Against the Gods: The Remarkable Story of Risk
by Peter L. Bernstein
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Book Summary Information
Author: Peter L. BernsteinEdition: Paperback
Audio: English (Unknown); English (Original Language); English (Published)
Published: 1998-08-31
ISBN: 0471295639
Number of pages: 400
Publisher: Wiley
Accessories:
- Economist on Wall Street (Peter L. Bernstein's Finance Classics): Notes on the Sanctity of Gold, the Value of Money, the Security of Investments, and Other Delusions
- The Price of Prosperity: A Realistic Appraisal of the Future of Our National Economy (Peter L. Bernstein's Finance Classics)
- A Primer on Money, Banking, and Gold (Peter L. Bernstein's Finance Classics)
Book Reviews of Against the Gods: The Remarkable Story of Risk
Book Review: Where Was This Book When I Took Statistics 101?
Summary: 5 Stars
This book does much to highlight, underscore and re-affirm the important and pivotal role of critical thinking in the measurement, analysis and interpretation of risk. Mr. Bernstein has put together a very readable text that simultaneously is part history, part tutorial, and part meditation on diverse and often inter-related topics of probability, descriptive and inferential statistics, economics and finance. He skillfully shows how a blind reliance on numbers and quantitation, especially as they apply to business, economics and finance can equally inform or mislead, and goes further to demonstrate that the tug of war between gut (our best guesses) and measurement has not been resolved with the introduction of theoretical treatments of individuals and groups, complex mathematical formulae, innovative management products and computers; it has only been taken to a new and higher level of complexity.
Mr. Bernstein's thesis was a simple one: people had to first make an intellectual leap- they had to believe that outcomes could be influenced by their actions and not merely in the 'hands of the Gods' a matter of fickle 'Fate', before they could even begin to think about taming risk, let alone measuring it. From the author's standpoint, risk management demands the uncommon ability to think with numbers. It also requires the ability to live with varying degrees of uncertainty. While people throughout history had the ability to do the latter, they had not, as a group, the ability to do the former until very recently in recorded human history.
Bernstein takes this as a jumping-off point for his exposition. He first details the origin of numbers, something so banal to us today. He then takes the reader to the gaming tables of Europe, and introduces us to the figures who would lay down the tenets of Standard Mathematical Probability. From there, Bernstein introduces us to various historical contributors to the allied fields of probability and statistics- from Fermat and Pascal through a host of Bernoullis (the archetypal Renaissance men) to such enigmatic figures as de Moivre and Gauss, pious men like Bayes, and right up to privileged and misguided social reformers like Galton and Quetelet. Each in turn contributed a crucial piece of the portraits comprising Standard Mathematical Probability and modern day statistics such as the concepts of mathematical expectation, conditional probabilities, sampling and measurement error, the law of large numbers and regression to the mean. Once these elements were in place, the stage was set for the formal development of risk management as a science and a practice, and at this point, Mr. Bernstein introduces us to the economists, who then as today couldn't agree on anything, could always be counted on to provide 'correct' answers for what has happened, and the wrong answer as to what will happen.
After setting the stage by presenting the tools of modern risk management, Mr. Bernstein then turns his attention in the last third of the book to those who have righfully challenged the assumptions underpinning neo-classical economics, modern finance, and Standard Mathematical Probability. This is perhaps the most interesting part of the book, because it is here that the author introduces the human factor in risk, and calls into question the use of mathematical techniques, largely developed over the course of studying a variety of regularly occuring and repeating natural phenomena, to the actions and behavior of that mass of capricious and unpredictable creatures, The Human Ape. His take on this subject has some very interesting implications in the world of finance, given that the Human Ape is, to paraphrase, smarter than the average monkey, and has the capacity to learn from his or her mistakes (which most unfortunately do not), and as a consequence, adapt to changing conditions.
I found the last half of the book to be the most interesting, because here is where the author fully lays out the limitations of the disparate mathematical techniques, especially as they apply to the Great Upright Walking Ape. Throughout the book, all probabilistic and statistical concepts are explained in plain English, and there are absolutely no equations in the text (a definite plus, as this often gets in the way of critical thinking and true understanding). Mr. Bernstein took great care to fully explain the key concepts in precise detail, and offers the reader many accessible sources for further enlightenment throughout the text.
Perhaps the most important messages of the book can be briefly summarized in the following way. We define risk as the chance of loss, uncertainty as something we don't know, and in this day and age, we often behave as if we know all of the risks and there is nothing that can happen that has not happened before. For us, the past is the best indication of the future course of events. Standard Mathematical Probability was developed under the assumptions of total information, independence of outcomes (past and present moves do not affect future moves), and the ability to reduce everything that matters (and many that don't) to a number. In essence, it looks at the same thing done in the same way repeatedly, and as such, takes the characteristics of any situation to be stable and immutable.
Standard Mathematical Probability forms the core foundation of risk management, and while it is a fine tool for the gambling tables, it falls apart when applied to the real world, where for a variety of reasons the assumptions are simply untenable. In fact, in the real world, they are ridiculous, bordering on insane. And this is before we even begin to contemplate the human factor....
In sum, while I do not agree with Mr. Bernstein's assessment of the failure to develop the tools of Standard Mathematical Probability before the time of the Renaissance (which I found puzzling, given the ample evidence of very sophisticated mathematical capability among such diverse ancient societies as the Aztecs, Egyptians, Olmec, Maya and Inca), I wholeheartedly agree with his assessment of these tools as they apply to the human element. I thank Mr. Bernstein for making clear all of those concepts that too many Professors in Statistics 101 (intentionally) obfuscate, and I highly recommend this book, as well as Benjamin Graham's The Intelligent Investor, to anyone wishing to invest with both safety and success.
Summary of Against the Gods: The Remarkable Story of Risk
A Business Week, New York Times Business, and USA Today Bestseller"Ambitious and readable . . . an engaging introduction to the oddsmakers, whom Bernstein regards as true humanists helping to release mankind from the choke holds of superstition and fatalism." -The New York Times
"An extraordinarily entertaining and informative book." -The Wall Street Journal
"A lively panoramic book . . . Against the Gods sets up an ambitious premise and then delivers on it." -Business Week
"Deserves to be, and surely will be, widely read." -The Economist
"[A] challenging book, one that may change forever the way people think about the world." -Worth
"No one else could have written a book of such central importance with so much charm and excitement." -Robert Heilbroner author, The Worldly Philosophers
"With his wonderful knowledge of the history and current manifestations of risk, Peter Bernstein brings us Against the Gods. Nothing like it will come out of the financial world this year or ever. I speak carefully: no one should miss it." -John Kenneth Galbraith Professor of Economics Emeritus, Harvard University
In this unique exploration of the role of risk in our society, Peter Bernstein argues that the notion of bringing risk under control is one of the central ideas that distinguishes modern times from the distant past. Against the Gods chronicles the remarkable intellectual adventure that liberated humanity from oracles and soothsayers by means of the powerful tools of risk management that are available to us today.
"An extremely readable history of risk." -Barron's
"Fascinating . . . this challenging volume will help you understand the uncertainties that every investor must face." -Money
"A singular achievement." -Times Literary Supplement
"There's a growing market for savants who can render the recondite intelligibly-witness Stephen Jay Gould (natural history), Oliver Sacks (disease), Richard Dawkins (heredity), James Gleick (physics), Paul Krugman (economics)-and Bernstein would mingle well in their company." -The Australian
With the stock market breaking records almost daily, leaving longtime market analysts shaking their heads and revising their forecasts, a study of the concept of risk seems quite timely. Peter Bernstein has written a comprehensive history of man's efforts to understand risk and probability, beginning with early gamblers in ancient Greece, continuing through the 17th-century French mathematicians Pascal and Fermat and up to modern chaos theory. Along the way he demonstrates that understanding risk underlies everything from game theory to bridge-building to winemaking.
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