In “Against the Gods,” author Peter L. Bernstein takes us on a remarkable thousand year journey, tracing man’s efforts to take on ever bolder and riskier ventures, enabled by steady improvements in forecasting, probability, statistics and business methods. For millennia men had to suffer the cruel fates dealt by the Gods. Mastery of risk demarcates modern times from the past. For modern man, the future is more than just a whim of the gods. To some extent, we can now understand and quantify future risks. We can even predict many future events. Just how did we evolve from creatures at the mercy of nature to our modern mastery of risks?
Data is a recurring theme in Bernstein’s book, since without data, risk management is all but impossible. Record-keeping is the genesis of data. Bernstein tells us how meticulous church scribes 325 years ago kept track of annual births and deaths in Silesian town Breslau, now known as Wrozlaw Poland. Initially, the thick record books were of little practical use beyond confirming bloodlines. A few years later, the famous astronomer Edmund Halley analyzed the data and was the first to calculate life expectancy, laying the foundations for the modern life-insurance industry. Indeed, Halley’s analysis produced some of the earliest actuarial tables. From the data, mathematical analysis had produced new information, useful for risk management!
Within the same period, Bernstein takes us to 17th century London where the merchants, ships captains, sailors, and investors hung out in London’s first coffee houses, listening for critical bits and pieces of information about ships coming and going. One such coffee house, Lloyd’s, gradually evolved into an insurance underwriter. Quite literally, what we now know as Lloyd’s of London started as a coffee house over 300 years ago!
Later in the book, the author brings the reader into modern times explaining, while we have mastered so many risks related to transportation, supply chain and the weather, we have also created many new risks, including financial risks. Almost too sophisticated to describe, derivatives are among the riskiest financial instruments ever devised. Far beyond the average person’s comprehension, derivatives determine who takes on the speculation and who avoids it. So risky are some derivatives, such as Credit Default Swaps (CDS), Warren Buffett referred to them as “weapons of financial mass destruction.” Bernstein makes a yeoman’s effort to bring the lofty subject back down to earth, so the rest of us can start understanding why derivatives exist.
Despite man’s current mastery of risk, nature remains a wild card. We know there will be hurricanes, or earthquakes, or tornados, or droughts, but we don’t exactly know where and when. Nature’s tendency is to repeat itself, but only imperfectly, so individuals and companies purchase insurance, against “natural disasters.” Humans are also a wild card, because we never know what man will do, hence the term “man-made disasters.”
Bernstein ends the book by quoting John Maynard Keynes: “…probability is to us the guide of life.” Our modern life, so full of innovation and technology, is simply not sustainable without understanding and mastering probability.
Bernstein is a master storyteller and this very engaging “page-turner” is full of great stories. If you like to read, if you like history and business, you will enjoy this book.
This book is available through Amazon.
You can read more about risk by visiting our first article in a series on risk management, Risk – Part 1: Recognizing and Understanding Business Risk.
Andy Pattantyus, CPIM is president of Strategic Modularity, Inc., a systems engineering consulting firm, which works with clients on process oriented Lean Transformation projects, including initiatives to improve administrative workflows. Andy is also an active member of APICS-SFV and The ACA Group. Contact Andy at email@example.com