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Risk Can Be a Good Thing

Everyone has an idea of what “risk” is, and it isn’t a positive one for most.

There’s the president of a New York-based financial planning firm telling The Washington Post that U.S. stocks are too risky. And there’s Friday’s BusinessWeek headline pronouncing corporate bonds as less risky than before. Both reinforce the powerfully negative stigma that surrounds risk.

But capital markets professionals have a special understanding of “risk” that doesn’t jibe with others. Risk can be good if managed correctly, according to Aaron Brown’s dramatically-titled new book Red-Blooded Risk: The Secret History of Wall Street.

The level of risk must always be under human control.“Risk is something you dial up or down in order to accomplish a goal,” Brown wrote. “Risks are two-sided; you can win or you can lose.”

Brown is quick to distinguish risk from “danger,” such as an athlete suffering an injury, and from “opportunity,” such as a baseball player pitching a no-hitter.

Crank up risk when you’re behind in the game by playing more aggressively in hopes of scoring more points. But dial it down when you’re ahead because playing it safe reduces variables and improves your chances of keeping the lead.

Conventional book lovers will appreciate that Red-Blooded Riskcovers the history of risk from the first rise of quants in the 1980s, and explains itself in terms of the Roman Empire, construction of Egypt’s pyramids and more. Contemporary readers will enjoy its manga illustrations (inset), and Brown’s explanations in terms of vampires and zombies.

Brown is one of those aforementioned quants, and today he is a risk manager at Greenwich, Conn.-based AQR Capital Management — and professional poker veteran. So he knows more than a thing or two about risk in many of its forms.

“It really annoys me, the number of people who talk to their kids about risk, but never actually go to places where people are taking risk or try it themselves,” Brown told trading blogMartinKronicle. “We [Brown and his band of original quants] sought wisdom from actual risk-takers,” he said in the book, “which took us to some disreputable places.”

Wall Street was one of the places they went, honing Red-Blooded Risk’s concepts from 1987 to 1992.

Brown will return to Manhattan to be the keynote speaker at the Sybase-sponsored lunch seminar “Risk Appetite and Road Feel” at the Harvard Club of New York City in midtown on Wednesday. He will explore the effects of technology’s trading-space invasion; how we lose the feel for trading the way power steering costs us a feel for the road; and how financial firms can put that feel back into risk appetite decisions.

Following Brown, Sybase will conclude with a brief discussion outlining how Complex Event Processing technology can provide continuous analysis of rapidly changing data to provide effective strategies for monitoring and mitigating risk. Click here to register.

“Risks always refer to human interactions,” Brown wrote. “Their level must be under our control.”

This is an opportunity to view risk in a new light, far beyond its pessimistic connotations. Attendees will also get a free copy of Red-Blooded Risk.

Red-blooded refers to people who are excited by challenges, but not to the point of being blinded to dangers and opportunities,” Brown wrote. “Red-blooded people feel anger and fear and greed like anyone else, but understand successful risk taking is a matter of calculation, not instinct.”

Follow Derek on Twitter: @DKlobucher

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  • Derek,
    My years of working in Sarbanes Oxley controls assessments taught me that risk is just something to be managed. If the likelihood of a bad outcome is low and the consequences not terribly consequential, the organization’s management may just decide that they are willing to accept the risk. The key is understanding the risk and being prepared for what could happen, either a good change or a bad change. So I agree, risk is neither inherently bad or inherently good, just a possibility of change.
    Thanks for an interesting post!
    • You’re welcome, Gretchen. And thank you for the comment! One of the things I really liked about this work is Brown’s notion that risk is a variable under human control.