Red-Blooded Risk: The Secret History of Wall Street

Pascal and Fermat

The letters between Blaise Pascal and Pierre Fermat in 1654 are merely the earliest tangible evidence of a fundamental shift in thought that occurred within a few years around this time. Among the consequences of that shift were that the analysis of gambling games became a serious subfield of mathematics, lists of raw data such as parish birth and death records were recognized as holding important information for science and public policy, financial instruments such as government annuities incorporated explicit—but not always accurate—actuarial analysis, and probability-based reasoning—what today are called Bayesian concepts—became the standard for assessing conflicting evidence in history and law.

Some historians dispute the novelty of these ideas in 1654, and find precursors in medieval and ancient texts, and also in non-Western traditions. I will sidestep that debate because the important point for me is that while some people might have thought this way before 1654, since that year the ideas have assumed increasing importance to the point that today nearly everyone thinks this way. What happened around 1654 was not a discovery that forced a change in thinking, but a change in social attitudes that required the development of a new theory. That theory proved extremely difficult to make rigorous, so the history of risk analysis is one of advances by practitioners, sometimes but not always explained later by theoreticians. Incidentally, I consider the book you ...