Against the Gods

Against the Gods – Peter L. Bernstein

For most of human history, the future was seen as the domain of fate, chance or the gods. People could do little more than consult oracles and hope for the best. The idea that risk could be measured, understood and managed is a relatively recent achievement, and it has transformed the modern world. In Against the Gods: The Remarkable Story of Risk, economist and financial historian Peter L. Bernstein tells the story of how this revolution came about.

Bernstein traces the history of thinking about risk from the introduction of Hindu-Arabic numerals to Europe, through the Renaissance gambler and mathematician Girolamo Cardano, and the famous correspondence between Blaise Pascal and Pierre de Fermat that laid the foundations of probability theory. He describes the contributions of Jacob and Daniel Bernoulli, the development of the law of large numbers and the concept of utility, Thomas Bayes’s approach to updating beliefs, and Francis Galton’s discovery of regression to the mean.

The story continues into the twentieth century, with the rise of game theory, Harry Markowitz’s portfolio theory, the development of options pricing and modern financial instruments, and the work of psychologists Daniel Kahneman and Amos Tversky, who showed how people often behave irrationally when facing risk. Bernstein also explores the limits of measurement and the dangers of relying too heavily on mathematical models.

Engaging, erudite and filled with fascinating characters, Against the Gods is a classic history of ideas for readers interested in finance, economics, mathematics and decision making. It is educational and not investment advice.