Peter L. Bernstein wrote “Against the Gods: The Remarkable Story of Risk” in the late 1990s, well before the financial meltdown of 2008 or the dot come bubble burst a few years later. The book itself is a good refresher of the history of mathematics and provides a reasonably entertaining and well written history of risk. Before getting to the book though, a quick detour about Bernstein himself.

# A Life Well Lived

Bernstein died in 2009 at the age of 90. Over those nine decades he was born into relative wealth, served as an officer in World War II, worked for the US federal government, taught university, took over his father’s investment business, sold the business for a tidy sum, wrote ten books – 3 in his late 80’s and became a respected academic. WHEW

For anyone of us, a few of the above accomplishments in our lifetime would be gratifying (including making it to 90) let alone the number he accomplished. In other words, Bernstein can be said to have had a life well lived.

# The Good News from the Gods

Some of the reviews on www.goodreads.com have critiqued Bernstein’s writing style. It is not the most elegant I have ever read but it was reasonably engaging and not too technical. He takes a chronological approach to risk but this is really on the mathematics of risk.

He notes the restrictions early western mathematicians had including the Roman numeric system, the enlightenment and renaissance (to get beyond the notion that all things are pre-ordained by God), bookkeeping, forecasting, algebra and an unfinished game of chance.

To this last point, the question was how best to divide up the winnings of a game with a fixed number of iterations of the game that was partially played. This question spurred the mathematics to ask the question about probabilities and the future. Risk management was born.

From the renaissance, Bernstein takes us through the development of more advanced mathematics, game theory and then finally the rise of the Quants in computerized trading.

In other words, the book is a good and reasonably accessible refresher on the history of mathematics and specifically the development of statistics and financial mathematics. Bernstein does explore some of the human side of risk. For example he discusses those old favorites of behavioral economics: loss aversion, regression to the mean / Prospect Theory, ambiguity aversion, etc. In other words, a good historical romp that ties in some familiar and some unfamiliar details into a reasonably good overview of the mathematics of risk…

# The Bad News about the Gods

… and therein lies the biggest problem with the book, big on math short on the story of risk. There is so much more that Bernstein could have incorporated into the book. For example

- How is risk perceived and managed in different cultures.
- How have the Christian and Muslim beliefs about risk and interest rates changed their respective trajectories.
- What has been the impact over the past 50 years on risk management given that risk has now being overtly managed.
- How have institutions such as the military, healthcare or pharmaceuticals changed in how they managed risks.
- What was the impact of large-scale events on the acceptance and management of risk, for example did the Black Death make people more or less risk averse and how did this affect risk management.

In a way it is too bad that Bernstein wrote the book when he did or that he did not write it say 10-12 years later. I would have been interested in his views on the 2008 financial crisis and the work of Nicholas Taleb, etc. who also discussed risk, statistics and randomness.

# In the End

So, a good read if you enjoy history, mathematics and what a fuller understanding of the concepts of risks. A revised edition would be great, or even better, a second volume with more depth and breadth. Never the less a read that rounds out anyone interested in Risk Management.

# A few Quotes and Thoughts

Publisher’s Description: With the stock market breaking records almost daily, leaving longtime market analysts shaking their heads and revising their forecasts, a study of the concept of risk seems quite timely. Peter Bernstein has written a comprehensive history of man’s efforts to understand risk and probability, beginning with early gamblers in ancient Greece, continuing through the 17th-century French mathematicians Pascal and Fermat and up to modern chaos theory. Along the way he demonstrates that understanding risk underlies everything from game theory to bridge-building to winemaking.

p. 15: Time is the dominant factor in gambling. Risk and time are opposite sides of the same coin, for if there were no tomorrow there would be no risk. Time transforms risk, and the nature of risk is shaped by the time horizon: the future is the playing field. Time matters most when the decisions are irreversible.

p. 197: 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.

p. 228: Keynes argued that interest is a reward for parting with liquidity, not for refraining from consumption.

p. 232: Game theory says that the true source of uncertainty is in the intentions of others.