Comment On âAgainst The Gods: The Remarkable Story Of Riskâ By Peter L Bernstein
Bernstein discusses the evolving view over time of the difference between ‘uncertainty’ and ‘risk’. Risk is associated with the probability of a particular result. Uncertainty is associated with the possibility of an outcome. He discusses these concepts in relation to financial markets and investment. But most of the ideas put forward are generally considered to be relevant to the operation of civilization. He has the typical anthropocentric view of what happens.
He mentions how various people have had differing views about the relative impact of uncertainty and risk over the centuries. But their arguments are all based on the premise that the future is uncertain to a large degree. The focus in this discussion is on developments over centuries is the enumeration of probability. This is probably appropriate in relation to financial markets where future decisions of individuals can have a big impact. For example, fiat money can be created, as now, and this will have an uncertain impact on the economy. Human decisions can have a significant impact on what happens to economies in the future.
There is also a degree of uncertainty about how natural systems will operate. Natural disasters, like the Victorian bush fires, Hurricane Katrina, Sichuan earthquake and the Sumatran tsunami, can occur. There is appreciable uncertainty about the timing and severity of these disasters. But there is very little uncertainty about many natural events. I am willing to bet the sun will rise in the east tomorrow. There will be more earthquakes. Seismologists have some idea of where they will occur but less knowledge about when. The residents of Tokyo and San Francisco live with that uncertainty. There will be more volcanic eruptions sometime in the future and we have essentially no capability to stop them. I am willing to bet, although I will not be here, that I will not see out this century as I am already old. I may be able to prolong my life by employing sensible measures but that will not change the certainty of the outcome! Bernstein harps on uncertainty yet I expect he accepts his own mortality. I will not comment on the applicability of what he has to say about risk management in the financial market. He gives appreciable insight into what has happened in the decade since he wrote the book.
But his views give rise to grave misunderstanding of what the operations of civilization are doing to its life support system, what is available from the environment. For example, they support the common, erroneous view that oil will continue to be available. There is appreciable uncertainty about how much energy we can harness from alternative sources. But it is certain that we will not be able to use 86 million barrels of oil per day at the end of this century. These views also support the erroneous contention that we can install systems that can harness vast natural forces to reverse global warming. The fact that we have unknowingly initiated climate change by enabling the unleashing of the vast forces in the fossil fuels does not mean we can reverse that process. There is little doubt that many systems will be installed to lessen the degree of climate change but it cannot be stopped and it certainly cannot be reversed..
Bernstein comments on the value of making rational decisions but does not mention the fact that using up the irreplaceable stock of oil, often in very wasteful manner, is a major example of how irrational society is.
Perhaps the most irrational aspect of the way Bernstein considers the operation of the economy is in the pursuit of what society regards as wealth. There was a time when society built up real wealth by using innovation coupled with the ‘cheap’ energy we garnered from the environment. But it went to our heads! We now have the spurious wealth created by the money games Bernstein discusses. And they are now imploding. There is little doubt that the views expressed by Bernstein and his ilk has had an impact on the investments scene in recent years. The most telling point is that the complexity of that awesome invention, derivatives is beyond the comprehension of even the cleverest of humans. So, they have made the mistake of getting computers to make the mistakes for them!
He has some critical comments on chaos theory without acknowledging that it does have a place in understanding of what actually happens. It would be interesting to have his view on the fact that we know oak trees have predictable forms of leaves even though they do vary in size. The shape, size and longevity of people is also fairly predictable!
He ends with
The central theme of this whole story is that the quantitative achievements of the heroes we    have met have shaped the trajectory of progress over the past 450 years. In engineering,       medicine, science, finance, business, and even in government, decisions that touch           everyone’s life are now made in accordance with disciplined procedures that far outperform    the seat-of-the-pants methods of the past. Many catastrophic errors of judgment are thus       either avoided, or else their consequences are muted.
It is ironical that he ends with this comment about ‘errors of judgment’. Society has made a profound error of judgment in exuberantly using up limited natural capital. Its operations are now totally dependent on irreversibly depleting that capital. Our civilization is now addicted to using this scarce natural resource at a high rate. The edifice of our civilization, the financial market is in chaotic disarray for reasons that Bernstein articulated well. The foundations, however, are crumbling but un-noticed by those transfixed on the money games. ‘Against the Gods’ is an appropriate title for what has happened!
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