Red-Blooded Risk: The Secret History of Wall Street [Hardcover]

Aaron Brown (Author), Eric Kim (Illustrator)

Book Description

Publication Date: October 11, 2011

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.

Editorial Reviews

Review

"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

From the Inside Flap

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 WallStreet 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 thrillingaccount 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.

See all Editorial Reviews

Product Details

• Hardcover: 432 pages
• Publisher: Wiley; 1 edition (October 11, 2011)
• Language: English
• ISBN-10: 1118043863
• ISBN-13: 978-1118043868
• Product Dimensions: 6.5 x 1.1 x 9.2 inches
• Shipping Weight: 3 pounds (View shipping rates and policies)
• Average Customer Review: 4.4 out of 5 stars  See all reviews (20 customer reviews)
• Amazon Best Sellers Rank: #355,969 in Books (See Top 100 in Books)
  • #87 in Books > Business & Investing > Industries & Professions > Insurance > Risk Management

More About the Author

I'm the author of "Red-Blooded Risk" and "The Poker Face of Wall Street," and a co-author of "A World of Chance." My day job is working for AQR Capital Management. I also am a columnist for Wilmott and Quantum magazines, and write for a lot of finance and poker periodicals; as well as teach classes and speak at conferences. I serve on the Editorial Board of the Global Association of Risk Professionals and am a member of the National Book Critics Circle. In past lives I've been a professional poker player, trader, finance professor, portfolio manager and head of mortgage securities.

I live on the upper west side of New York City with my wife. I have a son who is an undergraduate at the University of Chicago, and a daughter in high school.

Most Helpful Customer Reviews

29 of 32 people found the following review helpful

5.0 out of 5 stars Best book on risk currently on the market October 5, 2011

By Brandon G. Adams

Format:Hardcover

Aaron is the quant's quant --- a god on Internet forums on topics ranging from quantitative finance to applied probability to poker. He left academics a long time ago to become rich (he's currently the head risk manager at the hedge fund AQR), and, in the process, he picked up some hard-won lessons about the realities of risk. This is not an academic book --- it's a quick-reading guide to thinking about risk in an intuitive way.

Aaron is good friends with Nassim Taleb and they share similar views about risk. As compared to Taleb's Black Swan, this book is a faster, more entertaining read. It's less conceptually dense, but it probably packs more of a punch. This is the book to learn from. The practical philosophy about speculation presented by both books is that one should spend much of one's energy playing defense; one should be constantly paranoid about unlikely events that might decimate one's portfolio.

Red-Blooded Risk contains the best intuitive explanation of the Kelly Criterion contained in any book that I've read. It also has innovative material about the powerful role of exponential growth in economics and investing. Aaron lays out a convincing case for the idea that investors should spend much of their time looking for attractively priced "lottery tickets" (potential exponential growth that is underpriced by the market).

This book is about more than investing. Red-Blooded Risk is really a comprehensive guide to thinking about risk in life, and it's probably the best guide of this sort currently on the market.

35 of 42 people found the following review helpful

2.0 out of 5 stars Interesting story but boringly written December 26, 2011

By Gordon

Format:Hardcover|Amazon Verified Purchase

I was impressed by the 5 stars of this book and bought it on my kindle. I realized the book is not as great as I have expected for the following reasons:

1. Interesting story made boring.
The author has many interesting little facts, academic experiment results and logic. I believe they will make him an interesting person to chat with, or an interesting presentation in a conference or seminar. However they become boring in text mainly because of the book's prolixity and disorganized article structure.

2. Misleading titles:
Both the book title and the chapter titles provide misleading information to what the content will tell you. For the most obvious example, you can hardly expect too much history on the wall-street on the "secret history of wall street". You will expect to be traced back history as far as stone age about how ancient people (and even animals) react to risk. (Probably "the history that made wall-street"?)

3. Lengthy introductions before making a point:
Whenever the author tried to put forth an idea, the author will trace all the way to its origin, and the origin of the origin. You often find yourself reading something like this: "before we talk about C, let's talk about B first.". Then it will follow "before we talk about B, let's talk about A." The author believe the origin of his knowledge is very important and he would like you to be equaly fascinated by the evolution of his ideas. This is understandable perhaps given his math background as he would just felt inclined to proof every result. However I just find myself lost within the process like I got lost in a math class. And often you will annoyingly read through redundant phrases like "However I will not go in to much detail here since this book is not about A or B" I often ended up not knowing what the book is about.

4. Debating against other view points without laying out the reasons constituting the counter-augument:
Frequently you will see the author claimed passionately "This is wrong!", "i don't agree with this!". And went on validating his points with his arguement. However I believe it will be more helpful if he can also lay out the reaons consitituting the opposing arguement of the point he was arguing against. Else I just felt like he was arguing with a wall.

5. Manga style illustration
The author seem to acknowledge the audience will not get him. So he added in manga to make his points clear. He stated if you would understand what he has written and agreed with the manga, you have got his point. (+1 stars from me for the effort.) However the manga was not a conversion from words to pictures, but a series of dialogues sparsely pasted over a series of seemingly related pictures.

The author has great ideas. However should he organize his writings in a clearer and more succint manner, I believe his ideas will be more efficient delivered to his audience.

Now, coming back and read through the reviews of this book again, I find some commenter seem to have a personal connection with the author and simply wanted to be made known their support. I think this is very unfortunate for the general audience such as myself.

9 of 10 people found the following review helpful

5.0 out of 5 stars Financial trading and risk management meet theories of probability December 17, 2011

By David J. Aldous

Format:Hardcover

This is the best book I've ever read that discusses financial trading and risk management as actually practiced over the last 35 years, in relation to underlying ideas from mathematical probability (described via arithmetic examples not formulas). Like Taleb's The Black Swan: The Impact of the Highly Improbable it combines stories from the author's own experience, a broad range of historical episodes and his own opinionated views, but the latter are presented in a more grounded and thoughtful style as well-argued analysis. In particular the book goes into as much detail concerning what a risk manager actually does as anyone not professionally involved would want, and makes it sound sufficiently exciting that, if I were 21 again, I might consider it as a career.

Regarding links with mathematics and statistics (my own interest -- but remember this is not a technical math book) three chapters struck me as particularly memorable. There is a very clear exposition of the Kelly criterion as "risk ignition" under the slogan "get rich exponentially slowly" (see Fortune's Formula: The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street for a more leisurely discussion). Chapter 5, which everyone interested in the basic mathematics of finance should read, compares and contrasts modern portfolio theory with Kelly. If you are a novice this will start you on the right track; if expert then you might disagree, but thinking why you disagree will sharpen your wits.

Chapter 9 describes different styles of 1980s quants, in particular via a vivid analogy: frequentists as blackjack card-counters, Bayesians as sports gamblers. In this picture, for example, frequentists are value investors, willing to increase a position if a spread moves against them. Chapter 14 is a wonderful lecture on VaR, emphasizing it doesn't mean what the name "value at risk" first suggests. In the author's words, VaR is the amount we expect losses to exceed with (for instance) 5% probability tomorrow, if markets are normal and we don't trade. He points out that VaR breaks, which should be random, are themselves often informative.

At a more conceptual level, his Chapter 10 prediction that derivative contracts with formal clearinghouses will be "the future of money" is intriguing. In Chapter 18 he observes that Black-Scholes type formulas can be viewed as bringing together the frequency and degree-of-belief views of the nature of probability, and speculates on analogous ideas outside the context of financial markets.

Disclaimer: I had brief correspondence with the author just before publication, and received a free copy.