Andrew Allentuck

Friday, October 6, 2000

Against the Gods: The Remarkable Story of Risk
by Peter Bernstein
John Wiley & Sons, 288 pages

Peter L. Berstein, a mathematician and institutional investor, has produced an improbable jewel of a book. Against the Gods is a history of statistics from the origins of the bell curve to the rise of chaos theory. Bernstein begins with a discussion of the origins of risk evaluation in gambling. He evaluates several schools of statistical interpretation, traces the development of mortality tables, explains the development of modern portfolio theory, the use of game theory to predict financial markets, and the development of valuation models for financial derivatives. All of this is done in a graceful narrative that is rich in the history of ideas. Inferential mathematics, a emerges as a vital and fascinating way of understanding the world.

Beyond the world of investing, Bernstein deals with the fundamental problem that people's decisions often deviate from what underlying events reveal. "Mother Nature, with all her vagaries, is a lot more dependable than a group of human being trying to make up their minds about something," he says. This is a fundamental insight into risk management. Behind short term trends is the phenomenon of regression to the mean, which makes the law of averages win out over those who try to beat it. Against the Gods is a guide to much more than making money in jumpy markets. It is a lesson on the meaning of history, a commentary on hope and fear, and an essay on the vanities of the educated who think they can tell where chance events are leading. It can change the life of anyone who understands it.