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Against the Gods

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Against the Gods by Peter L. Bernstein (Wiley) is a fascinating history of the development of the scientific and mathematical techniques of risk assessment. This sounds like an economist’s bedtime snooze-read but it’s a rivetting ride through the history of the entire development of commerce as we moved from believing in “Luck”, “the Gods”, “the Will of Allah”, and other similar fatalistic views of the future to proven techniques that could underpin activities such as trade, banking, investment, insurance, pensions, market surveys, gambling, and many of the financial furniture of the modern world that we take for granted.

Bernstein follows the lives and stories (some pretty bizzarre) of the oddballs (back then, you needed to be both rich and daft to be a scientist) who worked out the building blocks of how we assess risk.

It all began with analysis of games of chance. A thinker of the day, back in the Age of Reason, put the question to some scientifically minded fellow habitues of the coffee shop. “If a game of chance is abandoned when incomplete, how should the unclaimed winnings be distributed?”

This sparked off an investigation of probability analysis. Back then, people were so naive they would give you equal odds on any number from 2 to 12 showing up when two dice are thrown, when a little analysis shows that 2 and 12 can only show up in two possible ways out of the 36 possibilities, whereas much greater numbers of combinations will produce for example, a 6 or a 10.
From such humble beginnings grew the vast array of actuarial and statistical analysis, the wonders of the bell curve, the stock market and financial markets, the capitalist system, etc. so much we take for granted as part of “modern life”.

Overall, the reading is clear and populist, only on one or two occasions does he say “The non-matemathically minded reader can skip the next two pages without missing the thread of the chapter …” before delving into some of the math. Otherwise it’s plain sailing for anyone who’s read a financial page, and well worth the reading.

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