Handbook of Finance: Valuation, Financial Modeling, and Quantitative Tools

Chapter 1. Risk and the French Connection

PETER L. BERNSTEIN

President, Peter L. Bernstein Inc.

Abstract: What distinguishes the thousands of years of history from what we think of as modern times goes way beyond the progress of science, technology, capitalism, and democracy. The distant past was studded with brilliant scientists, mathematicians, inventors, technologists, and political scientists. Hundreds of years before the birth of Christ, the skies had been mapped, the great library of Alexandria built, and Euclid's geometry taught. Demand for technological innovation in warfare was as insatiable then as it is today. Coal, oil, iron, and copper have been at the service of human beings for millennia, and travel and communication mark the very beginnings of recorded civilization. The revolutionary idea that defines the boundary between modern times and the past is the mastery of risk: The notion that the future is more than a whim of the goods and that men and women are not passive before nature. Until human beings discovered a way across that boundary, the future was a mirror of the past or the murky domain of oracles and soothsayers who held a monopoly over knowledge of anticipated events. The remarkable vision of a group of great thinkers revealed how to put the future at the service of the present. By showing the world how to understand risk, measure it, and weigh its consequences, they converted risk taking into one of the prime catalysts that drives modern Western society. ...