Against the Gods: The Remarkable Story of Risk

Chapter 12

The Measure of Our Ignorance

Our confidence in measurement often fails, and we reject it. “Last night they got the elephant.” Our favorite explanation for such an event is to ascribe it to luck, good or bad as the case may be.

If everything is a matter of luck, risk management is a meaningless exercise. Invoking luck obscures truth, because it separates an event from its cause.

When we say that someone has fallen on bad luck, we relieve that person of any responsibility for what has happened. When we say that someone has had good luck, we deny that person credit for the effort that might have led to the happy outcome. But how sure can we be? Was it fate or choice that decided the outcome?

Until we can distinguish between an event that is truly random and an event that is the result of cause and effect, we will never know whether what we see is what we’ll get, nor how we got what we got. When we take a risk, we are betting on an outcome that will result from a decision we have made, though we do not know for certain what the outcome will be. 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.

Just what do we mean by luck? Laplace was convinced that there is no such thing as luck—or ...