Moreover, it is misunderstood—even by many who have smelled it up close personally via big trading loses on hedged positions. Aaron Brown’s most recent text, Red-Blooded Risk, explains why.
In doing so, it is simultaneously brilliant and flawed. For the former, Brown deserves credit; for the latter, the publisher presumably deserves most of the blame.
First, the brilliance; summarized in one word, with two intended meanings: pragmatics. Oh yeah, the book includes 漫画-style comic strips, helpfully provided as idiot self-detectors.
First, well-known meaning is the philosophical tradition linking practice and theory. Arguably unique for risk books, Brown builds deep intuition around the concept of risk and its manifestation from structural to marked positions to historical roots in tulips. Brown has clearly lived and breathed risk management for many years (self-proclaimed from its modern origin in the 1980s), and that wisdom shines through via first-person prose combining insight, intuition, arrogance, pride, greed, humility, regret, condescension, and insecurity. Perhaps the first book ever to make VaR sound geek-sexy—with nary a technical definition.
Second, lesser-known meaning is the subfield of linguistics which investigates ways in which context contributes to meaning. Unlike technical risk texts, Brown spends much of the book deep diving into context and letting meaning emanate from therein. As he states, “different aspects are easier to understand from different vantages” (p. 57). As a reader who never personally worked at a big bank, this is deeply informative for attuning mental models (akin to Harris for trading mechanics, Rebonato for derivatives, and Taleb for hedging). Explaining the lineage of quant hedge funds through the corresponding frequentist versus Bayesian disposition of their founders is fascinating, and indeed makes sense in retrospect. Slicing away the credibility mystique and exposing the raw underbelly of banks, down to explaining front, middle, and back office in depth. For readers familiar with disciplined metrics-driven tech companies, the apparent intellectual and technical sloppiness of big banks is simply jaw dropping.
One excerpt simply must be quoted, beginning of Chapter 4, as it is perhaps the most accurate and beautiful summary of self-entitlement believed by geeks with -IQ time immemorial:
The rocket scientists came together on Wall Street in the 1980s and began the process that eventually explained the modern concept of probability and reconstructed the global financial system. We were not individually ambitious. All we wanted was to make more money than any rational person could spend, without ever putting on a tie or being polite to anyone we didn’t like. We didn’t have any use for the money, except for maybe some books and cool computer equipment. We didn’t want to throw (or go to) fancy parties or buy political power—and we didn’t spend it on cars, jewelry, or places to live, and least of all on clothes. We’d probably give the money away, but until then, it would give us the power to say “f- you” to anyone, except that we were mostly pretty soft-spoken and civil in our expressions
Now, the flawed parts.
One reviewer caveat worth advance mention is 9 books out of 10 read by Quantivity have content dense with math, code, or both. On the positive side, reading of Brown’s book indicates positive noteworthiness due to its statistical abnormality (given it has neither); on the negative side, any review is biased through such lens.
First, lots of effort was expended by the publisher making this text appeal to a mass audience, clearly rushing to fill the void of perceived post-financial crisis publishing opportunity. From the ridiculous title (and cover) to the silly use of “secret history” meme to hilarious tongue-in-cheek back cover reviewer comments by Gatheral, Taleb, Wilmott, and Thorp. Parts of the book are prone to hyperbole, which read like they were edited in for sales effect. While these nuisances detract credibility, such can be ignored and arguably contributes the positive benefit of reducing its purchase price to mass market (i.e. under $25).
Second, the book lacks unifying organization. While Brown provides the following disclaimer for such, the editor equally deserves some blame (p. 57):
If I had all the theory worked out, I could write a textbook organized in logical sequence. Instead, I’m going to intersperse theoretical discussions with accounts of the development of the ideas.
While this makes sense, it is admittedly a bit jarring to see that disclaimer juxtaposed alongside supposition of having “explained the modern concept of probability”. Thus, the reader is left wondering whether perhaps either of the following may be true:
- Brown has a theory of risk, but was refused in editing due to overabundance of equations
- Brown has a new theory of probability, but could not muster a theory of risk
Either are intriguing, although perhaps the former seems more likely as Brown includes the following tongue-in-cheek disclaimer regarding use of a tiny bit of high school-level math included in Chapter 5 (p. 73):
Warning, this chapter contains a little math. It’s nothing intimidating, mostly multiplication and some simple algebra, but I know a lot of people don’t like it. If that describes you, I urge you to read the chapter anyway. It’s one of the most important in the book. You can skip the math and get the ideas anyway.
Having never met Brown and thus unfamiliar with his personality, cannot escape the sense that he is making gentle fun of readers which possess such bias. Either way, it’s amusing.
While modest disorganization is a textual flaw, astute readers may perhaps perceive it as subtle financial opportunity: if such theory was sufficiently well-defined to warrant standard textbook treatment, then there would undoubtedly be much less juice possible from doing it really well.
In either case, remedy for this shortcoming is to read the book in as few distinct sittings as possible. Having read it in two sittings, the wisdom was able to percolate together and expand personal mental models nicely. Well worth the read.