What do you think?
Rate this book
Red-Blooded Risk: The Secret History of Wall Street
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 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.
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.
532 pages, Kindle Edition
First published September 19, 2011
Ratings & Reviews
Friends & Following
Create a free account to discover what your friends think of this book!
Community Reviews
Displaying 1 - 12 of 12 reviews
July 14, 2017
Very interesting ideas. Use VaR as a way to understand normal scenarios and that you know what drives them and that you have good data, and always remember that VaR is NOT risk.
Kelly fraction is ideal for betting, adding a bayesian element in order to update your assessment of your odds can lead to very desirable results. Diversification works for truly uncorrelated assets, having thousands of correlated assets makes no difference from having 20.
Kelly fraction is ideal for betting, adding a bayesian element in order to update your assessment of your odds can lead to very desirable results. Diversification works for truly uncorrelated assets, having thousands of correlated assets makes no difference from having 20.
September 20, 2013
Really good. A little too much rambling into philosophy, like Taleb. First 100 pages is tour de force looking at the markets from the perspectives of Modern Portfolio Theory and the Kelly Criterion.
August 21, 2018
I really don’t know what to make of this book. Parts of it are hugely interesting, even brilliant, and other parts are simply strange. It’s a mighty and personal exposé of philosophy, psychology, politics, gambling, statistics and god knows what else. All of the above is tied to risk taking and risk management. Aaron Brown, who paints a picture of financial markets that has profoundly changed the development society a large, is risk manager at Cliff Asness’ hedge fund giant AQR. With a 30- year career in the financial markets Brown has also been a trader, a portfolio manager, head of mortgage securities and a risk manager at institutions like Citi, Morgan Stanley and others. To top it off he’s been a finance professor and a world-class poker player. Brown is one of the first generation Wall-Street quants that apparently often had a background in the gambling world.
There are plenty of highlights in the book but one important theme touches on what has been called “Knightian uncertainty”, i.e. Frank Knight’s distinction between “risk” as something unknown but measurable and with predictable variation and “uncertainty” as something where the outcomes were likewise random, but governed by an unknown probability model. There are also parallels to Nassim Nicholas Taleb’s Mediocristan vs. Extremistan. Brown points to the fact that in relation to this “probability” means two things; the frequency of something recurring and a degree of belief in a proposition. The first is something that you should exploit in your day-to-day business through measured risk taking and the other is something you should prepare for so you make sure you live to see the next day when it occurs.
Brown stipulates three iron rules for risk takers 1) you need to have an edge in all your bets, 2) your bets must be as independent as possible so you’re not effectively making the same bet over and over and 3) you must size your bets properly. On the one hand you cannot lose so much that you are taken out of the game but on the other hand you must bet big when the right gambles appear. Those rules lead to a second theme of the book, that of the Kelly criterion vs. modern portfolio theory. Possibly the best chapter of the book is When Harry met Kelly that describes how the risk management of Harry (Markowitz) focused of diversification while that of contemporary (John) Kelly instead emphasized the position sizing giving optimal long term returns. They both agree on the fact that you shouldn’t put all your money in one stock. For Markowitz this was because you should minimize the stock specific risk of the portfolio while for Kelly it was because it was a case of overbetting. If you loose your money on that one bet you also give up the chance to participate in all the future possibilities to profit. MPT has become finance mainstream but the Kelly criterion is still pretty much confided to the domain of hedge funds and traders. In this mainstream finance looses a valuable opportunity to understand how volatility affects multi-period results.
The author’s writing in many respects resembles that of Taleb. Brown’s self-perception is equally extended; he fosters an opinionated outsider mentality; clearly has a similar philosophical interest and is extremely talkative. Even though the language is forthright and there is almost no mathematical notation, this book is not an easy read as the reader often will find himself lost in a number of side stories, anecdotes and metaphors. At times a section off the beaten track will lead back to the topic of risk and an important insight, but at times it will not. In between the texts there are, believe it or not, a number of manga strips! In what is almost a separate – and interesting - story within the story, Brown develops the notion of derivates as the future of money. Personally, I think Brown to some extent overstates the financial industry’s impact on Main Street.
It is entirely fitting that the Amazon customer review grades for the book includes no average grading’s. The reader will not stay unaffected.
There are plenty of highlights in the book but one important theme touches on what has been called “Knightian uncertainty”, i.e. Frank Knight’s distinction between “risk” as something unknown but measurable and with predictable variation and “uncertainty” as something where the outcomes were likewise random, but governed by an unknown probability model. There are also parallels to Nassim Nicholas Taleb’s Mediocristan vs. Extremistan. Brown points to the fact that in relation to this “probability” means two things; the frequency of something recurring and a degree of belief in a proposition. The first is something that you should exploit in your day-to-day business through measured risk taking and the other is something you should prepare for so you make sure you live to see the next day when it occurs.
Brown stipulates three iron rules for risk takers 1) you need to have an edge in all your bets, 2) your bets must be as independent as possible so you’re not effectively making the same bet over and over and 3) you must size your bets properly. On the one hand you cannot lose so much that you are taken out of the game but on the other hand you must bet big when the right gambles appear. Those rules lead to a second theme of the book, that of the Kelly criterion vs. modern portfolio theory. Possibly the best chapter of the book is When Harry met Kelly that describes how the risk management of Harry (Markowitz) focused of diversification while that of contemporary (John) Kelly instead emphasized the position sizing giving optimal long term returns. They both agree on the fact that you shouldn’t put all your money in one stock. For Markowitz this was because you should minimize the stock specific risk of the portfolio while for Kelly it was because it was a case of overbetting. If you loose your money on that one bet you also give up the chance to participate in all the future possibilities to profit. MPT has become finance mainstream but the Kelly criterion is still pretty much confided to the domain of hedge funds and traders. In this mainstream finance looses a valuable opportunity to understand how volatility affects multi-period results.
The author’s writing in many respects resembles that of Taleb. Brown’s self-perception is equally extended; he fosters an opinionated outsider mentality; clearly has a similar philosophical interest and is extremely talkative. Even though the language is forthright and there is almost no mathematical notation, this book is not an easy read as the reader often will find himself lost in a number of side stories, anecdotes and metaphors. At times a section off the beaten track will lead back to the topic of risk and an important insight, but at times it will not. In between the texts there are, believe it or not, a number of manga strips! In what is almost a separate – and interesting - story within the story, Brown develops the notion of derivates as the future of money. Personally, I think Brown to some extent overstates the financial industry’s impact on Main Street.
It is entirely fitting that the Amazon customer review grades for the book includes no average grading’s. The reader will not stay unaffected.
January 4, 2020
An interesting account of modern finance and how it came to be. The author starts with principles of risk management and ends with the financial crisis of 2008. In between he covers the various schools of probability, portfolio theory, risk management philosophies, risk metrics, evolution of money and banking, and the role that quants (or rocket scientists in his words) played in shaping the the world of finance we know today. It's pretty much dense book with a lot of novel and eccentric ideas. Especially interesting are the chapters on paper money and VaR, the latter not simply restricted to finance; the author does give the essence behind the VaR boundary and how it can be leveraged elsewhere. In between the lines are comic strips- the one on VaR of jungle (which has Bal2 and Bal3 characters, stands for Basel 2, Basel 3 ) is amusing.
The author does a good job of explaining everything from first principles, but I'd doubt someone without a mathematical background would be able to understand the arguments holistically. I had to on several occasions resort to outside material to get a good sense of the points he is making. The anecdotes are interesting too. Some of the ideas and arguments however weren't lucid or elaborated, which makes it a bit annoying. There is a bit of rambling that isn't always useful or insightful.
Overall not an easy read ( but no book covering that breadth should :) ). Would recommend it to anyone working in finance, or a quantitative field, or anyone in a profession that deals with uncertainty.
The author does a good job of explaining everything from first principles, but I'd doubt someone without a mathematical background would be able to understand the arguments holistically. I had to on several occasions resort to outside material to get a good sense of the points he is making. The anecdotes are interesting too. Some of the ideas and arguments however weren't lucid or elaborated, which makes it a bit annoying. There is a bit of rambling that isn't always useful or insightful.
Overall not an easy read ( but no book covering that breadth should :) ). Would recommend it to anyone working in finance, or a quantitative field, or anyone in a profession that deals with uncertainty.
February 1, 2021
Interesting take on risk management, true middle office work. Aaron went in to how VaR came to be the 'valid' metric for risk and where it may fail, applications that it has been used and where we truly have risks around funds. Solid methodology toward his framework for what works in risk positions.
April 22, 2020
Not the greatest writtibg but had 3-5 original concepts I haven’t heard before. Mostly around game theory.
May 26, 2020
The book started out very strong, but became repetitive towards the end. Enjoyed the authors insights, and guidance.
June 20, 2021
An excellent read for anyone who manages risk, full of personality and history.
July 7, 2012
The beginning of the book covers the history of probability and risk, starting with Pascal. The author then moves on to the history of risk in modern day financial institutions (specifically, hedge funds). I found the first half pretty interesting, and then started glazing over as the content got more and more hedge-fund specific. I think more financially-minded readers would appreciate the book more than I did.
February 13, 2018
How risk function actually (should) work.
January 12, 2017
Accessible & non-academic, opinionated & controversial. Highly recommended
January 18, 2016
I will have to change my mind, I was much smarter before I read this book
Displaying 1 - 12 of 12 reviews