Against the Gods: The Remarkable Story of Risk
ISBN:9780471295631 read summary

Very readable book. I would highly recommend it to anyone who has ever had an interest in statistics. However, arguments regarding derivatives and how they spread the risk efficiently are out of fashion.

A great book and highly recommended. Peter starts with the history of evolution of numbers and how the probability concept was born, almost thousand years ago. He goes on to explore the assumptions in risk management models and how historical data can be very dangerous to predict the future course of markets. Good coverage on diversification concept by Markowitz and how behavorial finance challenges that view.

One of the first questions that one comes across in Against the Gods is how to divide the stakes of an unfinished game of chance between two players when one of them is ahead.

This question gave rise to probability, which later developed in risk management.

Some of the concepts Peter cover in his book are normal distribution, bell curve, rationality, behavioral finance. He asks one question again and again; how much past data is useful in predicting the future? He goes on to say that risk management is valid if we believe that future is in our hands.

Peter attacks the common phrase we use in our lives â on the averageâ. If we put head of a man in oven and feet in refrigerator, is the person on average normal?

Then Peter goes to normal distribution and explains why it is the core of all risk management systems and insurance businesses. He explains that for stock prices to be in random as believed by many, changes in stock prices must form normal distribution and the fact is although changes in stock prices are normal but problems occur at the extremes (normal curve would not have untidy bulges). Fortunes are created and destroyed at the extremes; more often destroyed!
Regression is another concept discussed in detail; good time are followed by bad times and vice versa. They say that in the long run prices will move towards mean. But what is the long run?

He explains that reducing uncertainty is a costly business and the number of risks that can be insured against is far smaller than the number of risks we take in the course of a lifetime.


Peter now moves on to the development of behavioral finance, which says that answer depends on the way question is asked. When the question is asked about profits, we are risk-averse and when the question is about losses, we are risk-seekers. This behavior is against the assumption that investors are rational.

Bottom-line is that rational behavior can be quantified whereas so-called anomalous behavior can not be quantified and hence markets which are based on anomalous behavior can never be predicted and can never be modeled.

From the most ancient times human beings have sought glimpses of the future through oracles, divinations and signs in the natural world. Such practices are still widely followed today in many parts of the world.

But there has also been a search for more rational ways to understand the future and to predict the outcomes of uncertain events.

Against the Gods covers the major milestones in humanity's understanding of risk and probability. Bernstein covers the impact of Arabic numerals and the "discovery" of zero in mathematics. Without these two intellectual advances any quantitative examination of risk would have been impossible. Gambling provided an early impetus to the study of probability, as players sought to gain an edge over their opponents.

All the key player are described - Pascal, the remarkable Bernoulli family, Leibnitz, Bayes, Keynes, Markowitz, Arrow, Gauss, Galton, von Neumann, Black, Scholes to name just some of the people who appear in this book.

Subjects include probability, sampling, regression to the mean, the law of large numbers, game theory and the new field of behavioural economics.

Not all of the concepts are easy or intuitive to follow, but Bernstein does an excellent job of making them as accessible as possible without dumbing down the text.

The book does not cover the impact of uncertainty in physics, where it is an integral part of quantum mechanics, for example. Bernstein's book is purely about finance and investment decision making.

In Greek mythology, the Gods often rebuked uppity humans who became too full of hubris. In a similar way, our search to understand and reduce investment risk has also involved some humbling stumbles.

Portfolio insurance was found to be wanting in the market crash of 1987. CDOs and other derivatives to re-package risk failed spectacularly in the current global financial crisis.

Risk management tools only work in orderly, smoothly trending markets where there are always buyers and sellers. But it is precisely in disorderly markets where we most want such tools to work.

These failures will not stop the search for better ways to understand and control risk.

Did you ever wonder about the people whose names are sprinkled in the statistical books used for courses in the universities. Why did they come up with such formulae, what was their motivation, and their objective. Well now Against the Gods attempts to open up secrets about these individuals.

A stellar reference source and fantastic account of the evolution of risk and the application of treatment solutions.

From the origins of statistical analysis, developing mathematics, prediction of outcomes and the follies of historical risk models this book brings such shadowy concepts and those that practice the dark arts into the sunlight, where many of them fail such public scrutiny. While developed and delivered to address the financial markets it is invaluable for current risk managers and security executives that seek to raise awareness or make comparative innovations around the mitigation of risk to all the other corporate asset classes.

Of particular relevance was the insight and terminology associated with psychological issues when addressing business resilience or risk management. Game Theory concepts, chaos theory and numerous behavioral economics models are presented in real world examples or easily transferable to corporate risk management strategies.

If you only read one technical reference book this year, make this the one.