Finance
by Peter L. Bernstein
When did we stop blaming the gods?
For most of history the future belonged to the gods, and a storm or a plague was simply fate. Peter Bernstein tells how people learned to measure risk and put odds on the future, and argues that this is what separates modern times from everything before.
Hear a sample · read by Laura
You can't calculate odds in Roman numerals. Bernstein begins with the arrival of Hindu-Arabic numbers in Europe, helped by Leonardo Pisano, known as Fibonacci, whose Liber Abaci of 1202 showed merchants how to use them. Zero and place value made the maths of chance possible.
In 1662 John Graunt, a London haberdasher, studied the city's weekly bills of mortality and drew conclusions about the whole population from them. It was one of the first uses of statistical sampling. Soon after, Edmond Halley built life tables that showed what a life annuity was really worth.
In 1952 Harry Markowitz, then a graduate student, showed mathematically how owning assets that don't move together lowers a portfolio's risk for the same expected return. People had spread their bets for centuries. Markowitz turned the habit into something you could measure.
Bernstein doesn't think measurement solves everything. Frank Knight and John Maynard Keynes argued that some uncertainty can't be measured at all. And Daniel Kahneman and Amos Tversky showed that people misjudge even the odds they can calculate, feeling losses far more sharply than gains.
Modern times
For most of history the future was left to fate. Learning to measure risk is what made the modern world.
Probability
In 1654 Pascal and Fermat worked out how to split the stakes of an unfinished game, and probability was born.
Utility
Daniel Bernoulli saw that the same gain means more to a poor man than to a rich one.
The average
Francis Galton found that extremes tend to drift back towards the average. He called it regression to the mean.
Spreading risk
Harry Markowitz showed that spreading money across different investments lowers risk without giving up much return.
A story from the book
In 1654 a French nobleman, the Chevalier de Méré, asked Blaise Pascal how to split the stakes of a game abandoned halfway. Pascal wrote to Pierre de Fermat. Their letters worked out the odds of every way the game could have ended, and probability theory began.
One thing to try
Pick something you're worried about, like a job, a loan or a trip. List the parts you can influence and the parts you can't. Bernstein sees managing risk as making the first list as long as possible and your exposure to the second as small as possible.
Knotd has the key ideas from 250+ non-fiction books, each in a few minutes, in plain words. Against the Gods comes with a Name That Idea round to make it stick.
Get the whole book on KnotdOpen in the appWhen did we stop blaming the gods? For most of history the future belonged to the gods, and a storm or a plague was simply fate. Peter Bernstein tells how people learned to measure risk and put odds on the future, and argues that this is what separates modern times from everything before.
First, the right numbers; Counting London's dead; Diversification gets a number; Where the numbers stop.
Pick something you're worried about, like a job, a loan or a trip. List the parts you can influence and the parts you can't. Bernstein sees managing risk as making the first list as long as possible and your exposure to the second as small as possible.
Yes. Knotd has the key ideas from Against the Gods in a few minutes, in plain words, plus a Name That Idea round to test them. It's one of 250+ non-fiction books in the app.
