Peter Bernstein Quotes

The information you have is not the information you want. The information you want is not the information you need. The information you need is not the information you can obtain. The information you can obtain costs more than you want to pay

The word 'risk' derives from the early Italian risicare, which means 'to dare'. In this sense, risk is a choice rather than a fate. The actions we dare to take, which depend on how free we are to make choices, are what the story of risk is all about. And that story helps define what it means to be a human being.

Our lives teem with numbers, but we sometimes forget that numberss are only tools. They have no soul; they may indeed become fetishes.

Game theory says that the true source of uncertainty lies in the intentions of others.

Time matters most when decisions are irreversible.

life is a collection of similarities rather than identities; no single observation is a perfect example of generality.

Fear of harm ought to be proportional not merely to the gravity of the harm, but also to the probability of the event.

Time matters most when decisions are irreversible. And yet many irreversible decisions must be made on the basis of incomplete information.

We are prisoners of the future because we will be ensnared by our past.

This is the essence of risk aversion—that is, how far we are willing to go in making decisions that may provoke others to make decisions that will have adverse consequences for us.

Vast ills have followed a belief in certainty.

Nothing ventured, nothing gained, but don’t put all your eggs in one basket.

Markets look a lot less efficient from the banks of the Hudson than from the banks of the Charles.

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.

So we pour in data from the past to fuel the decision-making mechanisms created by our models, be they linear or nonlinear. But therein lies the logician's trap: past data from real life constitute a sequence of events rather than a set of independent observations, which is what the laws of probability demand.[...]It is in those outliers and imperfections that the wildness lurks.

We are by now well into the eighteenth century, when the Enlightenment identified the search for knowledge as the highest form of human activity. It was a time for scientists to wipe the metaphysical dust from their eyes.

Shefrin and Statman hypothesize the existence of a split in the human psyche. One side of our personality is an internal planner with a long-term perspective, an authority who insists on decisions that weight the future more heavily than the present. The other side seeks immediate gratification. These two sides are in constant conflict.

In the first sense, probability means the degree of belief or approvability of an opinion—the gut view of probability. Scholars use the term “epistemological” to convey this meaning; epistemological refers to the limits of human knowledge not fully analyzable.

[The] utility resulting from any small increase in wealth will be inversely proportionate to the quantity of goods previously possessed.

The prospect of getting rich is highly motivating, and few people get rich without taking a gamble.

The prevalence of surprise in the world of business is evidence that uncertainty is more likely to prevail than mathematical probability.

We could turn this assertion around and state that a decision should involve the strength of our desire for a particular outcome as well as the degree of our belief about the probability of that outcome.

The real trouble with this world of ours is not that it is an unreasonable world, nor even that it is a reasonable one. The commonest kind of trouble is that it is nearly reasonable, but not quite. Life is not an illogicality; yet it is a trap for logicians. It looks just a little more mathematical and regular than it is; its exactitude is obvious, but its inexactitude is hidden; its wildness lies in wait.

One winter night during one of the many German air raids on Moscow in World War II, a distinguished Soviet professor of statistics showed up in his local air-raid shelter. He had never appeared there before. “There are seven million people in Moscow,” he used to say. “Why should I expect them to hit me?” His friends were astonished to see him and asked what had happened to change his mind. “Look,” he explained, “there are seven million people in Moscow and one elephant. Last night they got the elephant.

You never get poor by taking a profit." It would follow that cutting your losses is also a good idea, but investors hate to take losses, because, tax considerations aside, a loss taken is an acknowledgment of error. Loss-aversion combined with ego leads investors to gamble by clinging to their mistakes in the fond hope that some day the market will vindicate their judgment and make them whole.

So we pour in data from the past to fuel the decision-making mechanisms created by our models, be they linear or nonlinear. But therein lies the logician's trap: past data from real life constitute a sequence of events rather than a set of independent observations, which is what the laws of probability demand.[...]Even though many economic and financial variables fall into distributions that approximate a bell curve, the picture is never perfect.[...]It is in those outliers and imperfections that the wildness lurks.

the more refined and intellectual our needs become, the less they are capable of satiety.

God is, or he is not. Which way should we incline? Reason cannot answer.

The Commanding General is well aware that the forecasts are no good. However, he needs them for planning purposes.

We have gold because we cannot trust Governments.

Trade is also a risky business. As the growth of trade transformed the principles of gambling into the creation of wealth, the inevitable result was capitalism, the epitome of risk-taking.

Discontinuities, irregularities, and volatilities seem to be proliferating rather than diminishing. In the world of finance, new instruments turn up at a bewildering pace, new markets are growing faster than old markets, and global interdependence makes risk management increasingly complex. Economic insecurity, especially in the job market, makes daily headlines. The environment, health,

His local campaigns around Macedonia also augmented that absolutely essential economic resource: slaves-slaves to work the mines, slaves to work the fields, slaves to keep the whole economy humming.

The real trouble with this world of ours is not that it is an unreasonable world, nor even that it is a reasonable one. The commonest kind of trouble is that it is nearly reasonable, but not quite. Life is not an illogicality; yet it is a trap for logicians. It looks just a little more mathematical and regular than it is; its exactitude is obvious, but its inexactitude is hidden; its wildness lies in wait.3

The information you have is not the information you want. The information you want is not the information you need. The information you need is not the information you can obtain. The information you can obtain costs more than you want to pay.

If the satisfaction to be derived from each successive increase in wealth is smaller than the satisfaction derived from the previous increase in wealth, then the disutility caused by a loss will always exceed the positive utility provided by a gain of equal size.

Writing in 1921, the University of Chicago economist Frank Knight uttered strange words for a man of his profession: “There is much question as to how far the world is intelligible at all. . . . It is only in the very special and crucial cases that anything like a mathematical study can be made.

The word “risk” derives from the early Italian risicare, which means “to dare.” In this sense, risk is a choice rather than a fate. The actions we dare to take, which depend on how free we are to make choices, are what the story of risk is all about. And that story helps define what it means to be a human being.

In his 1996 book, Against the Gods: The Remarkable Story of Risk, Peter L. Bernstein wrote, “Regression to the mean motivates almost every variety of risk-taking and forecasting. It is at the root of homilies like ‘What goes up must come down,’ ‘Pride goeth before a fall,’ and ‘From shirtsleeves to shirtsleeves in three generations.

The earliest known work in Arabic arithmetic was written by al-Khowârizmî, a mathematician who lived around 825, some four hundred years before Fibonacci.11 Although few beneficiaries of his work are likely to have heard of him, most of us know of him indirectly. Try saying “al-Khowârizmî” fast. That’s where we get the word “algorithm,” which means rules for computing.12 It was al-Khowârizmî who was the first mathematician to establish rules for adding, subtracting, multiplying, and dividing with the new Hindu numerals. In another treatise, Hisâb al-jabr w’ almuqâbalah, or “Science of transposition and cancellation,” he specifies the process for manipulating algebraic equations. The word al-jabr thus gives us our word algebra, the science of equations.13

Eight years later, Daniel Bernoulli, Jacob’s nephew and an equally distinguished mathematician and scientist, first defined the systematic process by which most people make choices and reach decisions. Even more important, he propounded the idea that the satisfaction resulting from any small increase in wealth “will be inversely proportionate to the quantity of goods previously possessed.” With

Why, given their advanced mathematical ideas, did the Arabs not proceed to probability theory and risk management? The answer, I believe, has to do with their view of life. Who determines our future: the fates, the gods, or ourselves? The idea of risk management emerges only when people believe that they are to some degree free agents. Like the Greeks and the early Christians, the fatalistic Muslims were not yet ready to take the leap.

If the random-walk view is correct, today's stock prices embody all relevant information. The only thing that would make them change is the availability of new information. Since we have no way of knowing what that new information might be, there is no mean for stock prices to regress to. In other words, there is no such thing as a temporary stock price-that is, a price that sits in limbo before moving to some other point. That is also why changes are unpredictable.

Thaler recounts an amusing real-life example of mental accounting.15 A professor of finance he knows has a clever strategy to help him deal with minor misfortunes. At the beginning of the year, the professor plans for a generous donation to his favorite charity. Anything untoward that happens in the course of the year—a speeding ticket, replacing a lost possession, an unwanted touch by an impecunious relative—is then charged to the charity account. The system makes the losses painless, because the charity does the paying. The charity receives whatever is left over in the account. Thaler has nominated his friend as the world’s first Certified Mental Accountant.

If they had kept quiet, and lain low for a time, things might have fizzled out as another unreal Wortstreist, blown up by a few ambitious authors of the party press. As it was, they decided to counter-attack the noisy, irrepressible outsiders--foreigners, to boot--and so forced a reluctant leadership to turn its full, slow, wrath against them; and against Bernstein too. For the most practical manifestation of revisionism was indiscipline and disobedience, a door opened to centrifugal forces of bourgeois influence.

Peter Bernstein and Robert Arnott reflected on this question in a recent article in the Journal of Portfolio Management: “Bull Market? Bear Market? Should You Really Care?” They concluded that “for most long-term investors, bull markets are not nearly as beneficial, and bear markets not nearly as damaging as most investors seem to think.” They noted, correctly, that “a bull market raises the asset value, but delivers a proportionate reduction in the prospective real yields that the portfolio can deliver from that point forward, while a bear market does the reverse, reducing portfolio value, which is largely offset by an increase in prospective yields, other things being equal.

that the opinion is a nonrational one.” (All quotes are from the frontispiece of Rethinking AIDS) Root-Bernstein subsequently backed away from his position challenging HIV,

Stock prices in general follow changes in company fortunes. Investors who focus excessively on the short run are ignoring a mountain of evidence demonstrating that most surges in earnings are unsustainable. On the other hand, companies that encounter problems do not let matters slide indefinitely. Managers will set to work making the hard decisions to put their company back on track

There is a strong probability that the hot manager of today will be the cold manager of tomorrow, or at least the day after tomorrow, and vice versa. This

But if men and women were not at the mercy of impersonal deities and random chance, they could no longer remain passive in the face of an unknown future. They had no choice but to begin making decisions over a far wider range of circumstances and over far longer periods of time than ever before.

but between reject and not—reject. You can decide that the probability that you are wrong is so small that you should not reject the hypothesis. You can decide that the probability that you are wrong is so large that you should reject the hypothesis. But with any probability short of zero that you are wrong—certainty rather than uncertainty—you cannot accept a hypothesis.

But in a cause-and-effect world, if we know the causes we can predict the effects. So “what is chance for the ignorant is not chance for the scientist. Chance is only the measure of our ignorance.

After his meeting with Romney, Fonesca encountered Keith Flax, a local jeweler who was also speaker of the legislative council and a close friend of both Romney and Peters. It didn't take long for the Panamanian and the Belonger to recognize they shared a special bond. Both were members of the ancient order of Freemasons. Dating to the Industrial Revolution in England, Freemasonry appropriated the symbols of craft guilds like the stonemasons to forge a fraternal order kept alive through esoteric rituals and Masonic lodges. ¶ Fonseca had tapped into an underground network—a secret society within a secret society—that exists in tax havens, particularly the British ones. Knowledge of Freemasonry, its signs, symbols, and rites, often serves as a doorway into closed cultures. It provides instant solidarity and an opportunity for government and business interests to network privately. John Christensen [the Jersey island exposé cooperator] says he was approached multiple times on Jersey to join one lodge or another. He always declined the offer. Holding no particular animus toward Freemasonry or the elite hobnobbing in the lodges, Christensen nonetheless viewed it all as slightly creepy.

Ask yourself whether the letter K appears more often as the first or as the third letter of English words. You will probably answer that it appears more often as the first letter. Actually, K appears as the third letter twice as often. Why the error? We find it easier to recall words with a certain letter at the beginning than words with that same letter somewhere else.

people who start out with money in their pockets will choose the gamble, while people who start out with empty pockets will reject the gamble.

mental accounting,

Against the Gods: The Remarkable Story of Risk by Peter L. Bernstein

But therein lies the logician's trap: past data from real life constitute a sequence of events rather than a set of independent observations, which is what the laws of probability demand.

[T]he “Law Of Frequency Of Error”. . . reigns with serenity and in complete self-effacement amidst the wildest confusion. The huger the mob . . . the more perfect is its sway. It is the supreme law of Unreason. Whenever a large sample of chaotic elements are taken in hand . . . an unsuspected and most beautiful form of regularity proves to have been latent all along.13

In 1738, the Papers of the Imperial Academy of Sciences in St. Petersburg carried an essay with this central theme: “the value of an item must not be based on its price, but rather on the utility that it yields.

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La palabra "riesgo" procede del italiano risicare, que significa "atreverse". En este sentido, el riesgo es más bien una elección que un destino.... La idea de la gestión de riesgos solo surge cuando las personas creen que hasta cierto punto son agentes libres.

A man is nothing but his mind; if that be out of order, all’s amiss, and if that be well, the rest is at ease.

Peter Bernstein, John Kenneth Galbraith, Nassim Nicholas Taleb and Charlie Ellis.

In December 1972, Polaroid was selling for 96 times its 1972 earnings, McDonald’s was selling for 80 times, and IFF was selling for 73 times; the Standard & Poor’s Index of 500 stocks was selling at an average of 19 times. The dividend yields on the Nifty-Fifty averaged less than half the average yield on the 500 stocks in the S&P Index. The proof of this particular pudding was surely in the eating, and a bitter mouthful it was. The dazzling prospect of earnings rising up to the sky turned out to be worth a lot less than an infinite amount. By 1976, the price of IFF had fallen 40% but the price of U.S. Steel had more than doubled. Figuring dividends plus price change, the S&P 500 had surpassed its previous peak by the end of 1976, but the Nifty-Fifty did not surpass their 1972 bull-market peak until July 1980. Even worse, an equally weighted portfolio of the Nifty-Fifty lagged the performance of the S&P 500 from 1976 to 1990.

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 gods 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.

Whetstone of Witte introduced the symbol "_" because "noe 2 thynges can be more equalle than a pair of paralleles.

a Greek epigram about Diophantus states that "his boyhood lasted 1 /6th of his life; his beard grew after 1/12th more; he married after 1 /7th more, and his son was born five years later; the son lived to half his father's age, and the father died four years after his son." How old was Diophantus when he died?7

Consider this set of coin-tossing possibilities, proposed by Warren Buffet. Suppose 225 million Americans all join in a coin-tossing contest in which each player bets a dollar each day on whether the toss of a coin will turn up heads or tails. Each day, the losers turn their dollars over to the winners, who then stake their winnings on the next day’s toss. The laws of chance tell us that, after ten flips on ten mornings, only 220,000 people will still be in the contest, and each will have won a little over $1,000. After that, the game heats up. Ten days later, only 215 people will still be playing, but each of them will be worth over $1,050,000. Buffet suggests that this small group of winners will marvel at their own skills. Some of them will write books on “How I Turned a Dollar into a Million in Twenty Days Working Thirty Seconds a Morning.” Or, they will tackle skeptical professors of finance with “If it can’t be done, why are there 215 of us?” But, Buffet goes on to point out, “. . . then some business school professor will probably be rude enough to bring up the fact that if 215 million orangutans had engaged in a similar exercise, the results would be much the same—215 egotistical orangutans with 20 straight winning flips.”22

As Peter Bernstein has written, nature's pattern emerges only from the chaotic disorder of many random events.

The Reformation meant more than just a change in humanity's relationship with God. By eliminating the confessional, it warned people that henceforth they would have to walk on their own two feet and would have to take responsibility for the consequences of their own decisions.