Bank Supervision

In November 1994, Alan Greenspan, Chairman of the Federal Reserve Board, declared:

There are some who would argue that the role of the bank supervision is to minimize or even eliminate bank failure; but this view is mistaken, in my judgment. The willingness to take risk is essential to the growth of a free market economy…[I]f all savers and their financial intermediaries invested only in a risk-free assets, the potential for business growth would never be realized.

– Peter L. Bernstein, Against The Gods, The Remarkable Story of Risk

 

Wikipedia.org:

Alan Greenspan (born March 6, 1926) is an American economist who served as Chairman of the Federal Reserve of the United States from 1987 to 2006.

Alan Greenspa

Game theory

Game theory brings a new meaning uncertainty. Earlier theories accepted uncertainty as a fact of life and did little to identify its source. Game theory says that the true source of uncertainty lies in the intention of others. – Peter L. Bernstein, Against The Gods, The Remarkable Story of Risk

 

Wikipedia.org:

Game theory is the study of strategic decision making. More formally, it is “the study of mathematical models of conflict and cooperation between intelligent rational decision-makers.”

Game theory is mainly used in economics, political science, and psychology, as well as logic and biology. The subject first addressed zero-sum games, such that one person’s gains exactly equal net losses of the other participant(s).

Modern game theory began with the idea regarding the existence of mixed-strategy equilibria in two-person zero-sum games and its proof by John von Neumann.

John von Neumann

Risk Management

Arrow is the father of the concept of risk management as an explicit form of practical art. – Peter L. Bernstein, Against The Gods, The Remarkable Story of Risk

 

Wikipedia.org:

Kenneth Joseph Arrow (born August 23, 1921) is an American economist and joint winner of the Nobel Memorial Prize in Economics with John Hicks in 1972. To date, he is the youngest person to have received this award, at 51.
In economics, he is considered an important figure in post-World War II neo-classical economic theory. Many of his former graduate students have gone on to win the Nobel Memorial Prize themselves. Arrow’s impact on the economics profession has been tremendous. For more than fifty years he has been one of the most influential of all practising economists.

Kenneth J. Arrow

Informação / Information

Once, at a professional investment conference, a friend pass me a note that read as follows:

The information you have is not the information you whant.

The information you whant is not the information you need.

The information you need is not the information you can obtain.

The information you can obtain costs more than you whant to pay

– Peter L. Bernstein, Against The Gods, The Remarkable Story of Risk

 

Chaos theory

According to this theory, much of what looks like chaos is in truth the product of an underlying order, in which insignificant perturbations are often the cause of predestined crashes and long-lived bull markets.  – Peter L. Bernstein, Against The Gods, The Remarkable Story of Risk

Risk Management

Until we can distinguish between an event that is truly random and an event that is the result of cause and effect, we will never know wheter what we see is what we´ll got, nor how we got what we got. When we take a risk, we are betting on an outcome that will result from a decision we have made, though we do not know for certain what outcome will be. The essence of risk management lies in maximizing the areas where we have some control over the outcome while minimizing the areas where we have absolutely no control over the outcome and the linkage between effect and cause is hidden from us.  – Peter L. Bernstein, Against The Gods, The Remarkable Story of Risk

Newton / Gauss

Gauss took special pride in his achievements in astronomy, feeling that he was following in the footsteps of Newton, his great hero. Given his admiration for Newton´s discoveries, he grew apoplectic at any reference to the history that the fall of an apple on Newton´s head had been the inspiration for discovering the law of gravity. Gauss characterized this fable a:

A stupid, officious man asked Newton how he discovered the law of gravitation. Seeing that he had to deal with a child intellect and wanting to get rid of the bore, Newton answered that an appe fell and hit him on the nose. The man went away fully satisfied and completely enlightened. – Peter L. Bernstein, Against The Gods, The Remarkable Story of Risk

Enlightenment / Iluminismo

(…) eighteenth century, when the Enlightenment identified the search for knowledge as the highest from of human activity. It was a time for scientists to wipe the metaphysical dust from their eyes. There were no longer any inhibitions against exploring the unknown and creating the new.  – Peter L. Bernstein, Against The Gods, The Remarkable Story of Risk

 

Wikipedia.org:

The Age of Enlightenment (or simply the Enlightenment or Age of Reason) was a cultural movement of intellectuals in 18th century Europe and America, whose purpose was to reform society and advance knowledge. It promoted science and intellectual interchange and opposed superstition,[1] intolerance and abuses in church and state. Originating about 1650 to 1700, it was sparked by philosophers Baruch Spinoza (1632–1677), John Locke (1632–1704), Pierre Bayle (1647–1706), physicist Isaac Newton (1643–1727), and philosopher Voltaire (1694–1778). The wide distribution of the printing press, invented in Europe in 1440, made possible the rapid dispersion of knowledge and ideas which precipitated the Enlightenment. Ruling princes often endorsed and fostered figures and even attempted to apply their ideas of government in what was known as Enlightened Despotism. The Enlightenment flourished until about 1790–1800, after which the emphasis on reason gave way to Romanticism’s emphasis on emotion and a Counter-Enlightenment gained force.

The word “statistics” – Tábua de Mortalidade

The word “statistics” is derived from the analysis of quantitative facts about the state. Graunt and Petty may be considered the co-fathers of this important field of study. – Peter L. Bernstein, Against The Gods, The Remarkable Story of Risk

Wikipedia.org:

John Graunt (24 April 1620 – 18 April 1674) was one of the first demographers, though by profession he was a haberdasher. Born in London.

Sir William Petty FRS (27 May 1623 – 16 December 1687) was an English economist, scientist and philosopher.

Graunt, along with William Petty, developed early human statistical and census methods that later provided a framework for modern demography. He is credited with producing the first life table, giving probabilities of survival to each age. Graunt is also considered as one of the first experts in epidemiology, since his famous book was concerned mostly with public health statistics.

Sir William Petty

The abacus

The abacus – the oldest couting device in history – ruled the world of mathematics until Hindu-Arabic numbering system arrived on the scene between about 1000 and 12oo AD. – Peter L. Bernstein, Against The Gods, The Remarkable Story of Risk

 

Wikipedia.org:

The abacus, also called a counting frame, is a calculating tool used primarily in parts of Asia for performing arithmetic processes. Today, abaci are often constructed as a bamboo frame with beads sliding on wires, but originally they were beans or stones moved in grooves in sand or on tablets of wood, stone, or metal. The abacus was in use centuries before the adoption of the written modern numeral system and is still widely used by merchants, traders and clerks in Asia, Africa, and elsewhere. The user of an abacus is called an abacist.


The word risk

The word risk derives from the early Italian risicare, which means “to dare”. In this sense, risk is a choice rather than a fate. The actions we dare to take, which depend on how free we are to make choices, are what story of risk is all about. And that story helps define what it means to be a human being. – Peter L. Bernstein, Against The Gods, The Remarkable Story of Risk

Is risk management a science or an art?

The issue boils down to one´s view about the extent to which the past determines the future. We cannot quantify the future, because it is an unknown, but we have learned how to use numbers to scrutinize what happened in the past. But to what degree should we rely on the patterns of the past to tell us what the future will be like? Which matters more when facing a risk, the facts as we see them or our subjective belief in what lies hidden in the void of time? Is risk management a science or an art? Can we even tell for certain precisely where the dividing line between the two approaches lies? – Peter L. Bernstein, Against The Gods, The Remarkable Story of Risk