Against the Gods: The Remarkable Story of Risk Review
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.
Against the Gods: The Remarkable Story of Risk Feature
- ISBN13: 9780471295631
- Condition: New
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Against the Gods: The Remarkable Story of Risk Overview
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
Against the Gods: The Remarkable Story of Risk Specifications
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.
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Customer Reviews
excellent, but out of fashion - CaRaPr -
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.
The best general book I have read on the subject - Robert Muirhead - Melbourne, Australia
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.
Brilliant - Amin -
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.
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