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Wednesday, July 18, 2007

Against the Gods: The Remarkable Story of Risk

Peter Bernstein examines the historic evolution of the concept of risk in about 268 pages of this 337 dedicated to the writing. He takes the reader through a journey from the Greeks through the days of Luca Paccioli, Pascal, Bernoulli, Leibiniz, Bayes, Gauss, Galton, Keynes, Kenneth Arrow, Frank Knight, John von Neumann to Markowitz, Kahneman, Tversky, Sharpe, Merton, and Scholes.

I plan to re-read the book at least a couple of times and search for the books listed in its bibliography.

Some of my favorite quotes:-

"The idea of risk management emerges only when people believe that they are to some degree free agents." - This simple statement to some extent answered my question as to why despite all the writings in other subjects ranging from weaponry to logic, didn't ancient Indians (East Asian Indians) talk about risk. I guess it meant going against the wills of the Gods for them.

Quoting Pascal's idea from Port-Royal Logic "Fear of harm ought to be proportional not merely to the gravity of the harm, but also to the probability of the event."

"...Only the pathologically risk-averse make choices based on the consequences without regard to the probability involved.....only the foolhardy make choices based on the probability of an outcome without regard to its consequences."

"..people with a phobia about being struck by lightning place such a heavy weight on the consequences of that outcome that they tremble even though they know that the odds on being hit are tiny."

"..this does not mean that numbers are useless in real life. The trick is to develop a sense of when they are relevant and when they are not."

"...coined the term "Quetelismus" to describe the growing popularity of discovering normal distribution in places where they did not exist or that failed to meet the conditions that identify genuine normal distributions."

" is easier to assume that the future will resemble the present than to admit that it may bring some unknown change."

On regression to mean "..never depend upon it to come into play without constantly questioning the relevance of the assumptions that support the procedure." This statement has a new meaning to me after reading "When Genius Failed" recently.

"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"

Quoting Poincare' "..what is chance for the ignorant is not chance for the scientist. Chance is only the measure of our ignorance"

"The information you have is not the information you want.
The information you want is not the information you need.
The information you need is not the information you can obtain.
The information you can obtain costs more than you want to pay."

Quoting Arrow "The possession of actual money lulls our disquietude; and the premium we require to make us part with money is the measure of our disquietude"

Quoting Knight "Uncertainity must be taken in a sense radically distinct from the familiar notion of Risk,......a measurable uncertainity or "risk" so far different from an unmeasurable one that is not in effect an uncertainity at all."

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