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: Real world, virtual risk
Summary: 4 Stars
Who dares wins. Bernstein puts the emphasis on winning: "higher risk should in time produce more wealth, but only for investors who can stand the heat."
The title of this book promises the story of risk. The story he tells, he tells very well, but it should be called a story of risk with significant omissions. The missing parts can best be described in terms of three categories of risk:
* directly perceived risk - climbing a tree, riding a bike, or driving a car to the channel tunnel,
* quantified risk - probabilistic estimates of failure, such as those made for new vaccines, bridges, or the reinforced concrete in the tunnel, and
* virtual risk - the scientists and statisticians don't know or cannot agree: the likelihood of a terrorist planting a bomb in the tunnel that will kill hundreds of people.
The management of the first category of risks has probably changed little since our ancestors climbed down from the trees. The particular dangers that we have to cope with are different - fierce animals have been replaced by cars. But we still respond to them intuitively in ways that have been programmed into us by evolution - we all duck if we see something about to hit us. The fact that, for this category, we are all risk managers, makes the official risk manager's job frustrating. If officaldom requires cars to be fitted with better brakes, we do not drive the same way as before and enjoy an extra margin of safety; we drive faster or start braking later. The potential safety benefit tends to get consumed as a performance benefit.
The management of virtual risks is guided by belief, conviction and superstition. These risks remain the realm of the gods. Like the computer programmer's virtual reality, they can be real - like those built into a simulator for training pilots - or completely imaginary - like space invaders. Virtual risks are products of the imagination that work upon the imagination. In the risk literature, such risks are usually labelled uncertainties. But we do not respond blankly to uncertainty; we impose meaning upon it - meaning that has no firm basis in science. And our responses continually change the world to which we are responding.
Whether associated with the stock market, global warming, mad cow disease, or the channel tunnel, virtual risks cannot be determined actuarially. They are inherently unknowable because they are the product of an infinitely reflexive regress. Investors, polluters, beef eaters, travellers, terrorists, and those responsible for security are all guessing about the responses of others, to their responses, to the responses of others ... At the time of writing it is not clear whether the recent fire in the channel tunnel was a result of accident or sabotage. But it is clear that Eurotunnel's estimate that a fire that will kill 50 or more people will occur only once in 600,000 years is fatuous . When fully operational, on a busy weekend the tunnel could have more than 10,000 people in it at any one time; and what will happen in the tunnel will be a result of people - employees, ordinary travellers, and terrorists - behaving in unpredictable ways in response to the behaviour of the tunnel operators who are, in turn, trying to guess what they will do.
Against the Gods does not address the first category of risk and, a more important weakness, blurs the boundary between quantified and virtual risks. It is essentially the story of the achievements of the risk quantifiers and their success in displacing the gods. In chapter 1 Bernstein elevates these achievements to a defining role in history:
"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 the whim of the gods and that men and women are not passive before nature."
In his conclusion this mastery becomes the shaper of progress:
"The central theme of this whole story is that the quantitative achievements of the heroes we have met shaped the trajectory of progress over the past 450 years - [these heroes] have transformed the perception of risk from chance of loss into opportunity for gain, from FATE and ORIGINAL DESIGN to sophisticated probability-based forecasts of the future, from helplessness to choice."
Bernstein devotes considerable space to an inconclusive discussion of uncertainty. For coping with it he recommends the methods of his heroes: "under conditions of uncertainty, both rationality and measurement are essential to decision making." But it is advice without practical content. If we don't know, we don't know. Sophisticated probability-based forecasts of the future are only as reliable as the assumptions upon which they are based. They are useful only to the extent that the past is a reliable guide to future. Bernstein argues that his heroes - Pascal, Gauss, Galton and Arrow to name but a few - have enlarged the domain of risk under scientific management, and reduced the domain of the gods. But the uncertainty within which we all live our lives remains boundless. The heroes appear merely to have shrunk infinity.
Or perhaps enlarged it? Might the increased command of science and technology over nature be illusory? Might pharmacologists and genetic engineers be creating new problems faster than they are solving old ones? Might the development of new financial instruments like derivatives - that appear to be beyond the comprehension of most of those dealing in them - be turning up the heat in the investors' kitchen? Such questions have no agreed answers. They lie in the realm of virtual risk.
The fire in the channel tunnel that closed it for 6 months 6 moths after it opened provides a test of the achievements, extolled in Against the Gods, of the risk quantifiers. Eurotunnel's Safety Case is a 295 page testament to the state of the art of quantified risk assessment. It concludes "It has therefore been possible to perform a deterministic safety analysis of the system and to use the potential risks which have been identified as the basis for Quantified Risk Assessment." Although no one died, the physical damage, and the consequent disruption of the service, were not anticipated in this assessment.
All this said, Bernstein has written a fascinating book. Against the Gods is the most comprehensive history I have read of the attempt to bring the science of probability to bear on risk management - I abandoned my usual practice of bending over the corner of a page containing something quotable when I realised that I was about to double the thickness of the book. But, at its centre is an unresolved ambivalence; Bernstein is a risk enthusiast on the verge of losing his nerve. After more than 300 pages devoted to applauding the triumph of probability theory over the gods of ignorance and superstition, he closes with a quotation from Keynes quoting Locke: "God has afforded only the twilight, as I may say, of Probability, suitable, I presume, to that state of Mediocrity and Probationership He has been pleased to place us in here." It is an intriguing note on which to end a book devoted to the defence of hubris (the title of the book is a definition of hubris). Is it offered, one wonders, to propitiate Nemesis, who invariably punishes such presumption?
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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