2min chapter

Risk of Ruin cover image

The Character Building Side Effect of Losing

Risk of Ruin

CHAPTER

Risk Management

Jason: Risk management to me has always meant the same thing, which is that when the one in 10,000 event happens, how are you doing? And nothing else matters that much. So on the way into that trade or whatever position I have, it's all about making sure I size and hedge things so that if that happened, it's not a like game changer for me.

00:00
Speaker 2
Remember that because Jason started his career during a Black Swan event, he had a front row seat as all of the world's assumptions about risk got destroyed. Seeing that happen would have an impact on anyone. So Jason's approach to risk is colored by that experience.
Speaker 1
I think the thing I took away to that I've applied my whole career is that there's a lot of different ways people risk manage portfolios. What I learned in 2008, and it's crazy, a lot of these banks, they quote this thing called value at risk or var and they basically, it measures, I mean I think they all do it differently, but it measures kind of a, what is it like, a 95th percentile worst outcome for them or something like that. And I always just find that really interesting like risk management to me has always meant the same thing, which is that when the incredibly unlikely event happens, when the one in 10,000 event happens, how are you doing, right? And nothing else matters that much. So when I trade my option portfolio, I am, when I'm dealing with risk management, I am hyper focused on the incredibly unlikely outcome and what that means for me. And it sounds obvious, but I see a lot of people not treating risk like that. You know, looking at, oh, you know, this is what a normal, like a normal day, or maybe this is like a, you know, 90th or 95th or even 98th percentile outcome for us looks like, but that's just always just seeing silly to me, you know, and pretty much every day I walk in the office and there's some like five standard deviation event or less likely happening against me in my portfolio, you know, company getting bought for 80% premium option market putting that at one in three billion universes, but we all know that's not the right price for it. But it's all about, okay, that happened to me. I need to stay in business, right? So on the way into that trade or whatever position I have, it's all about me making sure I size and hedge things so that if that happened, it's not a like game changer for me.

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