Ladies and gentlemen, please welcome Manhattan Institute President Ryhan Salam.
Good evening everyone. I'm Ryhan Salam, president of Manhattan Institute, an organization that works to keep America and its great cities prosperous, safe, and free. We've gathered this evening to talk about Worth the Risk, an important new book by my distinguished colleague, Allison Schrager, a senior fellow at Manhattan Institute and a columnist for Bloomberg Opinion. Allison's writing has appeared in the Economist, Foreign Affairs, Wired, and most importantly, City Journal. She's also become a fixture on CNBC's Squawkbox. For years, Allison has drawn attention to what looks like a strange contradiction. Unemployment is low. The safety net is, like it or not, more generous than it has ever been. So, you'd think this would be a great time for Americans to embrace risk-taking. Instead, as she makes clear in her new book, the rising generation is choosing the path of least resistance. Younger Americans are less willing to take risks romantically. They are less likely to move from one city to another. Entrepreneurship has fallen. Immigrants are now nearly twice as likely as native born Americans to start a new business. Worth the Risk explains how we got here and what it will take to reverse it. Allison's work deserves a serious interlocutor and we're fortunate to have found the perfect person. Cliff Asness is a founder, managing principal and chief investment officer of AQR Capital Management. He is also one of the most decorated researchers in finance, a five-time winner of the Bernstein Fabozzi Jacobs Levy Award, a two-time winner of the Graham and Dodd Award, and a recipient of the CFA Institute's James R. Verdin Award. And as anyone who knows him will tell you, Cliff is a man who loves risk. Most people who have ascended to the pinnacle of the investment business say nothing in public. Cliff has spent years saying exactly what he thinks under his own name at great length to anyone who will read it. Or he did until I went looking for his X account earlier today and couldn't find it. I fear one of your PR people at AQR got hold of your phone, Cliff. If so, I hope for their sake that they've made it to a non-extradition country by now. Cliff is a former trustee of Manhattan Institute and remains one of our most steadfast supporters. We honored him with our Hamilton Award in 2023 and we're grateful he's with us tonight. None of this work is possible without the friends and supporters in this room. I especially want to recognize the trustees who are with us tonight, Reihan Salam, Susie Edelman, and Ken Gilman. With that, please join me in welcoming Allison Schrager and Cliff Asness to the stage.
The X account is coming back. I needed a detox and my ability to just not log on if it's all hooked up is zero. So, you have a month, by the way, if you cancel your account to just restart it and it's in my calendar. Security was something, wasn't it? I didn't know about Zelensky and I'm in the security line just thinking how many people hate Allison. But I don't think it was you and Risk. Let's dive right in. Ryhan gave a complete summary of the book and I think we're pretty much done. So, you're an economist who won't ski, who won't ride a bike in a city, and you've written a book telling us all that we should take more risk. How'd that happen?
Well, I guess during the pandemic, it struck me how much we kept hearing the word safety. And as you know, we're both financial economists. Safety has a very special meaning in finance. And the value of safety changes over time and I was like wow we really value safety a lot more than we used to. And I have my risk aversions. I think we all do and it dawned on me that we'd really had this big change in our relationship with risk and that we'd become much less tolerant of it. And it coincided with also zero interest rates which got me thinking about doing another book which after the last one about sort of how I think financial...
What was the title of the last one again?
An Economist Walks into a Brothel.
I just wanted to hear you say it.
We can talk about brothel too if you want but...
But so it just got me thinking about like what is the relationship with safety and how has it changed? And then when I dug into the book, I really became more aware of just how much safer the world had been, yet also how much more we were valuing safety.
You go through seven myths in the book, let me jump right to the conclusion. If this audience was to take away one, what's the most important one?
I think one of the myths is that we are always being told like we're bad at risk. Like we have these like cognitive biases and the fact is like...
We better have them or I couldn't make a living. Let me just be clear. But go on.
But like we've thrived as a species for thousands of years and we're actually very good risk takers. It's just when the world changes particularly shocks to wealth, technology, our understanding of risk can get a little unmoored. I think the other thing that sort of surprised me is like the last book I didn't go into a brothel again but I like colorful people. Sort of a book's an excuse to meet interesting people like the mob hitman or the bounty hunter. And I was talking to Nick Wallenda who is the tightrope walker and...
The tightrope walker without a net.
And he walked across Niagara Falls without a net or I think they made him take out a net and he's Canadian and he was really upset about it. And Grand Canyon. And we're talking about like you know there's life on the wire and like you know they're famous tightrope walking family. They all get together at their compound in Sarasota and like play around on the highwire. Then he tells me he's like terrified of investing in the stock market which is like we do all the time. And it occurred to me that like we all have like I think like other books have argued or other people like to argue or that there's categories of people who are like risk averse or risk takers. And I don't think that's true. I think we all like me like I won't ride a city bike but like we have our domain of risk we're comfortable with and we understand how to manage that and we feel good about that. It's just people have that domain has gotten a lot smaller and I think if we really like and like sort of learn some basic things we can feel comfortable all investing in the stock market. I'll never like do be a high tight rope walker but we can all sort of expand our pool of what we take risk in. I've had years where I'd much prefer to be walking a tight rope over Niagara Falls to what I do.
Yeah. I think it is what haunts our society now. It is a very seductive idea that comes up in finance as you know again and again. I think your crusade against private equity is a great...
I'm not against private equity. I'm simply against them saying that their values don't move when the stock market moves. Let me be clear.
Exactly. The risk illusion.
I invest in these things. I just assume they're as risky as equities.
But that's part of the delusion is that you can beat the market and get a higher return without taking on risk.
People want to be sold that.
Yeah. It's like a lot of really smart, knowledgeable people invested in Madoff and they're like, 'Oh, he can beat the market and I'll never lose money.' And like as we've both been trained like the most principle idea behind what undergirds all of finance is you can't get extra reward without taking some risk. I mean people like you find a way to sort of like maybe take less risk than everyone else.
But yeah it's still risky. There's no beating the market without taking on extra risk. But somehow like people in finance convince themselves of this again anyway they should know better. But like I think it's now become like a societywide epidemic that people...
So it's leaked from finance into society or just the same thing is showing up more broadly.
Exactly. It's like when young people complain I did everything right. I went to the right schools. I had the right job. I did the right internship but I'm not thriving the way I thought I would. It's like yes because you took no risk. You expected upside and you got so little. And that's one of the reasons I'm convinced that socialism is catching on because this is a generation that's a lot less comfortable taking risk. And so when someone says I can create a world where there's total equality, no downside risk, I'll protect you against everything.
But you're still going to prosper. It doesn't work like that.
Yeah. That's the part they don't seem to understand.
Yeah. But it's the risk illusion like that people in finance fall for all the time. Like even a lot of smart people with private equity right now. Like I also am not against private equity, but I'm...
You really seem to be I got to tell you.
No, I write about this all the time. I think it's gotten too big relative to what it should be.
And I'm also uncomfortable with any asset class that grows on the pretense that you can beat the market and take less risk.
Go the other way from risk. You define safety in fairly interesting ways. Can you share?
Yeah. So I was thinking a lot about safety because we heard so much the word safe during the pandemic when go outside when it's safe or you know we want to make sure everyone stays safe. And I'm a retirement economist by training and sort of the safe asset is what Merton would always say to me is numeraire like it is the foundation of everything. It is what how you define risk because we don't have like a unifying definition of risk. Some people think it's a bad thing that happens. Some people it's an upside that happens. You have these two different definitions. But there's one thing risk and like every book I read about risk. It had a really strange terrible definition I didn't quite understand. But there's one thing risk is and it's what safe isn't. It's the complement of safety. But what safety is is also really hard to understand because it's like really idiosyncratic. What struck me about the pandemic is we were just shoving down everyone's throat. There's one safety. It is not getting COVID when for other people it was that their children weren't getting educated. They shouldn't go to school safety. For other people is that their business doesn't shut down. And so we all have our own version of safety. Even in finance, the safe asset is very idiosyncratic to you, to what your financial goals are, to your investment horizon. We always assume it's just like a T-bill. And I don't think people understand how important the risk-free asset is in finance. It's in every asset pricing formula. It really does define what risk is. And yet, we always sort of assume it's the same asset for everyone when it's really not.
Yeah. Like I would agree with that. 98% of the papers will use T-bills as the risk-free asset when you could say 30-year TIPS in some cases should be the risk-free asset. Tell us you have some cool evidence using Google of how the world's perception of the word risk and safety has changed. Can you tell us about that?
Yes. So, it wasn't my evidence. A group of researchers at Gerd Gigerenzer's Institute in Germany looked at Google.
We're giving you credit, not the Germans.
Well, they sent me the data and a very nice collegiate associate at Manhattan Institute helped me graph it, so we're going to take credit. Looked at the usage of the word risk and safety over time using books and newspapers and what you see is just you know the association with the word risk was quite positive in like the early 20th century, 19th century and then just starting around 1970 around the time of the Great Society or maybe the derivation of Black-Scholes I mean whatever you choose all of a sudden risk became had a negative connotation and was starting to you see this real takeoff in positive connotation with safety and that word all of a sudden gets used way more than risk.
Yeah. Because risk is symmetric.
And it is interesting how it's completely symmetric of the risk and safety usage just going like that.
Let's talk about evidence. You make this strong assertion with a lot of evidence in the book that the world has gotten less risky. Can you give us a few examples?
Well, I mean obviously like we're not living in a world of cholera and you know we live longer. I think that everyone kind of when they think about it thinks that's trivially true. But even in the last say 30, 40, even 20 years I don't think people realize I think we all kind of idealize the recent past. Certainly we idealize the 60s but if you look at wage variability so that's how much wages go up and down. So it's like if you think of your income like a financial asset, volatility would be how risky it is, how predictable, how volatile it is. It's actually been trending down for everyone but the top 5%. And this was kind of actually a shocking result. Like my PhD dissertation was and the only thing I've ever published in academic journal was all about how you know retirement looks different because wages have got more variable. And everyone always believed that. This is like this huge myth that's been going around that workers have less security and like it was because we were relying on survey data that turned out to be like really faulty and it was a technological breakthrough that we were able to use big data and when economists actually were able to look at social security records which is perfect because you can because you actually have to understand wage risk you have to go through someone's entire lifespan you can't just look at aggregate populations year to year which is what people usually do you actually have to look at individual what happened to them. And when they did that, they're like, 'Oh my god, wages have never been more stable.' And it's trending down. And I mean, everyone, it turns out the reason why is people change jobs a lot less frequently because changing jobs is, you know, where you get a big wage boost. So what we see is less volatility, which is great. Everyone likes to know what their salary is going to be, but also less upside. So we see wages growing less fast. There's also this evidence that, you know, people aren't moving as much. They're forming businesses. Even now with the post-pandemic bump, people are still forming businesses less frequently and changing jobs less likely. And then there's all the evidence about I think we all hear about this about teenagers not drinking, not driving at all and all of those sorts of things.
You make an interesting link and you mentioned the top 5% still have volatility in their wages. You make an interesting link to inequality where there are a lot of traditional reasons for it, but you tie it to risk. Can you take us through that?
Yeah, we've effectively shut lower income people out of risk-taking, which I think we consider like this great noble thing. And it is because, you know, they were traditionally a lot more vulnerable and vulnerable to downside risk. I mean, if you only make $20,000 and you have a bad shock, I mean, that's, you know, catastrophic. But, you know, it depends how you structure benefits. And certainly since the Great Society we've been structuring benefits more it's like you know the difference between well you know the difference like between insurance and a hedge. So...
So insurance is like a stock option or like fire insurance. If something bad happens you get a payout right? And so in the 20th century we sort of saw this growth of government benefits and in the beginning it was very insurance-oriented like unemployment insurance or you know disability insurance if something bad happened you got a payout and that was great. I mean and you could argue even I'm not a big government person but like you could argue that's even the role in government as we urbanized and industrialized we faced a lot more systematic risks...
Yeah. And the government's uniquely able to do that. So that was fine. And as everyone knows in finance, the sort of picture you always learn in like finance 101 is insurance maintains upside. You're protected on the downside for a fee, but you still get the upside. A hedge is just taking risk off the table.
So just narrows the distribution.
Exactly. It's like just investing more in the safe asset, whatever that is, and you lose upside. So what you see is you see policy after the Great Society becoming much more hedging oriented. So you think particularly like I once had this experience. It's the closest thing I've ever done to investigative journalism is was it the Economist?
It's not investigative journalism if you're not wearing a disguise.
I dressed in sloppy clothes.
And I went into this homeless shelter to teach financial literacy. So like I'm a life cycle finance economist. Like financial literacy is like my thing. I study it. And so I was really curious to learn, and I discovered it's incredibly difficult financially to be poor in a way I never really understood. Like my utility function is, you know, roughly monotonic with income. Like I am happier the more money I make. And all of these women like very smart. I don't think I was useful to them at all. But what was useful because I had nothing to offer them because being poor is so complicated financially and I knew nothing about it. But they're talking to each other and giving each other really fantastic financial advice. And you realize again they don't have this sort of monotonic function like they make more money they lose money and their financial lives are so complicated because they just there's no incentive to take a risk. If they do move for a better job if they do make more money they lose benefits. So we've just effectively like I guess we've prevented some downside protection but how do they get ahead?
Yeah, I think of it as there is incentive if you're able to think which is very difficult incredibly...
Because you can raise your situation now but not actually benefit because you lose your benefits and eventually get to a different state of the world. But that's a real leap to ask people to take. So how would you design it differently?
Well, I mean things like the earned income tax credit are great. I think you want to make benefits certainly less tied to income levels. Get rid of all the income tests. Things like that. You know, ideally in my perfect world, I would...
Am I getting benefits in your system?
No, I think you should get social security if you paid into it.
Yeah, that ain't happening. But like what you I mean, ideally in a perfect world, what we would do is not tie health insurance to employment.
I mean, that's a big reason why wages aren't growing as much. Like we're getting paid more in insurance than we or benefits which I wouldn't even say is insurance because I don't think people think of health benefits as something they only use when they're needed. They expect all their like sort of regular predictable care. It's not really insurance. So they want to be paid in benefits and so it's risk reduction but they also are losing a lot of salary for it.
Yeah. I think employer supplied health care and the tax subsidy to that is one of the original sins of American healthcare. I think you're exactly right. I also think the question about that you raised that people are risk-averse on changing jobs.
That's certainly a contributor right that they get locked in and they're afraid to lose their healthcare.
Yeah. You have a family and you want to start your own business and they don't have healthcare anymore. It's just...
And the whole model you talked about insurance versus hedging. That's a hedging model. An insurance model is catastrophic health risk. And I think that would be better for most of the world. Ensure the true disaster.
Yeah. Not to plug someone else's book, but like Amy Finkelstein a couple years ago wrote out her and she's like one of the most talented benefit economists. Her vision for what healthcare should be. And it's sort of like government provided catastrophic care.
And then you pay for your own health insurance without a tax deduction and it would be better. It's the closest thing the left-wing I'll say, but I kind of agree with that.
Yeah. Well, no. They want Medicare for all. Like she'd be like Medicaid for all. Like it's not great.
That's different. That is very different.
Yeah. Like I mean I think what AOC is promising is like really like the you know Cadillac healthcare for everyone which is not insurance.
Big broad question. By almost any measure when economists or even pundits look at the actual data things are actually pretty good. I wrote a piece with Michael Strain of AEI called Have you heard the good news? A little bit of a religious call out just going through that all these and many other people have. And yet people I mean I wasn't around in the Great Depression. I'm getting old, but not that old. And yet, people seem angrier about the economy than I can remember.
They say it's broken all the time.
How do you square the circle?
I've been thinking a lot about this lately. Like, why? Like, why do people think the economy is not working? Why do they think it's broken when it's so delivered? Like, I guess I'm still like a neoliberal, although no one else wants to say that, but like, you know, neoliberal.
You don't want to be a neoliberal or a neocon. Yeah.
You don't want to be neo.
Pretty sure I'm one of those two.
But neoliberalism. You should be. Neoliberalism worked amazing.
I was thinking neocon, but okay.
Can you be both? I guess you can.
But like it worked amazingly well. Like not only did it bring like more than a billion people out of poverty in other countries. It brought people a much higher standard of living in our own country. Like capitalism worked. Like that was the deal. But I think I've been sitting a lot. I think we're all thinking a lot. I think we were all kind of shaken by the mayoral race of why are people feeling like we have to do something so extreme if this economy isn't working for people. And I mean my...
You don't subscribe to my theory that they're just absolute effing morons in New York.
I'm trying to be generous.
I'm pretty sure I'm right, but go on.
So, you know, so they claim the economy is broken. It's not working for them anyway on paper it actually is like they still are making more money than most people I think some people I think there's also a misalignment of what people expect their 20s to be economically. Like I mean I was in grad school my 20s I had a $20,000 stipend yet you know I had very low expectations I guess for what my living standard would be. So I think they also have high but I think...
You had a bigger stipend than I did I'm going to chalk that up to you being younger than me.
And stipends going up I get competitive inflation adjusted.
I don't know. I'm not going to be on stage and guess your age. Let's be serious.
Well, also Hyde Park has a lower cost of living.
That's what I said. I was at Columbia.
Okay. That's true. That's probably it.
But I think part of the problem other than, as I said, a misalignment of expectations, unrealistic ideas of what like your 20s are going to be financially, is also that we're this I'm really worried about this generation because I think we've really set them up to feel like, again, this explains the enthusiasm for socialism, that they shouldn't have to take risks. I mean, first of all, they weren't raised to be good risk takers. I think helicopter parenting ups the ante with each generation. Like I'm like borderline Gen X millennial and like people like our age are like obsessed with talking about how we had these feral childhoods. We drank from the hose and we were all like hardcore but like we really were like we were probably much more risk averse than boomers. They were definitely much more risk averse than the greatest generation. So you get this like increasing ratcheting up because you get a more risk averse generation and they in turn raise their kids to be more risk averse because they raised them to take even less risk. And it's like I delved into talking to neurologists and developmental psychologists about if you're not taking these risks as a kid. Like you know this woman who just got arrested for letting her 5-year-old collect feathers on his own. But like this used to be very normal. Like what they call the age of release when you're allowed to be outside by yourself used to be five. Like even like a couple decades ago.
Yeah. Playing in front of your house.
Yeah. And this woman who's a professor at Georgetown, a psychology professor, she's like, I asked my students when were they able to sort of be out on their own and they're like 14. So like the age of release has gone to like 13 or 14.
You do give the example of Japan in the book where they have the little kids wandering around at 5 alone going to the store. That just might be because Japan is a very safe place.
That could be because they're not known for being risk takers in Japan.
Yeah. Well, there are all these contradictions. Let's talk about young people some more. You pointed out they drink less, they work less, they start fewer businesses, and yet, and this is maybe more male than female, just going by my own family, they bet on sports constantly. Square that circle.
I think that's part of it. So, if you don't take productive risks when you're young, like the stupid things you do as a teenager are actually a very important part of your brain development. Like these neurons form in your brain where you're like betting on the Super Bowl and going to debt for is kind of dumb. So, they didn't have that experience. They didn't take healthy risks when they're young or really young. So, now they're in their 20s and they're not good at gauging which risks are good or bad. And I mean, I'm not someone who even goes to a casino, but like some gambling can be okay in moderation if you look at it as like, you know, entertainment. But they're actually looking at it as an investment strategy. They don't see the difference between that and like an index fund and that is just like a failure.
But they don't they're not able to make that assessment.
Yeah. I what I've said is I'm fairly convinced that many of them cannot distinguish their FanDuel app from their Robinhood app.
