Against the Gods: The remarkable story of Risk by Peter L. Bernstein
People have always believed that no human being can go against the will of the gods. However, Peter Bernstein tries to explain how human beings have gone against all odds to beat the gods at their own game. In his book, ‘against the gods: the remarkable story if risk’ he tells the story of grasping risky opportunities to change the fate of the world. Peter narrates the story of a few scientists and their assistant amateurs who risked everything to bring the future to the present. What they discovered and invented aided the world with the necessary tools for foretelling the future and propel the world to its current situation in risk management. The book aids the reader with the knowledge of how to differentiate a gamble from an ability and reasonable and unreasonable choices of financial risk. Bernstein looks at how mathematical formulas came into existence, formulation of probability risk and financial risking.
Bernstein begins his book outlining the way man started learning and trying to make sense of probability and risk (Bernstein 5). He starts with the founding fathers of modern mathematics who explained and formulated statistical methods, but never thought in detail about risk. He goes on about how later; the ancient Arabic numerals and mathematical formulas helped to discover the statistical chances of risk. The formulas also provided the knowledge of how to come out alive when risking. These methods or formulas are what the common mathematicians, gamblers, Stockbrokers, and financial advisers use to make money without breaking a sweat.
The formulas range from probabilities, charts, regressions, law of numbers, and integers as well as uncertainty theory, which people use to explain risk in portfolio development. The author talks about financial risk by explaining that for one to understand the risk an individual needs to learn the way people think about the future (Bernstein 10). Gambling is a game of gain or loss. However, as Bernstein puts it, the game is addictive and calls on Lady Luck to come to their aid (Bernstein 19). Financial risk-taking is what has developed the world to the level it is right now. However, nobody in the world will ever take any risk with a mentality that it will fail.
In his book, Bernstein states that the Greeks had vast interests in gambling in the pre-era of 1200, which was the numbers period. Looking at the Greeks interests and desires to prosper in gambling one would automatically assume they would formulate and explore the laws and theories of probability. However, that was not the case mainly because they believed that the gods controlled everything in the world, which included chance and fate of human beings. The Greeks believe made them reluctant to study the universe and anything that was concerned changing it, for fear of being punished by the gods. Bernstein does a good job in introducing the whole idea of chances using the era characterized by numbers formulation and understanding. He brings to light Leonardo Pisano, who created the Liber Aabaci that was the first application of different characteristics of numbers. During this period, 0 (zero) was introduced, and it had major changes in everything regarding the way people viewed and associated with numbers (Bernstein 23).
Bernstein goes on to introduce the 1200-1700 period a time associated with accounting, Pascal’s triangle, and inference drawing. In this part, Bernstein introduces the father of accounting and author of ‘Summa’ called Lucal Pacioli who in his book gave the multiplication table of 60 by 60. Later on, Bernstein introduced the author of Ars Magna and Ludo Algae both Greek terms that mean the great art and book on games of chance respectively by the name Cardano (Bernstein 40). Cardano, according to Bernstein was a physician and an addict of gambling who played at least every day of his life to the point he intended to set rules for the game. Cardonos’ writings proved to be the first that made efforts concerning statistical probability. At this level, Bernstein outlines that the probability meant foretelling the future and analyzing the past (67). Therefore, Cardonos writings become the foundations of risk management. He according to Bernstein came up with gambling words like fair dice, combination, and odds ratio due to his experience in the games. Other individuals that helped in the development of the probability theory include Blaise Pascal, Fermat (the last theorem of probability theory), and Chevalier de mere. The three mathematicians combined to pose the balla problem. A combination between Pascal and Fermat gave birth to Pascal triangle that was used to calculate the odds in solving the balla problem. According to Bernstein, Pascal’s triangle summarized probability in gambling. Bernstein then finalizes the period by introducing Graunt and Petty, who developed methods of drawing inferences from samples. However, they never mentioned probability in their research and findings (Bernstein 76).
Bernstein talked about the 1700-1900 a period he calls the measurement unlimited era. At this level, he brings in the Bernoulli family into the picture, which had a number of mathematicians who contributed immensely to the probability theory. The Bernoulli family, according to Bernstein made a contribution of six individuals in the mathematical world. The six were Daniel Bernoulli, Jacob I Bernoulli, De Moivre, Bayes, Gauss, and Francis Galton. Daniel Bernoulli according to Bernstein came up with the risk taker component (Bernstein 140). According to Daniel, an individual’s wealth is inversely proportional to a person’s view on the importance of wealth. Daniel introduced utility concept that had an enormous impact on the principles of risk management. Jacob was concerned with a-posteriori chances. With the concern, he formulated the law of large numbers. De Moivre continued Jacobs researching on findings and came up with the normal curve distribution. Later on, Bayes made his contribution, although Bernstein states that his work did not get a chance at the publisher's office. Gauss followed, and he researched about geodesic measurements, which lead him to introducing the theorem that talks of average of averages (Bernstein 154). Finally, Francis Galton closed the Bernoulli family in research. Francis was a scientist who concerned himself with heredity. According to Bernstein, Francis never concerned himself with business or economics of any sort. However, His love was in the art of measuring and numbers and thus, his greatest contributions were in the regression of averages (Bernstein 190).
According to Bernstein, in the 1900-1960 period, the soul of risk management lies in increasing areas of control and reducing areas with no absolute control over given results. Laplace and Henri Policare are among the individuals who championed the idea. However, they both settled to the fact there was no guarantee to complete info to attribute causality, which brought about the reject or non-reject hypothesis (Bernstein 216). Bernstein introduced Markowitz, who was the last in the era. Markowitz used mathematics in portfolio assortment and introduced a formula for selecting stocks. His ideology lasted for some time before a professor from Chicago who Bernstein does not name challenged Markowitz work finally developing behavioral finance in economics (250). Therefore, people use the behavioral finance system to understand the levels of belief and uncertainty. Bernstein finalizes book in the post-1960 period by focusing on prospect theory. The theory illustrates how people choose between risky probabilistic options where the chances of the outcome are known (Bernstein 308).
The book focuses on financial risk rather than risk management in general. However, the book provided many theories that are practical on financial risking. For example, If an individual picks a random number, takes its average, repeat severally, he or she will come to the conclusion that the frequency distribution is normal. It filled my mind with the history of numbers and the development of money and financial risk.
Bernstein, Peter. Against the gods: The remarkable story of risk. New York, NY: John Wiley & Sons, Inc, 1998. Print.