I recently finished reading Against The Gods – The Remarkable Story of Risk by Peter L. Bernstein. As the title indicates this book narrates the history of Risk and its role in human advancement.
Peter best summarizes the content of the book in his introduction: “this book tells the story of a group of thinkers whose remarkable vision revealed ow to put the future at the service of the present. By showing the world how to understand risk, measure it, and weight its consequences, they converted risk-taking into one of the prime catalysts that drives modern Western society.”
The book presents the history of Risk in a chronological sequence, and outlines its understanding in the respective timeframe and through the lenses of the people advancing the field. It also reflects on how that understanding affected the advancement in the various aspects of their lives.
A great educational and informative book. Peter manages to present the content in a very fluid manner, without getting caught up in the technicalities and the jargon – making this book accessible to all readers. A recommended read!
Below are excerpts from the book that I found particularly insightful:
1- “The revolutionary idea that defines the boundary between modern times and the past is the mastery of risk: the notion that the future is more than a whim of the gods and that men and women are not passive before nature. Until human beings discovered a way across that boundary, the future was a mirror of the past or the murky domain of oracles and soothsayers who held a monopoly over knowledge of anticipated events.”
2- “The word “risk” derives from the early Italian risicare, which means “to dare.” In this sense, risk is a choice rather than a date. The action we dare to take, which depend on how free we are to make choices, are what the story of risk is all about. And that story helps define what it means to be a human being.”
3- “Risk and time are opposite sides of the same coin, for if there were no tomorrow there would be no risk. Time transforms risk, and the nature of risk is shaped by the time horizon: the future is the playing field.”
4- “The trick is to be flexible enough to recognize that the regression to the mean is only a tool; it is not a religion with immutable dogma and ceremonies. ”
5- “The essence of risk management lies in maximizing the areas where we have some control over the outcome while minimizing the areas where we have absolutely no control over the outcome and the linkage between effect and cause is hidden from us.”
6- “Knight builds his analysis on the distinction between risk and uncertaintly: Uncertainty must be taken in a sense radically distinct from the familiar notion of Risk, from which it has never been properly separated…It will appear that a measurable uncertainty, or “risk” proper…is so far different from an unmeasurable one that it is not in effect an uncertainty at all.”
7- “Once we understand that we are not obliged to accept the spin of the roulette wheel or the cards we are dealt, we are free souls. Our decisions matter. We can change the world. Keynes’s economic prescriptions reveal that as we make decisions we do change the world. Whether that change turns out to be for better or for worse is up to us. The spin of the roulette wheel has nothing to do with it.”
8- “Game theory brings a new meaning to uncertainty. Earlier theories accepted uncertainty as a fact of life and did little to identify its source. Game theory says that the true source of uncertainty lies in the intentions of others.”
9- “Tversky offers an interesting speculation on this curious behavior: Probably the most significant and pervasive characteristic of the human pleasure machine is that people are much more sensitive to negative than to positive stimuli….[T]hink about how you feel today, and then try to imagine how much better you could feel….[T]here are a few things that would make you feel better, but the number of things that would make you feel worse in unbounded.”
10- “Occasional large gains seem to sustain the interest of investors and gamblers for longer periods of time than consistent small winnings. That response is typical of investors who look on investing as a game and who fail to diversify; diversification is boring. Well-informed investors diversify because they do not believe that investing is a form of entertainment.”
11- “Derivatives are not transactions in shares of stock or interest rates, in human lives, in houses vulnerable to fire, or in home mortgages. The product in derivative transactions is uncertainty itself.”
12- “But there is only a fine line between guaranteeing absolute safety and stifling the development of financial innovations that, properly handled, could reduce the volatility of corporate cash flows. Corporations that shelter their cash flows from volatility can afford to take greater internal risks in the form of higher levels of investment or expenditures on research and development. Financial institutions themselves are vulnerable to volatility in interest rates and exchange rates; to the extent that they can hedge that volatility, they can extend more credit to a wider universe of deserving borrowers.”