Against the Gods: The Remarkable Story of Risk by Peter L. Bernstein Page B
Authors: Peter L. Bernstein
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though they did not turn it all the way, they inserted the key into
the lock. The significance of their pioneering work for business management, for risk management, and, in particular, for insurance was to
be seized upon by others-for whom the Port-Royal Logic was an
important first step. The idea of forecasting economic trends or of using probability to forecast economic losses was too remote for Pascal and
Fermat to have recognized what they were missing. It is only with
hindsight that we can see how close they came.
The inescapable uncertainty of the future will always prevent us from
completely banishing the fates from our hopes and fears, but after 1654
mumbo jumbo would no longer be the forecasting method of choice.
e all have to make decisions on the basis of limited data. One
sip, even a sniff, of wine determines whether the whole bottle is drinkable. Courtship with a future spouse is shorter
than the lifetime that lies ahead. A few drops of blood may evidence patterns of DNA that will either convict or acquit an accused murderer.
Public-opinion pollsters interview 2,000 people to ascertain the entire
nation's state of mind. The Dow Jones Industrial Average consists of just
thirty stocks, but we use it to measure changes in trillions of dollars of
wealth owned by millions of families and thousands of major financial
institutions. George Bush needed just a few bites of broccoli to decide
that that stuff was not for him.
Most critical decisions would be impossible without sampling. By the
time you have drunk a whole bottle of wine, it is a little late to announce
that it is or is not drinkable. The doctor cannot draw all your blood
before deciding what medicine to prescribe or before checking out your
DNA. The president cannot take referendums of 100% of all the voters
every month before deciding what the electorate wants-nor can he eat
all the broccoli in the world before expressing his distaste for it.
Sampling is essential to risk-taking. We constantly use samples of
the present and the past to guess about the future. "On the average" is
a familiar phrase. But how reliable is the average to which we refer?
How representative is the sample on which we base our judgment?
What is "normal," anyway? Statisticians joke about the man with his
feet in the oven and his head in the refrigerator: on the average he feels
pretty good. The fable about the blind men and the elephant is
famous precisely because each man had taken such a tiny sample of
the entire animal.
Statistical sampling has had a long history, and twentieth-century
techniques are far advanced over the primitive methods of earlier times.
The most interesting early use of sampling was conducted by the King
of England, or by his appointed proxies, in a ceremony known as the
Trial of the Pyx and was well established by 1279 when Edward I proclaimed the procedure to be followed.'
The purpose of the trial was to assure that the coinage minted by
the Royal Mint met the standards of gold or silver content as defined
by the Mint's statement of standards. The strange word "pyx" derives
from the Greek word for box and refers to the container that held the
coins that were to be sampled. Those coins were selected, presumably
at random, from the output of the Mint; at the trial, they would be
compared to a plate of the King's gold that had been stored in a thricelocked treasury room called the Chapel of the Pyx in Westminster
Abbey. The procedure permitted a specifically defined variance from
the standard, as not every coin could be expected to match precisely the
gold to which it was being compared.
A more ambitious and influential effort to use the statistical process
of sampling was reported in 1662, eight years after the correspondence
between Pascal and Fermat (and the year in which Pascal finally discovered for himself whether God is or God is not). The work in question was a small book published in London
the lock. The significance of their pioneering work for business management, for risk management, and, in particular, for insurance was to
be seized upon by others-for whom the Port-Royal Logic was an
important first step. The idea of forecasting economic trends or of using probability to forecast economic losses was too remote for Pascal and
Fermat to have recognized what they were missing. It is only with
hindsight that we can see how close they came.
The inescapable uncertainty of the future will always prevent us from
completely banishing the fates from our hopes and fears, but after 1654
mumbo jumbo would no longer be the forecasting method of choice.
e all have to make decisions on the basis of limited data. One
sip, even a sniff, of wine determines whether the whole bottle is drinkable. Courtship with a future spouse is shorter
than the lifetime that lies ahead. A few drops of blood may evidence patterns of DNA that will either convict or acquit an accused murderer.
Public-opinion pollsters interview 2,000 people to ascertain the entire
nation's state of mind. The Dow Jones Industrial Average consists of just
thirty stocks, but we use it to measure changes in trillions of dollars of
wealth owned by millions of families and thousands of major financial
institutions. George Bush needed just a few bites of broccoli to decide
that that stuff was not for him.
Most critical decisions would be impossible without sampling. By the
time you have drunk a whole bottle of wine, it is a little late to announce
that it is or is not drinkable. The doctor cannot draw all your blood
before deciding what medicine to prescribe or before checking out your
DNA. The president cannot take referendums of 100% of all the voters
every month before deciding what the electorate wants-nor can he eat
all the broccoli in the world before expressing his distaste for it.
Sampling is essential to risk-taking. We constantly use samples of
the present and the past to guess about the future. "On the average" is
a familiar phrase. But how reliable is the average to which we refer?
How representative is the sample on which we base our judgment?
What is "normal," anyway? Statisticians joke about the man with his
feet in the oven and his head in the refrigerator: on the average he feels
pretty good. The fable about the blind men and the elephant is
famous precisely because each man had taken such a tiny sample of
the entire animal.
Statistical sampling has had a long history, and twentieth-century
techniques are far advanced over the primitive methods of earlier times.
The most interesting early use of sampling was conducted by the King
of England, or by his appointed proxies, in a ceremony known as the
Trial of the Pyx and was well established by 1279 when Edward I proclaimed the procedure to be followed.'
The purpose of the trial was to assure that the coinage minted by
the Royal Mint met the standards of gold or silver content as defined
by the Mint's statement of standards. The strange word "pyx" derives
from the Greek word for box and refers to the container that held the
coins that were to be sampled. Those coins were selected, presumably
at random, from the output of the Mint; at the trial, they would be
compared to a plate of the King's gold that had been stored in a thricelocked treasury room called the Chapel of the Pyx in Westminster
Abbey. The procedure permitted a specifically defined variance from
the standard, as not every coin could be expected to match precisely the
gold to which it was being compared.
A more ambitious and influential effort to use the statistical process
of sampling was reported in 1662, eight years after the correspondence
between Pascal and Fermat (and the year in which Pascal finally discovered for himself whether God is or God is not). The work in question was a small book published in London
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