Against The Gods
Ranked #7,869 in Books, Poetry & Writing, #279,690 overall
What is Against The Gods all about?
When you place a bet, you evaluate risks. When you make a decision, you evaluate risks. If you take any action, the consequence of which lies in the future and is not certain involves an analysis of risk - even if you do not do so consciously.
This is a paradigm shift. Imagining taking (or not taking) an action because someone sneezed just before you started. Or staring at tea leaves to make a decision regarding the future.
The complex economic structure that envelopes every human activity today is made possible only because the concept of risk today is well understood and implemented. In fact , the present financial crisis is an indicator of what can happen is risk evaluation is bypassed.
Against The Gods written by Peter L. Bernstein is the story of how the concept of risks evolved and matured.
This lens is a review of the book.
Picture courtesy: Gabriel Doyle
From the book
One of the most familiar manifestation of the failure of invariance is in the old Wall Street say, "You never get poor by taking a profit." It follows that cutting your losses is also a good idea, but investors hate to take losses, because, tax considerations aside, a loss taken is an acknowledgment of error. Loss-aversion combined with ego leads investors to gamble clinging to their mistakes in the fond hope that some day the market will vindicate their judgment and make them whole.
Against The Gods - Central Theme
In the beginning there was lady luck. And lots of gambling. Then advanced minds sought to quantify gambling. The result of intense intellectual cooperation between Fermat (of the last theorem fame) and Blaise Pascal resulted in the Theory of Probability. It was now possible to compute the probability of a roll of a dice or two or many. Or for that matter any event could now be quantified. Or large number of events. It was now possible to develop and study patterns.
Have you even taken part in an opinion poll? Well, you have the great Swiss mathematician Jacob Bernoulli to blame. He invented the Law of Large Numbers and methods of sampling.
But life is not a roll of dice. It involves decision and interactions and decisions that change on interactions. Enter Game Theory. One could rationally figure out the correct response to a situation to maximize benefits or minimize damage.
Life is also uncertain. When we take a decision can we extrapolate our past experience into the future? What are the various consequences of a decision? How wrong can we go? How badly will be hit if we go wrong? How do we protect ourselves if we go wrong? Should we take out an insurance? Should we invest everything in the shares that have done well in the past? Should businesses diversify? Should we hedge? These are the aspects of the concept of risk.
Bernstein in his book traces the development of the concept of risk. Along the way, you get to meet strange statisticians who measured everything to geniuses who revolutionized the way risks was perceived. There is also a delightful chapter that explains the system of side bets, a.k.a derivatives, that is very relevant today.
From the book
It is difficult to understand why statisticians commonly limit their inquiries to Averages, and do not revel in more comprehensive views. Their souls seem as dull to the charm of variety as that of the native of one of our flat English counties, whose retrospect of Switzerland was that, if its mountains can be thrown into its lakes, two nuisances would be rid of at once.
Against The Gods - Ratings and Recommendation
Style: Despite handling a subject that is mathematically oriented and logically inclined, the book is a surprisingly easy read. The story of mathematicians is skillfully interwoven and gives an otherwise dry subject a wonderful narrative charm.
Knowledge content: Gives you a good understanding of the subject of risks.
Applicability: You cannot hope to make a killing in the stock exchange based on this information. But at least you will start appreciating the happenings in the financial world.
Recommendation: Perhaps the best book on the history of finance and economics. Buy and read it.
From the book
Pascal and Fermat held the key to a systematic method of calculating the probabilities of future events. ... The significance of their pioneering work for business management, for risk management, and, in particular, for insurance was to be seized by others. ... The inescapable uncertainty of the future will always prevent us from completely banishing the fates from our hopes and fears, but after 1654 mumbo jumbo would no longer be the forecasting method of choice.
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