Against the Gods The Remarkable Story of Risk

Advance Praise for Against the Gods

"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

"No one else could have written a book of such central importance with so much charm and excitement." -Robert Heilbronerc author of The Worldly Philosophers

"A fascinating and unusual perspective on modern man's Promethean attempt to master risk. The book reads easily and provokes thought-a rare combination." -William Kristol Editor and Publisher, The Weekly Standard

"Peter Bernstein leads us effortlessly through the history of risk because he writes so beautifully. This is a book on a left brain subject that will have right brain readers lining up for more!"-Robert Ferguson Managing Director, Bankers Trust Australia Limited

"In Against the Gods, Peter Bernstein, a scholar, historian, and successful investor gives us the history of great thinkers whose visions put the future at the service of the present."-Dr. Marc Faber Managing Director, Marc Faber Limited, Hong Kong

"This looks like a new classic to me."-Barton M. Biggs, Chairman Morgan Stanley Asset Management, Inc.

"It's a sizzler!"-Charles P. Kindleberger author of Manias, Panics & Crashes

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 more distant past. Against the Gods, a narrative that reads like a novel, chronicles the remarkable intellectual adventure that liberated humanity from the oracles and soothsayers by means of the powerful tools of risk management that are available to us today. This is a richly-woven tale of Greek philosophers and Arab mathematicians, of merchants and scientists, gamblers and philosophers, world-renowned intellects and obscure but inspired amateurs who helped discover the modern methods of putting the future at the service of the present, replacing helplessness before the fates with choice and decision.

When investors buy stocks, surgeons perform operations, engineers design bridges, entrepreneurs launch new businesses, astronauts explore the heavens, and politicians run for office, risk is their inescapable partner. Yet their actions reveal that risk today need not be feared: managing risk has become synonymous with challenge and opportunity.

Bernstein presents fascinating vignettes of such towering intellects as Omar Khayyam, Pascal and Bernoulli, Bayes and Keynes, Markowitz and Arrow, and Gauss, Galton and von Neumann. With his engaging literary style, he clarifies the concepts of probability, sampling, regression to the mean, game theory, and rational versus irrational decision making. The final sections of the book raise important questions about the role of the computer, the relationship between facts and subjective beliefs, the impact of chaos theory, the role of the burgeoning markets for derivatives, and the looming dominance of numbers.

Against the Gods: The Remarkable Story of Risk is that rare book that turns the most profound issues of our time into pure reading pleasure.

AGAINST THE GODS appeared in the "Washington Is Also Reading..." section of The Washington Post Book World. The book is described as, "A comprehensive history of man's efforts to understand risk and probability, from ancient gamblers in Greece to modern chaos theory."-The Washington Post Book World, September 20, 1998

“A useful…introduction to the history of financial risk.” (Breakingviews.com, Wednesday 16th April 2008)

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

Der Bestseller zur Risikobewertung jetzt als Broschurausgabe. Das ganze Leben ist ein einziges Risiko. Menschen in allen Bereichen des Lebens - Politiker, Wissenschaftler, Gesch ftsleute, sogar Familien - m ssen regelm ig Entscheidungen treffen, die in irgendeiner Form Risiken bergen. Die F higkeit, das Ausma des Risikos solcher Entscheidungen zu bewerten und einzugrenzen geh rt zu den Grundprinzipien der modernen Gesellschaft. 'Against the Gods' erz hlt die Abenteuer einer Gruppe k hner Denker, die sich auf eine intellektuelle Entdeckungsreise begeben haben und den urzeitlichen Aberglauben verwandelt haben in leistungsstarke Methoden zur Risikokontrolle, wie sie heute Anwendung finden. Interessant und spannend geschrieben und ohne den sonst themabedingten technischen und mathematischen Ballast. (10/98)

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

PETER L. BERNSTEIN is President of Peter L. Bernstein, Inc., economic consultants to institutional investors. Mr. Bernstein is the author of six books in economics and finance, including the bestselling Capital Ideas: The Improbable Origins of Modern Wall Street, as well as many articles in the professional and popular press. He is the Editor of The Portable MBA in Investment (Wiley) and was the Founding Editor of The Journal of Portfolio Management.

Includes bibliographical references (p. 353-364) and indexes.

Acknowledgments ix

Introduction 1

TO 1200: BEGINNINGS

1. The Winds of the Greeks and the Role
of the Dice 11

2. As Easy as I, II, III 23

1200–1700: A THOUSAND OUTSTANDING FACTS

3. The Renaissance Gambler 39

4. The French Connection 57

5. The Remarkable Notions of the Remarkable Notions Man 73

1700–1900: MEASUREMENT UNLIMITED

6. Considering the Nature of Man 99

7. The Search for Moral Certainty 116

8. The Supreme Law of Unreason 135

9. The Man with the Sprained Brain 152

10. Peapods and Perils 172

11. The Fabric of Felicity 187

1900–1960: CLOUDS OF VAGUENESS AND THE DEMAND FOR PRECISION

12. The Measure of Our Ignorance 197

13. The Radically Distinct Notion 215

14. The Man Who Counted Everything Except Calories 231

15. The Strange Case of the Anonymous Stockbroker 247

DEGREES OF BELIEF:EXPLORING UNCERTAINTY

16. The Failure of Invariance 269

17. The Theory Police 284

18. The Fantastic System of Side Bets 304

19. Awaiting the Wildness 329

Notes 339

Bibliography 353

Name Index 365

Subject Index 369