In 1654, a time when the Renaissance was in full flower, the Chevalier de Méré, a French nobleman with a taste for both gambling and mathematics, challenged the famed French mathematician Blaise Pascal to solve a puzzle. (Location 187)
In 1730, Abraham de Moivre suggested the structure of the normal distribution—also known as the bell curve—and discovered the concept of standard deviation. (Location 221)
Even more important, he propounded the idea that the satisfaction resulting from any small increase in wealth “will be inversely proportionate to the quantity of goods previously possessed.” With that innocent-sounding assertion, Bernoulli explained why King Midas was an unhappy man, why people tend to be risk-averse, and why prices must fall if customers are to be persuaded to buy more. (Location 224)
Bayes’s theorem focuses on the frequent occasions when we have sound intuitive judgments about the probability of some event and want to understand how to alter those judgments as actual events unfold. (Location 231)
Nobel laureate Kenneth Arrow has warned, “[O]ur knowledge of the way things work, in society or in nature, comes trailing clouds of vagueness. Vast ills have followed a belief in certainty.” (Location 255)
Nobel laureate Kenneth Arrow has warned, “[O]ur knowledge of the way things work, in society or in nature, comes trailing clouds of vagueness. Vast ills have followed a belief in (Location 256)
Those games were generally referred to as “hazard,” from al zahr, the Arabic word for dice. (Location 327)
Those games were generally referred to as “hazard,” from al zahr, the Arabic word for (Location 328)
The Times cites a University of Illinois professor who estimates that state governments pay three dollars in costs to social agencies and the criminal justice system for every dollar of revenue they take in from the casinos—a calculus that Adam Smith might have predicted. (Location 344)
This familiar-looking spiral appears in the shape of certain galaxies, in a ram’s horn, in many seashells, and in the coil of the ocean waves that surfers ride. The structure maintains its form without change as it is made larger and larger and regardless of the size of the initial square with which the process is launched: form is independent of growth. The journalist William Hoffer has remarked, “The great golden spiral seems to be nature’s way of building quantity without sacrificing quality.”2 (Location 620)
This familiar-looking spiral appears in the shape of certain galaxies, in a ram’s horn, in many seashells, and in the coil of the ocean waves that surfers ride. The structure maintains its form without change as it is made larger and larger and regardless of the size of the initial square with which the process is launched: form is independent of growth. The journalist William Hoffer has remarked, “The great golden spiral seems to be nature’s way of building quantity without sacrificing quality. (Location 621)
The Greeks understood that more things might happen in the future than actually will happen. (Location 897)
There was even a Royal Academies Company that promised to hire the greatest scholars of the age to teach the 2,000 winners of a huge lottery a subject of their own choosing. (Location 1835)
Note: lol - Idea for story. an average seeming person, perhaps even a bit dull-witted, wins, and is taught by (name royal academy person of the time).
Newman is not easy to characterize, although his The World of Mathematics was a major source for this book. (Location 2342)
“He was a worse than mediocre administrator who searched everywhere for subtleties, and brought into the affairs of government the spirit of the infinitely small.” (Location 2830)
“He was a worse than mediocre administrator who searched everywhere for subtleties, and brought into the affairs of government the spirit of the infinitely (Location 2831)
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 story that the fall of an apple on Newton’s head had been the inspiration for discovering the law of gravity. (Location 2868)
Baumol suggests that dissatisfaction with the U.S. record since the late 1960s is the result of myopia on the part of commentators who overemphasize recent performance and ignore long-term trends. (Location 3749)
Despite his academic title, Jevons was among the first to suggest dropping the word “political” from the phrase “political economy.” (Location 3932)
In 1931, Keynes himself still exhibited the optimism of his Victorian upbringing when he expressed his “… profound conviction that the Economic Problem … is nothing but a frightful muddle, a transitory and an unnecessary muddle.”6 The italics are his. (Location 3986)
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. (Location 4016)
The information you have is not the information you want. The information you want 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 want to pay. (Location 4108)
One incident that occurred while Arrow was forecasting the weather illustrates both uncertainty and the human unwillingness to accept it. Some officers had been assigned the task of forecasting the weather a month ahead, but Arrow and his statisticians found that their long-range forecasts were no better than numbers pulled out of a hat. The forecasters agreed and asked their superiors to be relieved of this duty. The reply was: “The Commanding General is well aware that the forecasts are no good. However, he needs them for planning purposes.” (Location 4131)
One incident that occurred while Arrow was forecasting the weather illustrates both uncertainty and the human unwillingness to accept it. Some officers had been assigned the task of forecasting the weather a month ahead, but Arrow and his statisticians found that their long-range forecasts were no better than numbers pulled out of a hat. The forecasters agreed and asked their superiors to be relieved of this duty. The reply was: “The Commanding General is well aware that the forecasts are no good. However, he needs them for planning (Location 4132)
Keynes once asked, “[Why] should anyone outside a lunatic asylum wish to hold money as a store of wealth?” His answer: “The possession of actual money lulls our disquietude; and the premium we require to make us part with money is the measure of our disquietude.”17 (Location 4163)
Keynes once asked, “[Why] should anyone outside a lunatic asylum wish to hold money as a store of wealth?” His answer: “The possession of actual money lulls our disquietude; and the premium we require to make us part with money is the measure of our disquietude. (Location 4164)
Because of the high volatility and low correlation, our mathematical stress test reveals that luck played a significant role in the AIM case just as in the American Mutual case. Indeed, we would need a track record exceeding a century before we could be 95% certain that these AIM results were not the product of luck! In risk-management terms, there is a suggestion here that the AIM managers may have taken excessive risk in their efforts to beat the market. (Location 4273)
The interest rate in any case might fail to fall in response to the higher propensity to save. Keynes argued that interest is a reward for parting with liquidity, not for refraining from consumption. (Location 4636)
Even if the interest rate does decline, it may not decline enough to encourage business managers to risk investing further capital in an economic environment in which animal spirits are lacking and in which shifting to a new set of decisions is costly. (Location 4637)
Note: V pertinent to GDP question
The utility of the larger sum diminishes as the amount of money at risk increases from single digits to triple digits. If all this sounds familiar, it is. The reasoning here is precisely the same as in the calculation of the “certainty equivalent,” which we derived from Bernoulli’s fundamental principle that the utility of increases in wealth will be inversely related to the amount of wealth already possessed (page 105). This is the essence of risk aversion—that is, how far we are willing to go in making decisions that may provoke others to make decisions that will have adverse consequences for us. This line of analysis puts von Neumann and Morgenstern strictly in the classical mode of rationality, for rational people always understand their preferences clearly, apply them consistently, and lay them out in the fashion described here. (Location 4911)
Do what you will, the capital is at hazard… . All that can be required of a trustee to invest, is, that he shall conduct himself faithfully and exercise a sound discretion. (Location 5106)
Many years later, when Markowitz was telling me about his reaction, he recalled, “I was struck with the notion that you should be interested in risk as well as return.” (Location 5151)
This was a dark time, one marked by a series of ominous events: Watergate, skyrocketing oil prices, the emergence of persistent inflationary forces, the breakdown of the Bretton Woods Agreements, and an assault on the dollar so fierce that its foreign exchange value fell by 50%. (Location 5162)
Experimental research has developed into a high art.a (Location 5754)
Note: Replicability iirc?
Experimental research has developed into a high art. (Location 5755)
Note: Replicability iirc?
A similar motivation prompts investors to turn their trading over to active portfolio managers, despite evidence that most of them fail to outperform the major market indexes over the long run. The few who do succeed on occasion tend to show little consistency from year to year; we have already seen how difficult it was to distinguish between luck and skill in the cases of American Mutual and AIM Constellation. (Location 5834)
Note: Lol woodford
A similar motivation prompts investors to turn their trading over to active portfolio managers, despite evidence that most of them fail to outperform the major market indexes over the long run. The few who do succeed on occasion tend to show little consistency from year to year; we have already seen how difficult it was to distinguish between luck and skill in the cases of American Mutual and AIM (Location 5835)
Note: Lol woodford
These disasters in derivative deals among big-name companies occurred for the simple reason that corporate executives ended up adding to their exposure to volatility rather than limiting it. They turned the company’s treasury into a profit center. They treated low-probability events as being impossible. When given a choice between a certain loss and a gamble, they chose the gamble. They ignored the most fundamental principle of investment theory: you cannot expect to make large profits without taking the risk of large losses. (Location 6586)
What are we to make of all this? Are derivatives a suicidal invention of the devil or the last word in risk management?d Bad enough that fine companies like Procter & Gamble and Gibson Greetings can get into trouble, but is the entire financial system at risk because so many people are trying to shed risks and slough them off onto someone else? (Location 6628)
The financial solvency of these institutions supports the financial solvency of the world economic system itself. Every single day, they are involved in millions of transactions involving trillions of dollars in a complex set of arrangements whose smooth functioning is essential. The margin for error is miniscule. Poor controls over the size and diversification of exposures are intolerable when the underlying volatility of the derivatives is so high and when so much is at stake beyond the fortunes of any single institution. (Location 6651)
