Against the Gods by Peter Bernstein

 Against the Gods: The Remarkable Story of Risk

Read: November 2021

This book concerns itself with calculation of risk. It begins with the historical roots of measurement of risk and wonders how come ancient civilizations with advanced mathematics could not take the logical step of calculating probabilities. How come Greeks who were very good with geometry, or Hindus who were excellent at arithmetic, or particularly, later on Arabs, who practically invented algebra, could not go a step ahead and come up with theory of probability. Why this seemingly simple step had to wait for hundreds of years to start its journey in Europe? According to the author, the reason lies in the fact that all ancient societies were fatalistic. The idea of risk management emerges only when people believe that they are free agents to some extent. Once the concept of free agency took root in the renaissance era Europe, a new branch of mathematics in probability was quick to spring out. Of course, the journey would not have completed in absence of the Hindu numeral system without which arithmetic calculation were not possible, or without printing press, which led to adoption of the new numeral system.

Mathematicians like Fibonacci, Pascal, Fermat, Leibniz, etc. were the early pioneers of this new subject. They were contemporaries of Newton and the period was a ferment of scientific ideas. For next few centuries the theory of risk calculation progressed in in fits with Gauss in 18th century having a starring role. It was in 19th century that the subject came into some shape resembling current understanding with a succession of brilliant mathematicians like Laplace, Newman, Poincare, and Francis Galton, a cousin of Darwin, and known for his first use of the word 'eugenics'. Then came Louis Bechelier at the turn of the 20th century who first came with the concept of randomness of the markets. He was ridiculed by his professor, the great Poincare, which doomed the academic career of a brilliant mind. Bechelier's paper was rediscovered only 50 years later. It was quickly succeeded by modern practitioners of risk theory like Von Neumann (game theory), Markowitz (portfolio selection), Sharpe (capital asset pricing model), and Black Scholes (option pricing).

The book is well written with a broad sweep of history, great anecdotes from brilliant people of past, mixed with philosophical explanations of bends of time. The book was a bestseller for a reason. Recommended