Against the Gods - another book by author with surname Bernstein

Author is "Peter L. Bernstein" -  the surname sounded familiar to me. Have I read one of his books before? What then? I don't read non-fiction, investment/risk - related books until late 2009, I remember their authors' names, certainly not Bernstein. (Thinking hard...) Ahhh!!! I know. The Birth of Plenty is written by William J. Bernstein .

So are these two persons related? Father and son? Brothers?

I googled "Peter Bernstein and William Berstein related" - and found the disappointing answer that they are NOT!!!

(Quote book review for The Birth of Plenty)

"Bill Bernstein's erudite history of the causes and consequences of growth grasps the main issues and keeps them up front all the way through. This book is a great magnifying glass for studying the complex world of today.� � Peter L. Bernstein (NB: Mr. Bernstein is not related to the author of The Birth of Plenty.) "

Damned!!

I thought I've found an evidence to the hypothesis "Like father like son" or "Like father produces like brothers" - the evidence is even stronger if Peter Bernstein and William Bernstein were brothers and happened to have a father who also wrote investment/trading books.

Anyway, it is an enlightening masterpiece, especially for us actuarial students who went through gruesome actuarial training that plants the idea of probabilities all over our head.

This book is really about modern risk management, but why is the book's title Against the Gods? The first step of managing risk is to believe that God doesn't control 100% of your future, that you can change the future by changing the ways you behave/your actions today.

Risk management necessitates understanding on how the future might turn out to be - Would Gillard lady change immigration rules after winning the election? Would Woolies (woo woo tongue-twister it is)  have special offers on canned tunas tomorrow morning? Would Claire be eliminated in today's episode of Master Chef (I'll find out soon)?

In one word: PROBABILITIES.

Probabilities=Probable+abilities=what is the chance (how probable) that something is able to happen

Why are probabilities invented anyway? Is it because we love the number zero and one so much that we'd love to invent something that always lie between those two extreme ends? LOL~ 1 and 0 are my favourite numbers when I was a school kid - they were so EASY in elementary maths.

6+1=7

6-1=5

6*1=6

6/1=6

Me in Elementary school: "So EASY!!! "

9+0=9

9-0=9

9*0=0

9/0=???

Me in Elementary school: "So EASY!!! Oh wait, teacher!! What is 9/0?"

Teacher: "Girl we don't divide something by zero."

Back then I imagined the hardest math (ie math in high school, uni) must have involved HUGE numbers e.g. 998883666388277673889298983+87837283787848787872=?

Of course I found out later that it is not, especially after starting Actuarial Studies when I realised that sometimes getting that answer between 0 and 1 can be such massive headache.

Probabilities are calculated because we want to know the rough picture of how the future would look like, and so that we can tailor our actions to either change the future or to cope better with the future. BTW, the title of this book should be Predict and Against the Gods - clearly doesn't sound as good, but that's the main thesis. Can human predict the future and go against what God has pre-arranged ???

BTW for those who have misconceptions about what an actuary does, the kind Blog author has some explanations for you:

Actuaries DO NOT know for sure what the future would look like!!!

So, don't come to me and start asking me to calculate how long you can live, who would be your wife/hisband, who would win the election in November (I personally want Gillard lady to win, Tony Abbott looks like an old-fashioned man with old-fashioned ideas.)

Because I DON'T KNOW. If I do know I would have become the richest person on earth by placing wagers on everything e.g. football matches. Actuaries are NOT fortune-tellers. Paul the octopus can predict better than me.

Probabilities all straighforward for games of chance ie games that are invented by human, such as roulette wheel, black jacks, kiddish games that I see in Jim Farmer's combinatorial probability notes. (How kiddish? e.g. Anne and Bob plays a game by throwing 2 coins, if the sides turn out the same, Bob pays Anne $1; if the sides that turn out different, Anne pays Bob $1.)

Which sane person would play a game like that? LOL~ The games I played as a kid were much more interesting than this one. But having said that many mathematicians, statisticians studied kiddish games like that and work out answers to questions like "What is the chance that Anne's pocket has more $$ then Bob's after 100 throws". The purpose is either to get rich - by working out the "optimal" ways to place bets if they so happened to have played these kiddish games with their best mates; or simply to kill past times or satisfy the inner curiosity of theirs.

Regardless of the motives, probability theories were developed over time by great nerds from the 17th , 18th, 19th centuries (from the way Peter Bernstein portrays them.)

BUT, God doesn't play simple games of chance!!!!

The games that God plays are much more complex!!!

Hurricanes and Tsumanis don't happen like how heads and tails appear on a coin toss, or how the ball lands in a roulette wheel, or how the faces of 6 dices turn up in a single throw. Global temperatures and sea levels don't go up like a straight line you drew on a graph paper. Things around us don't happen in neat fashion: independently, frequently and consistently - which are the qualities in games of chance invented by mankind. The three qualities are what we need to work out or approximate probabilities, and we have neither in circumstances where probabilities are most needed.

As if things are not complicated enough, the MOST COMPLICATED game invented by God is actually the brain of human. Yes, your brain, my brain, everyone's brain. I don't even know precisely what, when, how I am going to do something tomorrow (what more to say in a month, year, decade's time?), even though I am the person who should have the most amount of infomation about myself.

If you can't even predict yourself, how can you fancy predicting other people? Well, we hope that although each of us behave in erratic ways, the collective us behave in predictable ways - RATIONALLY, in the long run. Being rational means choosing the action that is best/optimal for your own good. E.g. you choose to do your homework despite not liking it because you know it is good for you. Being rational also means not being swarmed by emotions - you should keep your emotions at bay when choosing the option that is best for you e.g. if you know your wife is going to kill you if you keep a mistress, you should not keep a mistress even though your emotions tell you to hide her in your cupboard.

Sounds simple? Not till you start trading in the stock market - the place where emotions override rationality in the biggest scale. No stocks go up forever, very few stocks go down forever - you know that, I know that, but still when we see stock prices going up most of us choose to believe it to climb endlessly, and cry (if we've invested our $$) when it collapses.

Are you rational? I am not. Rational people don't make decisions based on sunk cost (cost you incur in the past e.g. $$ I paid for my gym membership) but based on opportunity cost (cost that you will incur by choosing something over some else e.g. the time I could have spent sleeping had I not chosen to go to the gym). The fact is, LOL~, the biggest motivation for me to head for my workout is the thought that if I don't my $$ would go to waste.

But all models used in the world of finance assume rationality - that is, hoping that the irrationalities of everyone happen to cancel out so that we as a population behave rationally. It's like "Oh please God, please~ ~ ~ We know each of us are not rational, but can you make all of our irrationalities combine into a big rationality fondant that ooze out thick stream of rationality when I cut through it?"

God isn't listening - that's why we have the Global Financial Crisis. Human came out with great, accurate formulae to predict our nature - the plants, the animals, the rocks, the rivers, but we are nowhere near to be able to predict our own thoughts and actions.  

Peter Bernstein said perhaps human would become better over the time and eventually come out with something that can predict ourselves.

Let me see, this book is published in 1996. 14 years down the track, has human, with the help of computers, moved closer to that noble target?
No. There will be no economic crisis if we were that good.

Can we ever be smart enough to create something to mimic ourselves close enough? Perhaps not, unless:

1. The earth is conquerred by aliens who turn us into robots e.g. send human for reformating so that all our brains are programmed identically - with emotions extracted and rationality inserted.
2. Someone become God's best friend and got the secret algorithm that determines how the 7 billion persons in this world think and act.

So why go Against the Gods?

We should Befriend the Gods.