Tip of the Week #34                     Tip Index

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Against the Gods:
The Remarkable Story of Risk

by Peter L. Bernstein, 1996, John Wiley & Sons, Inc., 383 p., hardcover.

This is a remarkable book, and I regret that I didn't get around to reading it sooner.  The history of decision analysis is sparse, and  this book pulls together in one place much of what is known about risk in decision-making.

Peter Bernstein and his company are economic consultants to institutional investors.  He has written other business best-sellers including Capital Ideas: The Improbable Origins of Modern Wall Street and The Portable MBA in Investment.

This history book is written in an engaging style.  Bernstein is clearly devoted to the subject and is persuasive in writing about the importance of risk-taking in society.

"Without a command of probability theory and other instruments of risk management, engineers could never have designed the great bridges that span our widest rivers, homes would still be heated by fireplaces or parlor stoves, electric power utilities would not exist, polio would still me maiming children, no airplanes would fly, and space travel would be just a dream."

Understanding risk marks a transformation in the human belief system.   Previously, the future was believed in the hands of the gods. Now, forecasts could be made, enabling trade and other risk-taking ventures.

Contributions range from simple expectation to portfolio theory.   Some of the important figures are Fibonacci, Pascal, Fermat, de Moivre, the Bernoullis, Galton, and Markowitz.


One of several interesting decision behaviors is the "endowment effect" (p. 294):

Most people have a "tendency to set a higher selling price on what we own (are endowed with) than what we would pay for the identical item if we did not own it."

Bernstein remarks that this behavior is exhibited routinely by stock investors. People are slow to sell investments that have lost money because this requires them to acknowledge that they made a mistake.


I highly recommend this book. It should be "required reading" for all professionals in quantitative analysis or for serious investors.

—John Schuyler, February 1998.

Copyright 1998 by John R. Schuyler. All rights reserved. Permission to copy with reproduction of this notice.