The Hindu Business Line : Future imperfect

FOR ages, future was a dark enemy, `a mirror of the past or the murky domain of oracles and soothsayers'. Then, with the help of daring thinkers, we realised that risk can be mastered, and future seen as an opportunity.

Risk management is thus a leverage to guide us "over a vast range of decision-making, from allocating wealth to safeguarding public health, from waging war to planning a family, from paying insurance premium to wearing a seatbelt, from planting corn to marketing cornflakes," as Peter L. Bernstein writes in "Against the Gods: The Remarkable Story of Risk," from Wiley (www.wiley.com) .

The book, a `worldwide bestseller', begins with the period till 1200, tracing risk-taking to gambling. The earliest-known form of gambling was a dice game played with astragalus or knucklebone - "a squarish bone taken from the ankles of sheep or deer, solid and without marrow, and so hard as to be virtually indestructible." Pontius Pilate's soldiers cast lots for Christ's robe as He suffered on the cross, notes the author, citing the Biblical reference. In the epic Mahabharata, a crucial turning point was the royal gamble.

Leonardo Pisano a.k.a. Fibonacci (literally meaning blockhead!) learnt `the wonders of the Hindu-Arabic numbering system' from an Arab mathematician on a visit to Bugia, `a thriving Algerian city'. He then wrote `Liber Abaci'. A short passage in it was about "the problem of how many rabbits will be born in the course of a year from an original pair of rabbits, assuming that every month each pair produces another pair and that rabbits begin to breed when they are two months old." Liber Abaci was "a spectacular first step in making measurement the key factor in the taming of risk," chronicles Bernstein.

The period 1200-1700 has `a thousand outstanding facts' including a discussion of Luca Paccioli's work Summa; Girolamo Cardano's Ars Magna on algebra and Liber de Ludo Aleae, `the first serious effort to develop the statistical principles of probability' or `a primer on risk management for gamblers'; and Galileo, born in 1564, the same year as Shakespeare.

The chapter on `the French connection' is on the contribution of Blaise Pascal, Pierre de Fermet and Chevalier de Mere. "The solution that Fermet and Pascal worked out to the problem of the points has long since been paying social dividends as the cornerstone of modern insurance and other forms of risk management," informs Bernstein.

"We all have to make decisions on the basis of limited data," he writes on the role of sampling. Examples are: "One sip, even a sniff, of wine determines whether the whole bottle is drinkable. Courtship with a future spouse is shorter than the lifetime that lies ahead. A few drops of blood may evidence patterns of DNA that will either convict or acquit an accused murderer."

According to Bernstein, `a stunning breakthrough' in the annals of statistical and sociological research was John Graunt's 1662 book titled `Natural and Political Observations made upon the Bills of Mortality'. Meet also in the chapter `The Remarkable Notions', William Petty who helped Graunt `with some of the complexities'; and Edmund Halley, `a child genius in astronomy' who compiled a table for reckoning `the price of insuring lives at different ages'.

Do you know that the first record of annuities dates back to 225 AD, in the form of `an authoritative set of tables of life expectancies' developed by a leading Roman jurist Ulpian? The Code of Hammurabi (1800 BC) devoted 282 clauses to `bottomry', meaning `a loan or a mortgage taken out by the owner of a ship to finance the ship's voyage'. No premium was paid, but "if the ship was lost, the loan did not have to be repaid," informs the book. The Emperor Claudius (10 BC - AD 54) was `a one-man, premium-free insurance company'. The insurance business gathered momentum around 1600, records Bernstein.

The period 1700-1900 is about `measurement unlimited', beginning with Daniel Bernoulli's contributions such as the formulation that `the utility resulting from any small increase in wealth will be inversely proportionate to the quantity of goods previously possessed'; the famous `Petersburg Paradox'; and the idea of `human capital'.

What follows is about how Carl Friedrich Gauss's work in `geodesic measurement' is related to probability study. Bernstein concludes his brilliantly written work with the caution that even as old risks are controlled, there are newer ones. An unputdownable classic.

BookValue@TheHindu.co.in

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