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This story is based on the elegant book by Peter L. Bernstien, "Against the Gods: The Remarkable Story of Risk". As the title suggests, managing risk is like fighting against the Gods. How can we ever hope to be victorious over superior beings? Whether you are a God believer or not, you cannot deny that since prehistory, our specie has constantly faced uncertainty of the future. It is just that with our present sophistication we have coined a modern and confusing term, "risk management" to assume the place of a more modest and the clearer "uncertain future".
The fact that we have progressed up to this point show that we have come some way in managing risk productively. We are not likely to vanquish future uncertainty or risk but our record of claiming territory from the "Gods" is not bad. Our present wealth and security is based on our understanding of risk and the courage to stare it in the face to take action.
Some have criticized "Against the Gods" as nothing but a very enjoyable and easy read of a complex subject - The History of Risk. If so, they have missed the point. There is much insight in the book that is so elegantly presented. If you could own some of these insight and grasp it better by ploughing through the book yourself, your investment track record and how you manage an uncertain future would also improve because of your deeper appreciation of the subject.
Ultimately
the issue between us and Risk is about control: The control of the future
(Box 2) by making it more predictable so that we can plan and benefit
ourselves.
The story of our war against Risk is when things become riskier, Peter Bernstein shows how we have responded in myriad ways to cope with it. Therefore as Risk (Box 1) grows, our control (Box 2) over Risk also increase - That is what the solid arrow from Box 1 to Box 2 means.
Unfortunately experience has also shown that even as we achieve greater control over our future, Risk has always been capable of returning. This is indicated by the solid back arrow from Box 2 to Box 1. So the story of Risk in the last five hundred years is about the relationship between Box 1 and Box 2. Along the way, as suggested earlier, we are claiming territory from Risk, i.e., we are able to manage risk better and use it to generate more wealth (Box 3). E.g., the financial markets is one of our lates innovations to cope with Risk. As our wealth grows (Box 3) we feel one up on Risk The dashed arrow from Box 3 to Box 1 suggest that the more wealth individuals and societies achieve, the less we feel the future is risky becaues we now have more resources or ways to cope with an uncertain future.
But Map 1 is incomplete. Risk is not vanquished. From causes which we could not put a finger on, Risk will eventually spring a surprise (Box 4) with such force that we lose control and once more we feel vulnerable about the future. In Map 2, this is the solid arrow from Box 4 to Box 1, i.e., Risk our enemy becomes powerful once more and at the same time, we become weak relative to Risk. See the dashed arrow from Box 4 to Box 2. If you need a prominent example for this, read, "When Genius Failed", the story of how a very bright star hedge fund company, LTCM or Long Term Capital Management LLC rose and fell. They were caught by surprise and they are unlikely to be the last to do so.
The story of our battles against Risk is about indivduals and small groups of people with brilliance, insight, courage and integrity figthing on behalf of the rest of us for the advancement of our civilization. Not all of us are as bright or insightful as these men and women but we must all have integrity and be as courageous in fighting our personal battles against Risk to be successful. I hope the following Flash movies below are able to encourage you to do so.
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