AGAINST THE GODS: THE REMARKABLE STORY OF RISK

AGAINST THE GODS: THE REMARKABLE STORY OF RISK

Peter Bernstein


FINANCE is a small word, but it covers a huge territory that includes markets, banking, corporate finance, the art of forecasting, accounting , taxation and more. In this universe, financial markets are the sun, a dazzling creation around which all the other activities rotate. I set the scene in this short essay, therefore , with some observations about markets before turning to the rest of the subject. Markets are places where buyers and sellers come together to do business; financial markets deal in money and risk. Financial markets are in the first instance a vehicle for financing governments and enterprises that need money.
Beyond that, financial markets are a place where owners of outstanding assets can convert those assets into cash, or where owners of cash can find longer-term uses for their money. Financial markets thus give holders of assets with future cash flows the option of realising the discounted value of those future cash flows in the present . In short, financial markets give investors the opportunity to change their minds, to reverse earlier decisions, at a cost and with a degree of immediacy that direct investment cannot provide. Reversibility of decisions is the key element in risk. The reversibility provided by financial markets is their most important attribute. Financial markets are a kind of time machine that allows investors to compress the future into the present. Without financial markets, all assets would be buy-and-hold .