In an account that follows the structure of a novel and with a timeline commencing from the Greek philosophers to the current computer cohort, Peter L. Bernstein provides a comprehensive, knowledgeable and meticulous voyage of key historical eras. Bernstein illustrates how the perception of man has changed towards vulnerabilities. The author has illuminated some light on the risks, by emphasizing its role and effect on the society. Bernstein illustrates how the concept of risk arises, and the value of controlling it for the betterment of the world.
Indeed, the author reckons that the power of computing has further enhanced the ability to control risks and as the world ushers in the information age, investors will deploy the most sophisticated mechanisms to calculate the odds and increase their likelihood of succeeding. To understand how probabilities and odds are computed and their significance in understanding risks, I will draw ideas and concepts from Chapter 12: The Measure of Our Ignorance. In this chapter, Bernstein reckons that the confidence that people often put in measurement usually fails and rather and people attribute such with either good or bad luck. Bernstein (1996) reckons s that if everything that people is measured based on luck, then risk management would become a worthless exercise. When luck is invoked, then truth ceases to exist because the former isolates an incident from its primary cause.
Applying probabilities and odds towards understanding risks
According to Bernstein (1996) probability and odds are primary factors in the assessment of potential value or rather in the know whether a certain market or business will produce si1gnificant returns or not. Understanding the computation involved in converting the odds into probabilities is important in helping a person assess the value of a certain product, service or market. One of the conversions are made, one should determine whether the probability is less than the evaluations. This helps in making quality decisions. Any potential investor or entrepreneur should never rely on luck in making business decisions. As reckoned by Bernstein (19960, the concepts of risk and probability were never in existence during the early times through the society was in dire need of them. A country or a region that has invested in farming, hunting or even fishing as the form of economic activity should not rely on luck for the purposes of survival. In all these forms of activities, the climate is the primary factor. A person can insure his business against the weather. During the early periods, people could insure their crops against weather through sharing. The element of sharing involved groups or parties that made promises of offering a helping hand in the case of eventualities. There exist different forms of rudimentary insurance.
During the 17th century, the business world transformed significantly. In some ways, the weather became a less significant risk when compared to other risks deemed critical. Indeed, everything seemed perfect both intellectually and commercially. This is probably one primary reason Insurance agencies did not progress during the early times. The corporate world failed to provide effective diversification opportunities. It was difficult to balance the risks because such an opportunity never existed. The only way that the business world would enhance diversification was through globalization and the investment markets were indeed globalizing.
Life is always impounded by diverse risks. However, Bernstein reckons that during the 17th century, society lacked a systematic method of managing risks. Indeed, through the consolidated efforts and innovative ideas of scientists and mathematicians, the society has gained a proper expertise in probability theory and other risk management instruments. As reckoned by Peter L. Bernstein in Chapter 12, risk management is very important in determining the success of a business or any form of economic activity. Good luck or bad luck should not be used as a way of relieving a person or business from undertaking responsibilities. But, it is often difficult to know whether the outcome of a particular event is a result of fate or choice. Until one is capable of differentiating an incident that occurs randomly and that which occurs because of cause and effect, it becomes difficult to discern whether what is observed is what is achieved. Therefore, when one takes a risk, it means that a person is betting on the result that will occur because of the decision made even without the certainty about the outcome. As such, the core of risk management lies in capitalizing on the areas that one can determine the outcome while evading the areas where we have no control over the results. Indeed, risk determines almost all the decisions that people usually make. However, only a small percentage of people often deliberate about its origins, its significance and the kind of life that people would live without the leaders. When the concept of mean-variance was introduced, the idea of a systematic connection between risk and return became clear.
As people learn new and better ways of dealing with risks, they tend to engage in risky adventures and the more the risks the high the profits. However, most of the risk-management method eventually requires exit strategies. In making decisions and choices, the outcome is usually the determining factor. For example, let us consider a situation that involves determining whether God exists or not. In responding to this question, the concept of reason cannot be relied upon. If a person acts as though God exists by living a virtuous life and living according to principles of God, yet there is no God, that particular person would be foregoing some important aspects in his/her lifetime. On the other hand, if a person acts as if God does not exist by leading a sinful a wicked life and in reality, God does exist, that particular person will eventually inherit everlasting damnation. When one deliberates about a problem in such a perspective, the probabilities rarely matters. The risk of gambling about the nonexistence of God is very huge. As such, while making decisions and choice, the final outcome is what matters most. The probability can be minimal; perhaps the likelihood of the existence of God is very small. However, if God indeed exists, the consequences are immense and one should not care about the probabilities but should lead an upright life. Assume the same application is utilized in determining whether the stock market exists or is ineffective. If an investor makes his/her investments with the mindset that the stock exchange exists, the outcome is likely to be favorable.
However, if the investor acts as though the market is insufficient but makes huge investments, he/she is likely to experience eternal condemnation. It is because of such a reason that people purchase insurance covers. For example, if there is a small probability that a person will die prematurely, then buying an insurance cover should be out of the question. However, if one fails to purchase the insurance cover and that person dies prematurely, it would have been better if that particular person was unaware of the probabilities and not make any decisions. As people understand and identify better and effective ways of dealing with risks, they usually engage in risky transactions and activities that are riskier but with levels of returns.
Bernstein is one of the few authors that have expressly explored the subject of probability. In his efforts of illustrating the essence of computing probability and odds, the authors have watered down the concepts of good luck and bad luck in making business investments. In chapter 12: The measure of our ignorance, Bernstein has reiterated the effects that probability and odds can generate in real life scenarios. Indeed, the author had explored the element of risk in great lengths by emphasizing its role and effect on society. He has carefully illustrated how the concept of risk arises, and the value of controlling it for the betterment of the world. Indeed, the author has also emphasized the power of computing in order to increase the capability of controlling risks. On the same note, Bernstein has also unveiled that probability is a matter of gambling with the resources or energy invested in executing a certain task or economic activity. One disadvantage of relying on probability and odds is the uncertainty involved. As such, one should always be ready to embrace the outcome.
Bernstein, P.L. (1996). Against the Gods: The Remarkable Story of Risk. New York: John Willey & Sons Inc. Print. Retrieved from: http://hostel.ufabc.edu.br/~nelson.faustino/Ensino/IPE2016/Livros/Peter%20L.%20Berns tein-Against%20the%20Gods_%20The%20Remarkable%20Story%20of%20Risk- Wiley%20(1998)%20(1).pdf