Like the weather and bad writing, financial risk is something everybody talks and nobody does anything about. More accurately, nobody did anything sensible and helpful about it until Aaron Brown and a bunch of fellow quants, short for quantitative analysts, invaded Wall Street and ushered in a brave new world of finance.
In Red-Blooded Risk, Brown reveals behind the scenes facts of finance based on centuries of higher math and even higher minded philosophy, then distills it down to compelling arguments that require no numbers to comprehend. (Full disclosure: I worked as an editor on the book.) Wall Street junkies and math geeks will find plenty to ponder for sure, but Red-Blooded Risk is modern risk management for the rest of us.
Subtitled The Secret History of Wall Street, Red-Blooded Risk tells the story of how this odd group of quants shook up the old white shoe business of finance, opting for calculations on the computer rather than cocktails at the club at the moment when stocks were about to overshadow bonds and start mattering to Main Street. This original Occupy Wall Street movement, highly educated and weaned on fringe activities including point-spread arbitrage and blackjack card counting, took advantage of technological advances that enabled advanced data analysis and unlocked information once the exclusive province of banks to turn finance on its head during the 1980s. It’s a spellbinding business how-dunnit that leads Brown to weave fascinating tales, including what if the ancient Egyptians had used money rather than slaves to build the pyramids, and explain how American colonists beat the British with currency devaluation, all marvelously illustrated by manga comic master Eric Kim.
The 1987 stock market crash brought the quants back to earth. Mainstream Wall Street blamed the quants and their mad scientist formulas for the devastation, but Brown says that 1987 proved the new breed needed to add risk to the equation and get it right. He calls those times the most intellectually stimulating period of his life as he and his colleagues searched for useful measures of risk.
As a truer picture of risk emerged, it became a tool in investment decision making. Things may have gone off the rails with the 2008 crisis, and one reaction has been moving to minimize risk. Brown provides compelling counterarguments that risk is not just essential to making money but that there’s an optimal amount of risk to maximize profit.
Brown notes when investment managers try to avoid risk and seek safe havens, the resulting groupthink multiplies risk for all. There’s little chance of such complacent unanimity crashing markets again as long as guys like Brown are in the game to shake things up.
Totally globalized native New Yorker and former broadcast news producer Muhammad Cohen is author of Hong Kong On Air, a novel set in his adopted hometown during the 1997 handover about television news, love, betrayal, financial crisis, and cheap lingerie. See his biography, online archive and more at www.muhammadcohen.com.