Against the Gods: The Remarkable Story of Risk

Chapter 4

The French Connection

Neither Cardano nor Galileo realized that he was on the verge of articulating the most powerful tool of risk management ever to be invented: the laws of probability. Cardano had proceeded from a series of experiments to some important generalizations, but he was interested only in developing a theory of gambling, not a theory of probability. Galileo was not even interested in developing a theory of gambling.

Galileo died in 1642. Twelve years later, three Frenchmen took a great leap forward into probability analysis, an event that is the subject of this chapter. And less than ten years after that, what had been just a rudimentary idea became a fully developed theory that opened the way to significant practical applications. A Dutchman named Huygens published a widely read textbook about probability in 1657 (carefully read and noted by Newton in 1664); at about the same time, Leibniz was thinking about the possibility of applying probability to legal problems; and in 1662 the members of a Paris monastery named Port-Royal produced a pioneering work in philosophy and probability to which they gave the title of Logic. In 1660, an Englishman named John Graunt published the results of his effort to generalize demographic data from a statistical sample of mortality records kept by local churches. By the late 1660s, Dutch towns that had traditionally financed themselves by selling annuities were able to put these policies on a sound actuarial footing. By ...