STREET DOGS: Important lessons on risk
From Peter Bernstein: Models work, but not always and you should never take a risk you don’t have to take
Extract of a conversation between Jason Zweig and Peter Bernstein: JZ: What are the important lessons about risk from your book Against the Gods? PB: Two things. First, in 1703 the mathematician Gottfried von Leibniz told the scientist Jacob Bernoulli that nature does work in patterns, but "only for the most part". The other part — the unpredictable part — tends to be where things matter the most. That’s where the action often is. Second, Pascal’s Wager. You begin with the obvious. But because it’s hard to accept, you have to keep reminding yourself: we don’t know what’s going to happen with anything, ever, over any period. And so it’s inevitable that a certain percentage of our decisions will be wrong. There’s just no way we can always make the right decision. That means you must focus on how serious the consequences could be if you turn out to be wrong: suppose this doesn’t do what I expected it to do, not just because it goes bad but even if it just doesn’t go up enough. If it go...
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