Red-Blooded Risk
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Red-Blooded Risk : The Secret History of Wall Street

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Description

An innovative guide that identifies what distinguishes the best financial risk takers from the rest
From 1987 to 1992, a small group of Wall Street quants invented an entirely new way of managing risk to maximize success: risk management for risk-takers. This is the secret that lets tiny quantitative edges create hedge fund billionaires, and defines the powerful modern global derivatives economy. The same practical techniques are still used today by risk-takers in finance as well as many other fields. Red-Blooded Risk examines this approach and offers valuable advice for the calculated risk-takers who need precise quantitative guidance that will help separate them from the rest of the pack.


While most commentators say that the last financial crisis proved it's time to follow risk-minimizing techniques, they're wrong. The only way to succeed at anything is to manage true risk, which includes the chance of loss. Red-Blooded Risk presents specific, actionable strategies that will allow you to be a practical risk-taker in even the most dynamic markets.




Contains a secret history of Wall Street, the parts all the other books leave out
Includes an intellectually rigorous narrative addressing what it takes to really make it in any risky activity, on or off Wall Street
Addresses essential issues ranging from the way you think about chance to economics, politics, finance, and life
Written by Aaron Brown, one of the most calculated and successful risk takers in the world of finance, who was an active participant in the creation of modern risk management and had a front-row seat to the last meltdown
Written in an engaging but rigorous style, with no equations
Contains illustrations and graphic narrative by renowned manga artist Eric Kim


There are people who disapprove of every risk before the fact, but never stop anyone from doing anything dangerous because they want to take credit for any success. The recent financial crisis has swelled their ranks, but in learning how to break free of these people, you'll discover how taking on the right risk can open the door to the most profitable opportunities.
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Product details

  • Hardback | 432 pages
  • 154.94 x 231.14 x 30.48mm | 1,383.45g
  • New York, United States
  • English
  • 1. Auflage
  • 1118043863
  • 9781118043868
  • 351,856

Flap copy

Everyone talks about risk, but few people give serious thought to what risk is. It's hard to describe it without expressing an opinion--we like things that are innovative, daring, creative, and bold; but those are exactly the same things that are reckless, speculative, risky, and irresponsible.



This book is the story of a group of young math whizzes who unleashed a revolution--one that reshaped our financial system and continues to echo through the halls of government, universities, and corporations today. In the 1970s, disillusioned with the sorry state of quantitative analysis, these young mathematicians (soon to be known as "quants") invented a new way of looking at probability and set out to prove it in the ultimate testing ground of odds-making: Las Vegas.



Once there, the quants turned conventional wisdom about gambling on its head. People said you can't beat the house, yet the quants managed to beat blackjack and other casino games. People said you needed a lifetime to learn poker, yet the quants' aggressive mathematical tactics swept the table against the best players in the world. Then the quants turned to sports betting, overturning the business model and squeezing out local bookies with a global organization that matched bets without taking risk.



Armed with their theories and experience, the quants raised their sights and headed to Wall Street, determined to replicate their success. Finance was a tougher challenge than gambling, but by the mid-1990s, the quants had remade Wall Street as thoroughly as they had remade Las Vegas. That transformation went unnoticed by the bond salesmen and investment bankers who ran Wall Street, as well as by academics, regulators, journalists, and investors; yet these changes caused both the greatest wealth creation event in the history of the world, and also to the financial disasters we have witnessed in its wake.



There's more here than just a lesson in recent financial history, however. Brown's story goes beyond the headlines to explore basic questions of economics, like the meaning of property and the nature of exchange. Along the way, it reveals secrets about the building of the pyramids, the glory of ancient Athens, the forcethat built the Roman Empire, a world-changing invention from medieval Italy, a secret in a mysterious letter written in 1654 and not decoded until the 1990s, and an essential aspect of the American Revolution left out of history books.



This book will change the way you think about everything from history, risk, and money to vampires, zombies, and tulips. It offers a fascinating and thrilling account of great events that have never before been described in an easily accessible form. There are bold ideas, colorful characters, and, most important, the keys to understanding the modern financial world and how its inner workings affect our daily lives.
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Back cover copy

Everyone talks about risk, but few people give serious thought to what risk is. It's hard to describe it without expressing an opinion--we like things that are innovative, daring, creative, and bold; but those are exactly the same things that are reckless, speculative, risky, and irresponsible.

This book is the story of a group of young math whizzes who unleashed a revolution--one that reshaped our financial system and continues to echo through the halls of government, universities, and corporations today. In the 1970s, disillusioned with the sorry state of quantitative analysis, these young mathematicians (soon to be known as "quants") invented a new way of looking at probability and set out to prove it in the ultimate testing ground of odds-making: Las Vegas.

Once there, the quants turned conventional wisdom about gambling on its head. People said you can't beat the house, yet the quants managed to beat blackjack and other casino games. People said you needed a lifetime to learn poker, yet the quants' aggressive mathematical tactics swept the table against the best players in the world. Then the quants turned to sports betting, overturning the business model and squeezing out local bookies with a global organization that matched bets without taking risk.

Armed with their theories and experience, the quants raised their sights and headed to Wall Street, determined to replicate their success. Finance was a tougher challenge than gambling, but by the mid-1990s, the quants had remade Wall Street as thoroughly as they had remade Las Vegas. That transformation went unnoticed by the bond salesmen and investment bankers who ran Wall Street, as well as by academics, regulators, journalists, and investors; yet these changes caused both the greatest wealth creation event in the history of the world, and the financial disasters we have witnessed in its wake.

There's more here than just a lesson in recent financial history, however. Brown's story goes beyond the headlines to explore basic questions of economics, like the meaning of property and the nature of exchange. Along the way, it reveals secrets about the building of the pyramids, the glory of ancient Athens, the force that built the Roman Empire, a world-changing invention from medieval Italy, a secret in a mysterious letter written in 1654 and not decoded until the 1990s, and an essential aspect of the American Revolution left out of history books.

This book will change the way you think about everything from history, risk, and money to vampires, zombies, and tulips. It offers a fascinating and thrilling account of great events that have never before been described in an easily accessible form. There are bold ideas, colorful characters, and, most important, the keys to understanding the modern financial world and how its inner workings affect our daily lives.
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Table of contents

Acknowledgments xi
Chapter 1 What This Book Is and Why You Should Read It 1


Risk, Danger, and Opportunity 2


Red- Blooded Risk Management 4


Risk and Life 7


Play and Money 9


Frequentism 11


Rationality 13


Bets 15


Exponentials and Culture 18


Payoff 20


Chapter 2 Red Blood and Blue Blood 23


Chapter 3 Pascal's Wager and the Seven Principles of Risk Management 29


Principle I: Risk Duality 32


Principle II: Valuable Boundary 33


Principle III: Risk Ignition 35


Principle IV: Money 38


Outside the VaR Boundary 40


Principle V: Evolution 45


Principle VI: Superposition 48


Principle VII: Game Theory 49


Chapter 4 The Secret History of Wall Street: 1654 1982 57


Pascal and Fermat 58


Poker 61


Advantage Gamblers 62


Sports Betting 63


Quants to Wall Street 66


Finance People 68


Real Finance 69


Chapter 5 When Harry Met Kelly 73


Kelly 74


Harry 76


Commodity Futures 79


If Harry Knew Kelly 84


Investment Growth Theory 88


eRaider.com 92


MPT Out in the World 96


Chapter 6 Exponentials, Vampires, Zombies, and Tulips 101


Types of Growth 102


The Negative Side 105


Tulips 106


Tulip Propaganda 108


Quantitative Tulip Modeling 111


Money 112


Chapter 7 Money 117


Chapter 8 The Story of Money: The Past 125


Property, Exchange, and Money 126


Paleonomics 128


Transition 131


What Money Does 134


Risk 135


Government and Paper 138


Paper versus Metal 142


1776 and All That 145


Andrew Dexter 147


A Short Digression into Politics and Religion 150


Chapter 9 The Secret History of Wall Street: 1983 1987 155


Effi cient Markets 157


Anomalies 159


The Price Is Right . . . Not! 161


Effi ciency versus Equilibrium 162


Beating the Market 165


Paths 170


Sharpe Ratios and Wealth 174


1987 177


Chapter 10 The Story of Money: The Future 179


Farmers and Millers 180


Money, New and Improved 183


A General Theory of Money 185


Value and Money 189


Numeraire 191


Clearinghouses 196


Cash 197


Derivative Money 200


The End of Paper 203


Chapter 11 Cold Blood 207


Chapter 12 What Does a Risk Manager Do? Inside VaR 213


Professional Standards 213


Front Offi ce 215


Trading Risk 217


Quants on the Job 218


Middle Office 222


Back Office 225


Middle Office Again 227


Looking Backward 228


Risk Control 230


Beyond Profi t and Loss 232


Numbers 234


The Banks of the Charles 236


Waste 238


The Banks of the Potomac 241


The Summer of My Discontent 245


Validation 247


Chapter 13 VaR of the Jungle 251


Chapter 14 The Secret History of Wall Street: 1988 1992 255


Smile 256


Back to the Dissertation 258


Three Paths 262


An Unexpected Twist 265


Surprise! 267


Computing VaR 271


Chapter 15 Hot Blood and Thin Blood 277


Chapter 16 What Does a Risk Manager Do? Outside VaR 283


Stress Tests 283


Trans- VaR Scenarios 287


Black Holes 289


Why Risk Managers Failed to Prevent the Financial Crisis 290


Managing Risk 296


Unspeakable Truth Number One: Risk Managers Should Make Sure Firms Fail 299


Unspeakable Truth Number Two: There s Good Stuff beyond the VaR Limit 305


Unspeakable Truth Number Three: Risk Managers Create Risk 309


Chapter 17 The Story of Risk 313


Chapter 18 Frequency versus Degree of Belief 323


Statistical Games 324


Thorp, Black, Scholes, and Merton 329


Change of Numeraire 333


Polling 336


The Quant Revolution 341


Chapter 19 The Secret History of Wall Street: 1993 2007 345


Where Did the Money Come From? 348


Where Did They Put the Money? 359


Where Did the Money Go? 364


Chapter 20 The Secret History of Wall Street: The 2007 Crisis and Beyond 369


Postmortem 379


A Risk Management Curriculum 387


One Hundred Useful Books 393


About the Author 401


About the Illustrator 403


Index 405
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Review Text

"Wickedly original, one of the most fascinating accounts I have ever seen. A rollicking and highly opinionated read." ( Risk Professional , October 2011)

"No one who reads Red-Blooded Risk: The Secret History of Wall Street will ever again regard risk management as a necessary but unproductive appendage of the financial industry. Other authors have chronicled how quantitative finance influenced investment management, but Aaron Brown has made a compelling case for a far more profound economic impact. . . If Red-Blooded Risk: The Secret History of Wall Street dealt with nothing more than the inadequacy of models used in highly important activities, it would represent a valuable contribution to financial economics. Brown's book, however, covers a great deal more than econometric malpractice. Probably no other book offers as much insight into the process with so little resort to mathematical notation. Especially valuable are Brown's discussions of middle-office risk management and value at risk, comparatively recent innovations that are essential to understanding modern financial institutions. Readers of Red-Blooded Risk should be prepared to have many of their assumptions challenged . Red-Blooded Risk is one of the most original and thought-provoking books reviewed in these pages in the past 20 years. No one who reads it will ever again regard risk management as a necessary but unproductive appendage of the financial industry. Other authors have chronicled how quantitative finance influenced investment management, but Aaron Brown has made a compelling case for a far more profound economic impact."
- Martin S. Fridson , CFA Institute Publications Book Reviews

"Red-Blooded Risk mixes risk history and philosophy nimbly and provides a perspective that can be both refreshing and challenging (often on the same page). While the book is not without weaknesses, it is also brimming with original perspectives and controversial opinions. Those who work in risk management or quantitative finance will enjoy Brown's story-telling and expert perspectives, even if they do not share his views, while non-quants will find his insights and confessions to be a useful glimpse into the psyche and ethos of an influential group of early quantitative risk takers.
- Roger M. Stein , Research and Academic Relations, Moody's Corporation, as reviewed in Quantitative Finance (August 6, 2012)
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Review quote

"Wickedly original, one of the most fascinating accounts I have ever seen. A rollicking and highly opinionated read." (Risk Professional, October 2011) No one who reads Red-Blooded Risk: The Secret History of Wall Street will ever again regard risk management as a necessary but unproductive appendage of the financial industry. Other authors have chronicled how quantitative finance influenced investment management, but Aaron Brown has made a compelling case for a far more profound economic impact... If Red-Blooded Risk: The Secret History of Wall Street dealt with nothing more than the inadequacy of models used in highly important activities, it would represent a valuable contribution to financial economics. Brown s book, however, covers a great deal more than econometric malpractice. Probably no other book offers as much insight into the process with so little resort to mathematical notation. Especially valuable are Brown s discussions of middle-office risk management and value at risk, comparatively recent innovations that are essential to understanding modern financial institutions. Readers of Red-Blooded Risk should be prepared to have many of their assumptions challenged. Red-Blooded Risk is one of the most original and thought-provoking books reviewed in these pages in the past 20 years. No one who reads it will ever again regard risk management as a necessary but unproductive appendage of the financial industry. Other authors have chronicled how quantitative finance influenced investment management, but Aaron Brown has made a compelling case for a far more profound economic impact. Martin S. Fridson, CFA Institute Publications Book Reviews Red-Blooded Risk mixes risk history and philosophy nimbly and provides a perspective that can be both refreshing and challenging (often on the same page). While the book is not without weaknesses, it is also brimming with original perspectives and controversial opinions. Those who work in risk management or quantitative finance will enjoy Brown s story-telling and expert perspectives, even if they do not share his views, while non-quants will find his insights and confessions to be a useful glimpse into the psyche and ethos of an influential group of early quantitative risk takers. Roger M. Stein, Research and Academic Relations, Moody s Corporation, as reviewed in Quantitative Finance (August 6, 2012)
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About Aaron Brown

AARON BROWN is risk manager at AQR Capital Management and the author of The Poker Face of Wall Street (Wiley), selected one of the ten best books of 2006 by BusinessWeek, and A World of Chance with Reuven and Gabrielle Brenner. In his thirty-year Wall Street career, he has been a trader, portfolio manager, head of mortgage securities, and risk manager for institutions including Citigroup and Morgan Stanley. He also served a stint as a finance professor and was among the top poker players in the world during the 1970s and 1980s. He holds degrees in applied mathematics from Harvard and in finance and statistics from the University of Chicago.
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Rating details

90 ratings
3.93 out of 5 stars
5 31% (28)
4 39% (35)
3 23% (21)
2 6% (5)
1 1% (1)
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