Red-Blooded Risk: The Secret History of Wall Street

Risk and Life

Risk taking is not just a quantitative discipline, it is a philosophy of life. There are basically two sensible attitudes about risk. The first is to avoid it whenever possible, unless there is some potential payoff worth the risk. The second is to embrace risk taking opportunities that appear to offer a positive edge. The advantage of the second course is that you take enough gambles that the outcome of any one, or any ten or hundred, doesn't matter. In the long run, you will end up near your expected outcome, like someone flipping a coin a million times.

In my experience, people incline to one of these two strategies early in life. Perhaps it's in our genes. In this context, I always think of a highway sign you can see if you drive from Nice to Monte Carlo. There is a fork, and the sign points right to “Nice Gene” and left to “Monte Carlo Gene.” On that choice, I'm a leftist. That doesn't mean I take huge risks; it means I take lots of risks. I have learned from others and invented myself ways to balance these to ensure a good outcome, insomuch as mathematics and human efforts can ensure anything.

There are three iron rules for risk takers. Since your plan is to arrive at an outcome near expectation, you must be sure that expectation is positive. In other words, you must have an edge in all your bets. Expectation is only an abstraction for risk-avoiders. If you buy a single $1 lottery ticket, it makes no practical difference whether your expected payout is $0.90 ...