Against the Gods

Bernstein argues that the idea of mastering risk, of replacing fate and oracles with measurement, is what separates the modern world from the past. He tells that story through the people who built the tools, from Cardano, Pascal and Fermat to the compilers of mortality tables, Gauss and twentieth-century figures such as Keynes, Harry Markowitz and the psychologists Daniel Kahneman and Amos Tversky.

Bernstein was well placed to write it. He ran an economic consulting firm for institutional investors, was founding editor of The Journal of Portfolio Management and had already written Capital Ideas, the standard history of how academic finance reshaped Wall Street. The book became a Business Week, New York Times and USA Today bestseller, and the Wall Street Journal called it extraordinarily entertaining and informative.

Publishers Weekly praised it as a thorough history, and Kirkus found it dense but rewarding. The density is the main caveat: Bernstein explains ideas rather than formulas, but some chapters still ask a lot of a casual reader. Its closing argument, that probabilities exist but our knowledge of them is limited, matters more after 2008 than when he wrote it. Pair it with Mandelbrot's The Misbehavior of Markets for the critique of the bell curve.

For anyone who builds, uses or relies on risk models, it is the best intellectual history available.

1. Risk management is a recent invention. Tools such as probability, sampling and insurance were developed only in the last few centuries, and each began with a practical problem, often a gambling one.
2. Utility, not value, drives decisions. Daniel Bernoulli's idea that a gain matters less to a rich person than a poor one underpins modern thinking about risk aversion and position sizing.
3. Regression to the mean is powerful but not guaranteed. Galton's discovery explains why extreme performance fades, yet the book cautions that the mean itself can move.
4. Diversification is a calculation. Markowitz showed that the risk of a portfolio depends on how its holdings move together, not only on the risk of each one.
5. Measurement has limits. Keynes's distinction between measurable risk and true uncertainty, and the behavioral evidence that people misjudge odds, mean every model should be used with humility.

The book is organized in five chronological parts, each named for the stage reached in thinking about risk.

1. To 1200: Beginnings. Gambling in the ancient world, why the Greeks did not develop probability despite their mathematics, and the arrival in Europe of Hindu-Arabic numerals, which made calculation possible.
2. 1200-1700: A thousand outstanding facts. Cardano's writing on games of chance, Pascal and Fermat's solution to the problem of points, and the first statistical analysis of births and deaths in London, which laid the groundwork for life insurance.
3. 1700-1900: Measurement unlimited. Daniel Bernoulli's insight that people weigh outcomes by utility rather than value, Jacob Bernoulli's law of large numbers, Gauss's normal distribution and Francis Galton's discovery of regression to the mean.
4. 1900-1960: Clouds of vagueness and the demand for precision. Keynes and Frank Knight on uncertainty that cannot be measured, game theory, and Harry Markowitz's portfolio selection, which made diversification a mathematical problem.
5. Degrees of belief: Exploring uncertainty. Kahneman and Tversky's evidence that people misjudge risk systematically, derivatives as tools for transferring risk, and the limits of newer forecasting methods such as chaos theory.

A Business Week, New York Times Business, and USA Today Bestseller Ambitious and readable . . . an engaging introduction to the oddsmakers, whom Bernstein regards as true humanists helping to release mankind from the choke holds of superstition and fatalism. —The New York Times An extraordinarily entertaining and informative book. —The Wall Street Journal A lively panoramic book . . . Against the Gods sets up an ambitious premise and then delivers on it. —Business Week Deserves to be, and surely will be, widely read. —The Economist [A] challenging book, one that may change forever the way people think about the world. —Worth No one else could have written a book of such central importance with so much charm and excitement. —Robert Heilbroner author, The Worldly Philosophers With his wonderful knowledge of the history and current manifestations of risk, Peter Bernstein brings us Against the Gods. Nothing like it will come out of the financial world this year or ever. I speak carefully: no one should miss it. —John Kenneth Galbraith Professor of Economics Emeritus, Harvard University In this unique exploration of the role of risk in our society, Peter Bernstein argues that the notion of bringing risk under control is one of the central ideas that distinguishes modern times from the distant past. Against the Gods chronicles the remarkable intellectual adventure that liberated humanity from oracles and soothsayers by means of the powerful tools of risk management that are available to us today. An extremely readable history of risk. —Barron's Fascinating . . . this challenging volume will help you understand the uncertainties that every investor must face. —Money A singular achievement. —Times Literary Supplement There's a growing market for savants who can render the recondite intelligibly-witness Stephen Jay Gould (natural history), Oliver Sacks (disease), Richard Dawkins (heredity), James Gleick (physics), Paul Krugman (economics)-and Bernstein would mingle well in their company. —The Australian