Red-Blooded Risk: The Secret History of Wall Street

Red-Blooded Risk Management

In emotional terms, thin-blooded people are motivated mainly by fear, hot-blooded people by anger and other passions—or even merely thrills—and cold-blooded people by greed. Red-blooded people feel anger and fear and greed like anyone else, but understand successful risk taking is a matter of calculation, not instinct.

This is not a self-help book. I do not have any advice for how to achieve this psychological state, if that is what you want to do. What I can tell you is how to compute the red-blooded action in risk situations. It's mathematics, not psychology. Red-blooded risk management consists of three specific mathematical techniques, which have been thoroughly tested in real-world applications. Although quantitative skills are required to implement them, the ideas are simple and will be explained in this book without math. The techniques are used to:

• Turn any situation into a system with clearly delineated risks, dangers, and opportunities.
• Optimize the risks for the best possible outcome.
• Arrange things so both dangers and opportunities make the maximum positive contributions.

This field was invented by a cohort of quantitatively trained risk takers born in the 1950s. In the 1970s, we rebelled against conventional academic and institutional ideas of risk. We sought wisdom from actual risk-takers, which took us to some disreputable places. In the 1980s, we found ourselves taking risks on Wall Street, and developed the ideas described in this ...