I’ve been reading this book, “Against the Gods: The Remarkable Story of Risk” by Peter Bernstein for like 2 months now. The book despite it’s “eye catching” title isn’t about religion or faith but rather is a book on the “history” of the development of risk management. It began with the telling of the invention of mathematics, then shifted to the discovery of probabilities and statistics, then to the conceptualization of the idea of risk, and finally to the modern development of risk management. The process by which Peter Bernstein tells the history of risk management is through the introductions of the key concepts in risk management (such as probability theory, normal distribution, variance etc) by way of meeting the personalities behind the “creation” of such concepts. In this sense, the book feels like an amalgam of biographies of “eccentric” but otherwise pretty interesting mathematicians. Though the book is about mathematics, surprisingly, the book seldom talks about numbers. Instead, the book delves almost exclusively on the theoretical concepts. In fact, the discussions on the theoretical concepts usually turned profoundly philosophical (an example would be the Theory of the Average Man which Francis Galton, one of the mathematicians being mentioned in the book proposes to be the tantamount to the perfect human being, the Theory of the Average Man is ultimately borrowed from the mathematical concept of Regression to the Mean). One of the recurring philosophical “rumblings” that is mentioned in the book is the assumption of Rationality. All of the mathematical concepts and models being discussed in the book are premised on a “rational” decision maker; that an individual would accept the conclusion of a logical analysis in choosing the appropriate course of action in an uncertain situation. The mathematical concepts and models would provide the framework for such logical analysis however, mathematical models aren’t the sole framework for logical analysis; conceptual frameworks are as effective as well. In real life however, such is not the case. Human beings decide or more appropriately, react despite what the logical analysis dictates. A case in point would be the recent financial crisis. The whole idea of Credit Default Swap is the shifting of the burden of default risk to the entity that could and willingly absorb it in return for a commensurate (which is often times lucrative) premium. Yet, even the most “secure” of the creditors (the ones who buys the CDS) eventually got to absorb the losses arising from default which goes against the very grain of CDS (creditors who bought CDS for protection against default losses done so after careful logical analysis, see “The Global Financial Crisis of 2008, dated”). Or in another case after the collapse of global finance, creditors/investors became extremely risk averse that they dumped even the most creditworthy of securities despite what the numbers generated by their analysis are favorably suggesting. So what this say? Are we human beings irrational? Or that our “models” of rationality is irrational in the first place? And this is the gist of the latter chapters of Peter Bernstein’s book, which is irrational? Us human beings or the conceptual models that we create to tell us which is rational? On one hand, human beings are too emotional to be rational. Our emotions tend to “cloud” our objective assessment of the facts of the matter and which is why we make mistakes in the first place. On the other hand, mathematical and conceptual models of analysis and decision – making are overtly “simplistic”, relying on 1 or 2 variables that poorly approximate the complexity of the human behavior. It is also too “static” to adapt to the ever changing human mind. But then again, aren’t human emotions itself a rationale of human rationality? I mean human emotions are built – in, instinctive, reactive mechanism. We react immediately to a stimulus to “preserve” ourselves, to protect ourselves from the perceived harm even without a thorough analysis of the still vague and unfolding situation. We couldn’t simply say, “wait, I haven’t thoroughly analyzed the situation yet and therefore, couldn’t make a decision as what to do, give me more time to finish….” in the face of imminent danger, can we? Of course not! Our emotions, our instinct does the “rational thinking” for us in a split second in such scenarios. It is for this obvious reason that we could conclude that we human beings are very much “rational” and this in turn led us to concede that our current mathematical and conceptual frameworks for decision making are still far from perfect. Now, if human beings are truly rational, why then the idea of rationality exists? If everybody is human and therefore rational, rationality as a concept shouldn’t be around because the mere notion of the existence of rationality implies that it’s anti – thesis, irrationality also exists, which in this case is true. We often label certain individuals or group of individuals as irrational, illogical, crazy, and even insane. But what is rationality anyway? Or better, what is irrationality? Based on dictionary definition, rationality is the quality or state of being agreeable to reason. Irrationality therefore would mean that being disagree to reason. And reason according to dictionary definition is a basis or cause, as for some belief, action, fact, event, etc. So in this sense, the whole idea of rationality is one of conformity; a conformity to reason or logic and irrationality is non – conformity to reason or logic. But what is the basis for reason or logic? Mathematical frameworks? Conceptual frameworks such as those based on faith, belief, traditions, or logical analysis? As mentioned, frameworks both mathematical and conceptual ones are insufficient basis for rationality. Furthermore, who determines that a framework/model for rationality is generally applicable or for that matter, incontestably correct? An authoritative figure? A synod of authoritative figures? Or simply general consensus of acceptance? Is there even a democratic process to determine the general acceptance of such model/framework for rationality? What about those who reject the model/framework for rationality? Are they being “irrational”? Perhaps the more interesting question is, “is a ‘reason’ based on some framework/model applicable to all?” Perhaps in some cases. Or there are as many “reason” as there are people in this world? So, is there such a thing called “rationality”?
P.S. If you ask the same question then welcome to “deconstructionism”.
No comments:
Post a Comment