Against the Gods

"Peter Bernstein was one of the most remarkable people I’ve ever known. He had an extraordinary mind, he was a wonderful person and a profound, broad renaissance thinker. What he does in this book is bring risk to life as an idea in a much richer way than anyone had ever thought to do before. For anyone who has read a book like Longitude , by Dava Sobel or some of the Mark Kurlansky books like Cod or Salt , Peter’s book is very much in the key of those wonderful explorations of a single idea. It’s telling you everything you could possibly want to know about a topic which turns out to be even more important to you than you realised. Risk is central to investing and personal finance. Without risk, there is no return. What investors have often failed to understand is that it goes both ways. Investments can’t provide returns unless they carry risk, and risk can be extraordinarily dangerous if you don’t understand it. Of course that was one of the lessons of the financial crisis, and it was something Peter warned about throughout his long life [Bernstein died in 2009 aged 90]. In the book, he explores risk at every conceivable level – what it is mathematically and what it is psychologically, how it has played out historically, how people have thought to measure it and also to control it. It’s probably the best and most interesting high-level book on investing I can think of. It’s a very serious, very elegant, beautifully written book that people should take the time to relish and understand. It’s not for casual readers, it does take some work. You have to be literate, and you have to care enough about the subject to stick with it. But it’s one of my favourite books of all time. Yes, because one of the great things that Peter does in the book, by providing an intellectual history of risk, is to show where people have gone wrong in the past – by not fully appreciating how risky investments can be, or not fully understanding what risk means. The historical and psychological perspectives that he gives are just so valuable to anyone trying to be more mindful and more thoughtful as an investor. It’s a great intellectual voyage and a terrific book. The book is centred on the history of financial risk, but it also talks a lot about probability and the mathematics of taking risk. So even if you’re not someone who cares enormously about investing and personal finance, you could get a great deal out of it, because it helps you think probabilistically, which is a very important skill. That’s right, and Peter explores that beautifully. As does the Belsky and Gilovich book. There are any number of people who, knowing they’re about to take an airplane, get a little nervous. They’ll have a few cigarettes, they’ll have a beer or a glass of wine to calm their nerves, then they’ll get in their car and drive to the airport. Of course statistically speaking, they’re in vastly more danger on that drive to the airport than they will be on the airplane, but on the plane they’ll sweat and grab the armrest in terror as the plane takes off and lands, while they never gave a second thought to the cigarettes or the alcohol or the fact that by driving they were taking their life into their hands."

"The package description of it is that it’s a ‘history of risk’ which makes it sound dry, but it’s an absolutely fascinating, for-the-layman account of how humanity mastered risk (in the mathematical sense) and came to understand probability. Bernstein makes the point that, particularly in the Middle Ages, betting on dice was seen as a grievous sin by the church: Because God decided everything and chose whether it would come up six or one, so it was a form of blasphemy to do something so frivolous as to play with what God wanted. But what happened was that gamblers got interested in the fact that certain sorts of numbers came up more often, and you had this extraordinary thing of gambling and mathematics walking hand in hand, as people like Fermat and Pascal got interested in how probabilities were created. Effectively, the invention of probability came out of studying dice. “Bernstein makes the point that, particularly in the Middle Ages, betting on dice was seen as a grievous sin by the church” Bernstein brilliantly convinces you that it’s a kind of humanist project, it’s an attempt to put into the realm of human understanding things that were once seen as utterly capricious, and probably to do with divine will. Our mathematical understanding of probability and risk is actually saying: ‘No, this is in our domain, we can manage this.’ And that leads through to things like – well, derivatives have a terrible press now, but they’re used, for example, if you’re a farmer when someone gives you a price for your crop for next season, that’s a very important tool in ensuring safety and prosperity, and spreading it around, and it’s a way of mastering risk. And then OK, you’ve sold next season’s crop, and then the right to buy that crop is a financial derivative, because it can be sold, traded, and sold on, and its price will fluctuate; even though the coffee is still the coffee, or the corn is still the corn. That’s a really important, genuinely helpful, humanist tool. It is a pity, as I say, that they took us over the precipice, but there is a kind of heroic aspect to humanity having worked out how to manage and utilise and exploit risk. The thing that’s really good about Bernstein’s book is that you do get the way in which there’s a tremendous amount of social utility in what humanity’s done with risk and options and derivatives and probability, and also a kind of beauty in the maths of it. “There’s absolutely no moral dimension at all to how the markets work in practice. I think it’s up to society to decide now the extent to which there is a moral dimension, and whether there should be moral constraints.” I think also it’s easy to forget how extraordinary markets are. There’s a Costcutter down the road and it’s got everything I might want from Parma ham to bleach to Special Brew to thread to today’s FT to Maltesers, and it was markets that put them there. I know we’re having a kind of condemnatory moment in general about the operation of the unregulated free market and, in many very specific ways, clearly things went completely wrong, but we mustn’t forget the ways in which markets are extraordinary things and do work."