Against the Gods: The Remarkable Story of Risk

by Peter L. Bernstein

“[N]ature has established patterns originating in the return of events, but only for the most part,

Our lives teem with numbers, but we sometimes forget that numbers are only tools. They have no soul; they may indeed become fetishes.

Time transforms risk, and the nature of risk is shaped by the time horizon: the future is the playing field.

Yet once we act, we forfeit the option of waiting until new information comes along. As a result, not-acting has value. The more uncertain the outcome, the greater may be the value of procrastination. Hamlet had it wrong: he who hesitates is halfway home.

The prospect of getting rich is highly motivating, and few people get rich without taking a gamble.

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

Probability has always carried this double meaning, one looking into the future, the other interpreting the past, one concerned with our opinions, the other concerned with what we actually know. The

Order is impossible to find unless disorder is there first.

Countless maples grow in the forests of Vermont, each of which is different from all the other maples, but none of which could be mistaken for a birch or a hemlock. General Electric and Biogen are both stocks listed on the New York Stock Exchange, but each is influenced by entirely different kinds of risk.

We cannot understand current phenomena . . . without systematic examination of earlier events which affect the present and will continue to exercise profound effects tomorrow. . . . [T]he long run is important because it is not sensible for economists and policymakers to attempt to discern long-run trends and their outcomes from the flow of short-run developments, which may be dominated by transient conditions.11

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

Wrong. We want exposure to upside we can’t control while we don’t mind exposure to down side if we can control it

“The Commanding General is well aware that the forecasts are no good. However, he needs them for planning purposes.

“the near pre-emption of [economics] by people who take a point of view which seems to me untenable, and in fact shallow, namely the transfer into the human sciences of the concepts and products of the sciences of nature.

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 immeasurable one that it is not in effect an uncertainty at all.

Keynes had no use for a hypothetical economy in which past, present, and future are merged by an impersonal time machine into a single moment.

not mean merely to distinguish what is known for certain from what is only probable. The game of roulette is not subject, in this sense, to uncertainty. . . . The sense in which I am using the term is that in which the prospect of a European war is uncertain, or the price of copper and the rate of interest twenty years hence, or the obsolescence of a new invention. . . . About these matters, there is no scientific basis on which to form any calculable probability whatever. We simply do not know!

Shefrin and Statman hypothesize the existence of a split in the human psyche. One side of our personality is an internal planner with a long-term perspective, an authority who insists on decisions that weight the future more heavily than the present. The other side seeks immediate gratification. These two sides are in constant conflict.

The real trouble with this world of ours is not that it is an unreasonable world, nor even that it is a reasonable one. The commonest kind of trouble is that it is nearly reasonable, but not quite. Life is not an illogicality; yet it is a trap for logicians. It looks just a little more mathematical and regular than it is; its exactitude is obvious, but its inexactitude is hidden; its wildness lies in wait.3