Against the Gods : Book Review

I came across this book when I was searching for a book that covers the history of re-insurance industry.(Reinsurance in its simplest form is an insurance bought by an insurance company to spread the risk). I got curious about what was the history of insurance , and how did people create such wonderful concept of reducing risk by the concept of risk sharing in the past.  Then stumbled on this gem which had some amazing reviews, and said Against the Gods was about the remarkable history of risk.

I am a slow reader, and this book took little longer than a week for me to complete. I read about 1-2 hours a day after work, and even in weekends I get about the same time to read. So  I took about 10 days to complete this book. I would attribute the slow reading speed to the breath of the subject covered in this book. I could not easily pass through the pages, as every page had some thing new and I had to re-read the chapters sometimes. Only then I got a better understanding of how some of the greatest mathematicians and economist thought through the problem of Uncertainty and  risk. The history of probability theory laid out in the initial chapters were fascinating for me. If I had known this history of how probability evolved, maybe my understanding of the probability concepts would have been much stronger. 

Risk – derived from the early Italian risicare, which means to dare. We are always faced with uncertainty about the future and risk management is about being prepared to face those uncertainties and be prepared for the worst possible cases.  If someone says-  I have never taken risks - then they are not seeing what risk means. We take risk in every step, by forgoing some money now and going to school, we hope to make more money in the future. The risk involved is capital loss and no job in the future. But the probability of failure is very low and hence everyone of us is trying to go to school and educate ourselves.

In this book - Peter Bernstein takes through the story of risk right from the Greek history and origin of numbers. Through this journey of over ~800 years you would read about the history right from the 1200s about Leonardo Pisano’s (aka. Fibonacci), Liber Abaci  to the 1990’s Option pricing by Black-Scholes. Many mathematicians and economist were behind this area of handling uncertainty - actually all of them were male, none of them were female. The diversity numbers in mathematics and economics especially among those prodigies were pathetic. But that apart, the history was fascinating as the author takes us through the work done by each of the folks that led to further development in the areas of probability, handling uncertainty and risk management.

Blaise Pascal & Fermat started a correspondence to solve a problem on how to separate the bets in an unfinished game of chance (say throwing a die) which led to the fascinating invention of probability.  The real uncertainty that caused the curiosity to handle it was in Gambling and which had led to further development outside the game of chance. Only in the the 1650’s, the beginning probability theory happened. In the 1700’s the Bernoulli family (yes there were more than one Bernoulli in the family of which 8 of them were mathematical prodigies over 100 year period of the family) made break through in the areas like Law of Large numbers, Central limit theorem and also the concept of Utility.

The utility resulting from any small increase in wealth will be inversely proportionate to the quantity of goods previously possessed – Daniel Bernoulli

The above statement would tell you why King Midas was an unhappy man. Later Abraham De Moivre, introduced the concept of standard deviation and the bell curve, which was refined further by Gauss & Laplace. Hence the name Gaussian curve, and the way Bernstein shared this story of how they arrived at these concepts were simply fascinating. Not just this, a minister Thomas Bayes made a striking advance in this field by introducing Bayes Theorem.  My favorite story was the research by  Francis Galton, where he tried to understand why the independent and random trials form a Gaussian / Normal curve which led him to the concept of regression to the mean or Mean reversion.  He even introduced the concept of co-relation, but Galton was doing all these in an area which is totally unimaginable – Eugenics.

The book does cover the great economists who were in the history of risk like Keynes, Kenneth Arrow, William Jevons, Harry Markowitz (Modern Portfolio theory), William Sharpe (CAPM) Daniel Kahneman  & Amos Tversky  (Prospect Theory), Fisher Black & Scholes (Option pricing)  and a few more in the list.  Each of the story had some pretty deep explanation of their work and how that connected to the development in the area of uncertainty & risk.

He did cover some brief about the insurance industry especially about the Lloyd of London where it all began, and this was the reason I was searching for a book on history of risk. So over all this book covers a good mathematical & economic history in a very beautiful sequence of events with some calculations and concepts thrown all the way to keep you interested .  Thoroughly enjoyed reading the book, and had to keep referring different concepts in the internet so that I get the context better to continue with what the author was adding to it further.

There were couple of other books I had read in the past,  which had a very similar style. One of the book was about the journey in the field of Cryptography - The Code Book and the other book was the journey of mathematicians to solve Fermat’s last theorem - Fermat’s Enigma. Both those books were written by the author Simon Singh.  If you had liked these books, you would enjoy Against the Gods as well.  So Against the gods is a journey of mathematicians and economists to solve the problem of uncertainty . To end with another beautiful quote by de Moivre from the book, which he made when he was fascinated with his finding of the Normal curve, ( when orderliness of a bell curve made its appearance as the number of random and unconnected observations increased),

[A]tho’ chance produce Irregularities, still the Odds will be infinitely great, that in process of Time, those Irregularities will bear no proportion to recurrency of that Order which naturally  results from ORIGINAL DESIGN  - De Moivre