Red-Blooded Risk: The Secret History of Wall Street

CHAPTER 1

What This Book Is and Why You Should Read It

Life is full of choices. At a job interview, you can give short, pleasant answers to questions. Or you can burst into an impassioned rant about how you will add value to the enterprise. You can dress sedately and behave discretely at a party, or go for maximum drama in your clothes and demeanor. In a basketball game you can throw up a quick shot, or pass the ball so the team can work into position for a higher-percentage shot. You can walk on by an interesting-looking stranger, or throw out a remark or a wink. These choices all concern risk.

In the basketball example, you have a coach. When the team is ahead late in the game, the coach will give one kind of advice. On offense, take plenty of time and get a high-percentage shot. On defense, deny the opponents easy shots and do not foul. Why? Because this style of play minimizes the variance of outcome, which is to the advantage of the team in the lead. The trailing team will try to shoot three-point shots quickly and will play aggressively for steals and blocks on defense. They don't mind fouls because those can change the score without running time off the clock. They are trying to maximize variance of outcome.

If you're not familiar with basketball, the same idea applies in virtually every competitive sport. The player or team that is ahead wants to minimize risk, whereas the opposing player or team wants to maximize it. In baseball, a pitcher with a lead throws strikes; when ...