Against the Gods: The Remarkable Story of Risk

by Peter L. Bernstein

The word “risk” derives from the early Italian risicare, which means “to dare.” In this sense, risk is a choice rather than a fate. The actions 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.

When the Soviets tried to administer uncertainty out of existence through government fiat and planning, they choked off social and economic progress.

Those games were generally referred to as “hazard,” from al zahr, the Arabic word for dice.6

Trade is a mutually beneficial process, a transaction in which both parties perceive themselves as wealthier than they were before.

The successful business executive is a forecaster first; purchasing, producing, marketing, pricing, and organizing all follow.

Without numbers, there are no odds and no probabilities; without odds and probabilities, the only way to deal with risk is to appeal to the gods and the fates. Without numbers, risk is wholly a matter of gut.

Bernoulli’s boldest innovation was the notion that each of us—even the most rational—has a unique set of values and will respond accordingly, but his genius was in recognizing that he had to go further than that. When he formalizes his thesis by asserting that utility is inversely proportionate to the quantity of goods possessed, he opens up a fascinating insight into human behavior and the way we arrive at decisions and choices in the face of risk.

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.

The Moving Finger writes; and having writ, Moves on: nor all your Piety nor Wit Shall lure it back to cancel half a Line, Nor all your Tears wash out a Word of it.

When the choice involves losses, we are risk-seekers, not risk-averse.

Kahneman and Tversky interpret the evidence produced by these experiments as a demonstration that people are not risk-averse: they are perfectly willing to choose a gamble when they consider it appropriate. But if they are not risk-averse, what are they? “The major driving force is loss aversion,” writes Tversky (italics added). “It is not so much that people hate uncertainty—but rather, they hate losing.”6

There is no difference other than in accounting conventions between a cost and a loss.

There is no reason to conclude that the frequent absence of rationality, as originally defined, must yield the point to Macbeth that life is a story told by an idiot.

Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.”