Against the Gods: The Remarkable Story of Risk Read online

  *Black suspected that something more unpleasant was involved: that his lack of proper warpaint in the form of a degree in economics excluded him from the tribal membership that the editors considered essential for an appearance in the JPE.

  *The literature on derivatives is massive, but I especially recommend the Fall 1994 issue of the Journal of Applied Corporate Finance, which is entirely devoted to the subject, and Smithson and Smith's book on managing risk (Smithson and Smith, 1995).

  In July 1995, the Federal Reserve Board, the Treasury Department, and the FDIC requested comments on a proposal to revise their requirements for commercial bank risk controls on transactions involving foreign exchange, commodities, and trading in debt and equity instruments. The document runs to 130 single-spaced pages. The so-called Basle Committee, consisting of representatives of central bankers from major economies, has issued the authoritative framework for the supervision of derivatives activities of banks and securities firms; it was published as a Federal Reserve press release on May 16, 1995.

  'al-Khowirizmi, the mathematician whose name furnished the root of the word "algorithm," would surely be astonished to see the offspring of what he launched nearly 1200 years ago.

  `From 1871 to 1958, stock yields exceeded bond yields by an average of about 1.3 percentage points, with only three transitory reversals, the last in 1929. In an article in Fortune magazine for March 1959 Gilbert Burke declared, "It has been practically an article of faith in the U.S. that good stocks must yield more income than good bonds, and that when they do not, their prices will promptly fall." (See Bank Credit Analyst, 1995.) There is reason to believe that stocks yielded more than bonds even before 1871, which is the starting point for reliable stock market data. Since 1958, bond yields have exceeded stock yields by an average of 3.5 percentage points.

  *For an extensive analysis of such cases, see Adams, 1995.

  Table of Contents

  Acknowledgments

  Introduction

  1. The Winds of the Greeks and the Role of the Dice

  2. As Easy as I, II, III

  3. The Renaissance Gambler

  4. The French Connection

  5. The Remarkable Notions of the Remarkable Notions Man

  6. Considering the Nature of Man

  7. The Search for Moral Certainty

  8. The Supreme Law of Unreason

  9. The Man with the Sprained Brain

  10. Peapods and Perils

  11. The Fabric of Felicity

  12. The Measure of Our Ignorance

  13. The Radically Distinct Notion

  14. The Man Who Counted Everything Except Calories

  15. The Strange Case of the Anonymous Stockbroker

  16. The Failure of Invariance

  17. The Theory Police

  18. The Fantastic System of Side Bets

  19. Awaiting the Wildness

  Notes

  Bibliography

  Name Index

  Subject Index

  Solow, Meir Statman, Marta Steele, Richard Thaler, James Tinsley, Frank Trainer, Amos Tversky,*

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  The Fibonacci series is a lot more than a source of amusement. Divide any of the Fibonacci numbers b

  The Greeks knew this proportion and called it "the golden mean." The golden mean defines the proport

  The centerpiece of the Hindu-Arabic system was the invention of zero-sunya as the Indians called it,

  Let us follow Cardano's line of reasoning as he details the probability of each throw in a game of d

  The 1654 correspondence between Pascal and Fermat on this subject signaled an epochal event in the h

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  Pascal produced an interesting by-product when he decided to turn over the profits from his bus line

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  After commenting on the incidence of accidents-most of which he asserts are occupation-related-Graun

  and departures and reports of accidents and sinkings.*

  fire and marine insurance and issued the first life-insurance policies in America-six-term policies

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  ing 50 ducats hurts the loser more than gaining 50 ducats pleases the winner.*