Red–Blooded Risk: The Secret History of Wall Street

"Aaron Brown combines his characteristic no–nonsense approach to risk management with the latest, cutting–edge research in behavioral finance. The result makes other books on risk look pale and anemic by comparison."
—Dylan Evans, author of Risk Intelligence
"I highly recommend these ruminations on the history, philosophy, and practice of risk management; on risk, money, and the social value of derivatives markets; and much else written by a prominent risk management practitioner. This unconventional book is not only a good read but is also a treasure trove of valuable insights into trading and markets."
—Jim Gatheral, professor at Baruch College and author of The Volatility Surface
"Aaron Brown is the dean of Wall Street risk managers, and the one I respect the most. He describes risk clearly and presents techniques for managing it. My disagreement is with the applicability of those techniques to extreme tail events. Aside from that he has been my principal recourse in the field owing to his acuity, depth, and clarity of exposition."—Nassim Nicholas Taleb, professor at the Polytechnic Institute of New York University and author of The Black Swan
"Aaron Brown eloquently explains the history of money and risk, and predicts a future with an increasing role for financial derivatives. After decades of serious poker playing and front–line risk management, he has a unique perspective. His blood is considerably redder than mine, which is looking rather pink after reading this book. I′m not sure I′ve got the nerve to follow all of his advice, but then again I like quiche."
—Paul Wilmott, mathematician and winner of thePeel sandcastle–building competition, August 2001
"Aaron is a modern–day alchemist, able to transform complex and somewhat esoteric mathematical concepts into something easily understandable through the use of everydayexamples. He′s a master of one of the most imp ortant skills required of any risk manager: the ability to communicate effectively. Red–Blooded Risk is uniquely written to appeal to both the novice and the professional."
—Richard Apostolik, President and CEO, Global Association of Risk Professionals
"An original and provocative introduction to risk by an experienced Wall Street manager. Entertaining and informative for beginners and professionals alike."
—Edward O. Thorp, author of Beat the Dealer and Beat the Market

Spis treści:
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 131What 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 Th e 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

Nota biograficzna:

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.

Okładka tylna:

"Aaron Brown combines his characteristic no–nonsense approach to risk management with the latest, cutting–edge research in behavioral finance. The result makes other books on risk look pale and anemic by comparison."
—Dylan Evans, author of Risk Intelligence
"I highly recommend these ruminations on the history, philosophy, and practice of risk management; on risk, money, and the social value of derivatives markets; and much else written by a prominent risk management practitioner. This unconventional book is not only a good read but is also a treasure trove of valuable insights into trading and markets."
—Jim Gatheral, professor at Baruch College and author of The Volatility Surface
"Aaron Brown is the dean of Wall Street risk managers, and the one I respect the most. He describes risk clearly and presents techniques for managing it. My disagreement is with the applicability of those techniques to extreme tail events. Aside from that he has been my principal recourse in the field owing to his acuity, depth, and clarity of exposition."—Nassim Nicholas Taleb, professor at the Polytechnic Institute of New York University and author of The Black Swan
"Aaron Brown eloquently explains the history of money and risk, and predicts a future with an increasing role for financial derivatives. After decades of serious poker playing and front–line risk management, he has a unique perspective. His blood is considerably redder than mine, which is looking rather pink after reading this book. I′m not sure I′ve got the nerve to follow all of his advice, but then again I like quiche."
—Paul Wilmott, mathematician and winner of thePeel sandcastle–building competition, August 2001
"Aaron is a modern–day alchemist, able to transform complex and somewhat esoteric mathematical concepts into something easily understandable through the use of everydayexamples. He′s a master of one of the most important skills required of any risk manager: the ability to communicate effectively. Red–Blooded Risk is uniquely written to appeal to both the novice and the professional."
—Richard Apostolik, President and CEO, Global Association of Risk Professionals
"An original and provocative introduction to risk by an experienced Wall Street manager. Entertaining and informative for beginners and professionals alike."
—Edward O. Thorp, author of Beat the Dealer and Beat the Market