s an interesting problem: You have this way of understanding risk and managing it that makes you so much safer, but it also raises the stakes. I think that technology in general has this recurring theme: As you become more successful, you see more moral hazards. You also don’t want to get too much false comfort that you’ve thought of everything because you have so much data.

Everyone talks about [data] as if it’s the new oil, but I think the skill and understanding of how to work with data is undervalued. There is so much unknown. And it is the Wild West: Everything works until it doesn’t … and it takes a real vulnerability and a change in the economy to understand, really, how robust are these tools? 

HF: What did the surfers tell you about their own relationships to finance? 

I didn’t speak with all of them about it, and some might be financial geniuses. Others were, like, “I have no idea how this works, I’m overwhelmed,” while I thought: “You are a risk master!” The fact that they could be so thoughtful about risk in one area of their life and then totally ignorant in another just shows that we’re not helping people connect the dots. They’re not realizing: I’m solving a significantly harder risk problem every time I go out in the water than I would be with my 401(k).

When you’re thinking about saving for retirement, you need to think about your goals in terms of income and wealth. They say the same thing in surfing too: What do you want to get out of this? Do you want more fame, more notoriety, do you just want to have fun? 

If you need $50,000 a year when you retire, that’s what you’re investing for. You’re in an index fund for diversification, or you have an investment in bonds as a hedge. If you want to surf an 80-foot wave, you do the data—you figure out where that wave is going to be. You organize the expedition. There are hedges: You want to make sure that there’s a jet ski there, that you have an adequate crew to be there to rescue you. And you need to pick the right wave—you don’t want to take the first wave in the set.

HF: What has the reaction been to the book? 

They were really friendly, but I think they were a little confused about why I was there. Then, when I did a Planet Money episode, and one of the surfers participated, they got excited: Wow, this is actually a thing that people were reading.

Some of my other sources who have public lives independent of me are now bringing different risk insights into their own work that I had never even thought of before. It’s fun. I feel like our community has gotten that much tighter, and in some ways, I’ve united all these people. 

HF: Well, you’ve given them a new language and a new self-identity…a way to think about the work they do in a different way.

I reject this idea that we’re all hopeless risk takers. So it was great finding the commonality among people. I really wanted to celebrate people for being smart: There are aspects of everyone’s lives where they are brilliant risk managers.

→ Learn how skateboarders defy the economic logic of cities in Beneath the Pavement Lies the Beach, excerpted from Hacking Finance No. 1, Movement

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