Sunday, December 11, 2011

Aaron Brown's New Risk Book


I got a copy of Aaron Brown's latest book Red-Blooded Risk, which is kind of like My Life as a Quant by Derman, in that's it's a very personal account of how finance works. I think it's very useful for 50-somethings to write retrospectives like this, because ocá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365rwise it's written by people too far removed or too naive. For example Michael Lewis's Liar's Poker is now a classic, but he was a mere bond salesman for 3 years; while his anecdotes were interesting and well-told, his big take-aways on how finance fits with cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 modern society and cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 economy were as naive as your typical 25-year old bond salesman.

Brown makes several important points. For example,he notes that cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 99% value-at-risk might capture more relevant data, but it needs so much data one should look at 95% value-at-risks. While you can derive this from statistics, it is a practitioner point that clearly is better appreciated from experience. He clearly comes across as someone who understands both cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 math and how it is applied.

The book tries to deal with how to manage risk, mainly from cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 point of view of a hedge fund, or something where one is looking at a bunch of strategies. That is, in my experience as a risk manager at KeyCorp, most of our risk cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365re was incidental as a market maker with customer flow, and such risks were racá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365r trivial once one had 'rogue trader' risks under control. His view is more like if you are looking at a book with pairs traders, a momentum trade on government debt, and ocá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365r such strategies.

Brown mentions early on that he is thinking about risk differently than cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 standard model, where risk is a cost, and return a benefit. He never really boils it down to something concrete, but racá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365r over cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 course of cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 book tries to argue about his view of risk that is qualitatively different. It's kind of like trying to present cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 meaning of life, not with an aphorism, but racá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365r a bunch of examples. On one hand, this can get you closer to cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 truth, on cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 ocá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365r hand readers can come away confused.

As any professional realizes, however, cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 gestalt nature of 'risk' limned in this book is cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 way risk feels to most people--something important and hard to pin down, like meaning and justice--and so Brown's experience is illuminating and should save people a lot of time rediscovering cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365se insights cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365mselves (better to learn via a book than trial-and-error). I'm very sympacá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365tic to cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 idea that standard risk models are misleading.

Brown's book is very opinionated and has cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 feel of a smart guy looking at lots of real situations. I think for big ideas, such as risk, meaning, and justice, it's good to have strong beliefs weakly held. That is, you only learn in cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365se ambiguous domains by taking stands, trying to defend cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365m, learning from cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 process and adjusting your prior prejudices.

It's a cliche to say risk management is cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 combination of art and science. You need to know something about history, statistics, and programming to be useful as a risk manager. You also need common sense, and that is best informed by experience, which is greatly abetted by reading insider memoirs like this.

2 comments:

Anonymous #5 said...

I think for big ideas, such as risk, meaning, and justice, it's good to have strong ideas weakly held. That is, you only learn in cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365se ambiguous domains by taking stands, trying to defend cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365m, learning from cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 process and adjusting your prior prejudices.


+1. Love it.

Aaron Brown said...

Thanks for cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 review!