Red-Blooded Risk

2014-09-29

Red-Blooded Risk: The Secret History of Wall Street

A must-read for Wall Street that shows the fun and success in being a red-blooded risk taker. Identifies what distinguishes smart risk-takers from silly ones. 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

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. “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
"Wickedly original, one of the most fascinating accounts I have ever seen. A rollicking and highly opinionated read."
--Risk Professional

Acknowledgments
Chapter 1 What This Book Is and Why You Should Read It
Risk, Danger, and Opportunity
Red- Blooded Risk Management
Risk and Life
Play and Money
Frequentism
Rationality
Bets
Exponentials and Culture
Payoff
Chapter 2 Red Blood and Blue Blood
Chapter 3 Pascal's Wager and the Seven Principles of Risk Management
Principle I: Risk Duality
Principle II: Valuable Boundary
Principle III: Risk Ignition
Principle IV: Money
Outside the VaR Boundary
Principle V: Evolution
Principle VI: Superposition
Principle VII: Game Theory
Chapter 4 The Secret History of Wall Street: 1654- 1982
Pascal and Fermat
Poker
Advantage Gamblers
Sports Betting
Quants to Wall Street
Finance People
Real Finance
Chapter 5 When Harry Met Kelly
Kelly
Harry
Commodity Futures
If Harry Knew Kelly
Investment Growth Theory
eRaider.com
MPT Out in the World
Chapter 6 Exponentials, Vampires, Zombies, and Tulips
Types of Growth
The Negative Side
Tulips
Tulip Propaganda
Quantitative Tulip Modeling
Money
Chapter 7 Money
Chapter 8 The Story of Money: The Past
Property, Exchange, and Money
Paleonomics
Transition
What Money Does
Risk
Government and Paper
Paper versus Metal
1776 and All That
Andrew Dexter
A Short Digression into Politics and Religion
Chapter 9 The Secret History of Wall Street: 1983- 1987
Effi cient Markets
Anomalies
The Price Is Right . . . Not!
Effi ciency versus Equilibrium
Beating the Market
Paths
Sharpe Ratios and Wealth
1987
Chapter 10 The Story of Money: The Future
Farmers and Millers
Money, New and Improved
A General Theory of Money
Value and Money
Numeraire
Clearinghouses
Cash
Derivative Money
The End of Paper
Chapter 11 Cold Blood
Chapter 12 What Does a Risk Manager Do?Inside VaR
Professional Standards
Front Office
Trading Risk
Quants on the Job
Middle Office
Back Office
Middle Office Again
Looking Backward
Risk Control
Beyond Profit and Loss
Numbers
The Banks of the Charles
Waste
The Banks of the Potomac
The Summer of My Discontent
Validation
Chapter 13 VaR of the Jungle
Chapter 14 The Secret History of Wall Street: 1988- 1992
Smile
Back to the Dissertation
Three Paths
An Unexpected Twist
Surprise!
Computing VaR
Chapter 15 Hot Blood and Thin Blood
Chapter 16 What Does a Risk Manager Do?— Outside VaR
Stress Tests
Trans- VaR Scenarios
Black Holes
Why Risk Managers Failed to Prevent the Financial Crisis
Managing Risk
Unspeakable Truth Number One: Risk Managers Should Make Sure Firms Fail
Unspeakable Truth Number Two: There's Good Stuff beyond the VaR Limit
Unspeakable Truth Number Three: Risk Managers Create Risk
Chapter 17 The Story of Risk
Chapter 18 Frequency versus Degree of Belief
Statistical Games
Thorp, Black, Scholes, and Merton
Change of Numeraire
Polling
The Quant Revolution
Chapter 19 The Secret History of Wall Street: 1993- 2007
Where Did the Money Come From?
Where Did They Put the Money?
Where Did the Money Go?
Chapter 20 The Secret History of Wall Street: The 2007 Crisis and Beyond
Postmortem
A Risk Management Curriculum
One Hundred Useful Books

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