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2023 COMMENTS, CONTRIBUTIONS & CONCLUSIONS | “What is it that distinguishes the thousands of years of history from what we think of as modern times?”

2023 COMMENTS, CONTRIBUTIONS & CONCLUSIONS | “What is it that distinguishes the thousands of years of history from what we think of as modern times?”

by Starling Insights

Starling Insights Editorial Board

Jun 07, 2023


In his classic, Against the Gods, Peter Bernstein suggests that the modern age began with the mastery of risk: “the notion that the future is more than a whim of the gods and that men and women are not passive before nature.1”  The heroes of his story are those brilliant thinkers, running from the Renaissance through the 20th century, who collectively established, refined, and ultimately reified probabilistic mathematics. Torn from the hands of fickle gods, risk became a matter of choice rather than fate, allowing us to define and choose from among possible futures. Such a mastery of risk allowed for greater risk taking — indeed encouraged it — and this in turn drove unprecedented progress and prosperity:

Without a command of probability theory and other instruments of risk management, engineers could never have designed the great bridges that span our widest rivers, homes would still be heated by fireplaces or parlor stoves, electric power utilities would not exist, polio would still be maiming children, no airplanes would fly, and space travel would be just a dream.

It is compelling story — the book is a page-turner and pulse-quickener — but amidst this tale of temerity and triumph it is easy to read past the many warnings Bernstein sounds throughout. Is risk management more so art or science? Both arguments have their champions, and the question remains contested. But while mathematical models have filled our lives with helpful numbers, Bernstein warns, we mustn’t conflate tools with truths. Numbers “have no soul,” he reminds, “and may indeed become fetishes.”

Mathematical models, the numbers they feed upon and propagate, serve as immensely valuable cognitive prosthetics; they improve our ability to take decisions that favor desired outcomes. But while they may inform human judgement, they do not, cannot, and ought not replace it. “It is one thing to set up a mathematical model that appears to explain everything,” Bernstein writes. “But when we face the struggle of daily life, of constant trial and error, the ambiguity of the facts as well as the power of the human heartbeat can obliterate the model in short order.” 

Against the Gods was published in 1996 — two years after the former head of bond trading at Salomon Brothers, John Meriwether, founded hedge fund Long Term Capital Management (LTCM). Merriweather answered risk with science and surrounded himself with some of the brightest minds of his day — among them Myron Scholes and Robert Merton, who would share the 1997 Nobel Prize for economics. In the four years from its inception, by 1998 LTCM had managed to amass $100 billion in assets and had generated returns of some 40-percent yearly. And then it collapsed. The firm’s demise threatened to take down several Wall Street banks that had extended it credit, and triggered an intervention by the NY Fed in what could be viewed as something of a dress-rehearsal for the 2007-08 financial crisis. 

We don’t know if Meriweather was familiar with Bernstein’s book, but he’s sure to have read When Genius Failed, 2  Roger Lowenstein’s masterful recounting of LTCM’s spectacular rise, published two years after its equally spectacular fall. “Long Term was an experiment in managing risk by the numbers,” Lowenstein writes. But beware: “It is a wrong perception to believe that you can eliminate risk just because you can measure it,” he quotes Robert Merton as having remarked. 

Merton may have been alive to Bernstein’s note of caution — “the power of the human heartbeat can obliterate the model in short order” — but his investment decision-making reflected an excessive faith in his models, nevertheless. 

The gods will have their say. 

Other Articles in the Comments, Contributions, and Conclusions Series

“What is it that distinguishes the thousands of years of history from what we think of as modern times?” 
Hidden inexactitudes 
“Radical Uncertainty” 
"Why did no one see it coming?" 
The real trouble with this world of ours 
More meaningful metrics 
“Too Big to Manage” 
Drifting into failure 
“Lying to Ourselves” 
"We have literally no time even to be astonished." 
“We need to develop a culture that empowers supervisors to act in the face of uncertainty.” 
“Culture, more than rule books…”  
“Proactive identification of threats to trust in banking.”  
The illusion of control 
What is Conduct Risk 
“Changing banking for good” 
Outcomes oriented 
Achieving foresight 
Trust matters 
Mapping and tapping workplace networks 
“An Epidemic of Loneliness” 
The fourth wave 
System shifts 
Conduct: the new prudential risk 
The costs of misconduct 
Has banking changed for good? 
Tribulations, and trials 
Audit Quality Indicators 
Shared interest and collective action 
Nothing ventured…

  1.   Peter L. Bernstein, Against the Gods: The Remarkable Story of Risk. Wiley, 1998.
  2.  Roger Lowenstein, When Genius Failed: The Rise and Fall of Long-Term Capital Management. Random House, 2001.

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