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Against the gods: the remarkable story of risk

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For several centuries, mathematics has been the language of the exact sciences. Only in the 20th century has mathematics become predominant in other fields, particularly economics and finance. In this ... Read full review

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Academic and ‘the best writer in the world of finance’
Economist and author 1919-2009
Nobody did more than Peter Bernstein, who died last week at the age of 90, to bring together the worlds
of high finance and academic research.
After a career as an academic economist and successful investor, he spent the long years of what might have been his retirement writing a series of best-selling books that revolutionised common understanding of investment – notably Against the Gods,a history of risk management, and Capital Ideas,onthe notions of market efficiency that underpinned the growth of modern finance.
In doing so, he retained the respect of people on all sides of the impassioned debate over the validity of theories based on the assumption that markets are rational. Last year’s financial implosion has prompted sharper criticism of his “capital ideas” and Bernstein kept contributing to the debate – last week, with a speech delivered posthumously to a conference in Canada.
Robert Arnott, former editor of the Financial Analysts Journal, and an often abrasive critic of these theories, was also a friend of Bernstein for 30 years, and read out the speech. He described Bernstein as “the best writer in the world of finance”.
“While he respected the power of quantitative models and methods, and loved the elegance of modern finance theory enough to write Capital Ideas, he also recognised that theory is theory,” said Mr Arnott. “It’s an approximation of the real world; it’s not reality. He relished poking holes in our industry’s over-reliance on theory and historically rooted models.”
Arguably, it was the over-reliance on theoretical abstractions that led to disaster last year, not the theories themselves. And Bernstein warned in Against the Gods, written a decade before the crisis broke: “Our faith in risk management encourages us to take risks that we would not otherwise take...How can we program into the computer concepts that we cannot program into ourselves, that are even beyond our imagination?”
Unlike the academics who built his “capital ideas,” Bernstein had very tangible experience of dealing with risk in the real world. Born in New York in 1919, the son of a Wall Streeter, he lived through the years of the Great Crash. After graduating from Harvard, where he studied economics under Joseph Schumpeter, he joined the Organisation of Strategic Services, precursor of the Central Intelligence Agency. He was stationed in London during Hitler’s campaign of rocket attacks.
After a stint as an academic, at Williams College in Massachusetts, he came to grips with financial risk as a loan officer for a bank, and then spent many years running the family investment management firm, where he had to work out price/earnings ratios with a slide rule.
He sold it (to Citigroup founder Sandy Weill) and built his own investment advisory group. He also launched the Journal of Portfolio Management, which became the central forum for applying academic theories to finance.
Although he is best known as an apostle of “capital ideas”, he had equal enthusiasm for the attempts to dispute the theories, often using research from behavioural psychology.
His last major book, Capital Ideas Evolving, published two years ago when he was 88, led off with a lengthy section on the behaviouralists bent on picking holes in the efficient markets theory, including Richard Thaler, Robert Shiller and Andrew Lo, whose “adaptive markets hypothesis”, which applies biology to markets, is a well-known alternative to efficient markets.
“Over the years, I’ve received many notes from Peter, usually typed, always signed, and each one made an insightful point about either my research or his, and I’ve benefited tremendously from his wisdom,” Mr Lo said.
For Mr Lo, Bernstein “single-handedly raised the level of discourse in the investments industry” by creating a forum where theories were “confronted with the realities of

Review: Against the Gods: The Remarkable Story of Risk

User Review  - Jessica - Goodreads

#6: Risk and its history. Read full review

Review: Against the Gods: The Remarkable Story of Risk

User Review  - Brian - Goodreads

Excellent overview of probability and the development of financial markets. I take issue with a few points- prospect theory does not obviate the benefits of statistical analysis, for example- but overall a fantastic read. Read full review

Review: Against the Gods: The Remarkable Story of Risk

User Review  - Craig J. - Goodreads

Against the Gods: The Remarkable Story of Risk by Peter L. Bernstein (1998) Read full review

Review: Against the Gods: The Remarkable Story of Risk

User Review  - Wade - Goodreads

Page 323: "They [you can guess who:] ignored the most fundamental principle of investment theory: you cannot expect to make large profits without taking the risk of large losses" Call of it as the first law of financial thermodynamics. Read full review

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