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AGAINST THE GODSTHE REMARKABLE STORY OF RISK

Prepared by:Amitanshu srivastava

Peter L. Bernstein.

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ABOUT THE AUTHOR

Peter Bernstein is President of Peter L. Bernstein, Inc., economic consultants to institutional advisors and corporations. His semimonthly analysis of the capital markets and the real economy, Economics and Portfolio Strategy, is read by managers and owners of investments totaling over one trillion dollars. Mr. Bernstein is the author of many articles in the professional and popular press, as well as six books in economics and finance, including the best-selling Capital Ideas: The Improbable Origins of Modern Wall Street. He is the co-editor of Investment Management (Wiley), and was the first editor of The Journal of Portfolio Management.

Clarifies the concepts of probability, sampling, regression to the mean, game theory, and rational vs. irrational decision making.

Shows how the understanding and management of risk underpins many aspects of modern life.

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Risk: race Against TIME

Risk and time are opponent sides of the same coin, for if there was no tomorrow there would be no risk.

Time transforms risks.

Risk touches on the most profound aspects of psychology, mathematics,

statistics and history.

A systematic way of dealing with hazards and insecurities induced and introduced by modernization itself.

Probability of adverse consequences.

Learning to live with uncertainty.

Define what may happen in the future and choose among alternatives.

Bernstein on risk

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 a whim of the Gods and that men and women are not passive before nature.

The big question

A risk is still a risk no matter how carefully measured, so where does the time-honored 'gut feeling' come into play?

A brief sketch

Bernstein provides mini biographies of the many mathematicians, gamblers, and others who made significant contributions to our understanding of probability and risk.

The is divided book into five sections, corresponding to historical periods in the understanding of probability and risk.

TO 1200: BEGINNINGS:

Gambling – the very essence of risk taking.

Talked about early history of Hindu as well as Arabic number system.

Tried to explain why probability did not emerge before the Renaissance.

Accused the Greeks for not making any contribution in this field.

 1200-1700: A THOUSAND OUTSTANDING FACTS:

Talks about real and substantial development of probability theory

Basically tries to cover the invention of basic probability theory, statistics, and the beginnings of business forecasting in Renaissance Europe.

A cup of coffee that changed it all.

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1700-1900: MEASUREMENT UNLIMITED:

Introduction of the concepts of utility, standard deviation, and regression to the mean.

This was the for the first time probability was seen in the light of real life.

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

Development of modern theories of risk management, the influence of game theory, and the role of diversification.

One chapter is dedicated entirely on measuring risks on the stock market.

DEGREES OF BELIEF: EXPLORING UNCERTAINTY:

Contains comprehensive survey of the leading thinkers of risk management.

Controversy between quantification based on observations of the past and subjective degrees of belief.

Development of chaos theory.

The SHORTCOMINGS

Certainly he should have spent much less time on the early figures.

Amateur readers will find this book a bit complex.

Everyone is invited.

Tell us what we can - and cannot - expect from risk management.

We cannot quantify the future, but we have learned to use numbers to scrutinize what happened in the past.

This book helps to show what we are up against.

The grand finale Luca Paccioli (monk) Girolamo Cardano (gambler) Galileo Galilei Blaise Pascal- Life tables, beginning of theory of

decision making Pierre de Fermat (lawyer) Chevalier de Mèrè (nobleman) John Graunt (a button salesman) – Statistical

sampling Jacob Bernoulli – life annuities, Law of large

numbers Abraham de Moivre - normal distribution Daniel Bernoulli - modern techniques of

quantifying risks, expected utility Thomas Bayes (minister)- blending new

information into old information

The grand finale

Pierre-Simon Laplace Carl Friedrich Gauss - normal distribution Francis Galton - Regression to the mean Adolphe Quetelet (composer of operas) -The

study of causes and effects Jules-Henri Poincarè -Early concept of Chaos

theory Kenneth Arrow- Theory of uncertainties Frank Knight (economist) John Maynard Keynes John von Neumann (physicist)- game theory Harry Markovitz- Diversification (Portfolio

Selection) Daniel Kahneman & Amos Tversky- Prospect

theory

The Curtain call

Safety is a myth. Risk is reality. Fear is

the mind killer. Seize the day. Take the road less travelled. Dare to be different. Nothing ventured, nothing gained. Avoiding danger is no safer in the long run than outright exposure. Life is either a daring adventure or nothing. Take the first step.

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