156 lines
10 KiB
Plaintext
156 lines
10 KiB
Plaintext
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w _____ ____ 1 000 555 "Risk and Uncertainty in Bernstein's w
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D // | \ 11 0 0 5 _Against the Gods_" by Otis D
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* || ____ | || | 1 0 0 555 *
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G || || \ / | || | 1 0 0 5 issue #105 of "GwD: The American Dream G
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w \\___// \/\/ |____/ 111 000 555 with a Twist -- of Lime" * rel 06/11/01 w
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--- -- - -- --- -- - -- --- -- - -- --- -- - -- ---
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Throughout history, mankind has sought order for all aspects of life.
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People are often afraid, though, of how the "gods" - usually the belief
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system, the normative moral order, or the rulers of a particular society -
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will react to attempts at solving the mysteries of the natural world. The
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perennial belief that "Science does not remove the terror of the gods" (Dobbs
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7) has often led to an avoidance of scientific research altogether. One by
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one, though, many mysteries have been solved through the application of
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scientific principles including why objects fall to the earth, why lightning
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moves from the clouds to the earth (not vice versa), and why each living thing
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is unique. Scientific principles have also been applied in cases
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traditionally thought to be governed by luck, such as games of chance. In
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systems such as games of chance and the stock market, the scientific
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principles of probability and statistics are used to manage risk and remove
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uncertainty. Peter L. Bernstein's _Against the Gods: The Remarkable Story of
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Risk_ traces the development of probability and statistics from their origins
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(beginning even before the introduction of Arabic numerals to Europe) to the
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present-day.
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Risk and uncertainty have been the subject of numerous studies throughout
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history, primarily due to their association with fiscal matters, as discussed
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in Bernstein's work. The terms are commonly used but they often lack clear
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definitions. Merriam-Webster defines "risk" as "possibility of loss or
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injury" (1011) and "uncertainty" as "[a] lack of...knowledge...about an
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outcome or result" (1285). These definitions are correct, to a certain
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extent. Why has mankind often sought to avoid risk and uncertainty? We
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surely wish to avoid loss or injury, but there are always two sides to a risk:
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loss and gain. One should not so easily dismiss risk as there is a chance to
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gain. A person must accept the possibility that s/he might lose in order to
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accept the possibility that s/he might win. This is often hard to do, though,
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as the chance of losing often overshadows the chance of winning in the
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prospective risk-taker's mind.
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A relationship exists between the risk and uncertainty. Uncertainty
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reflects the degree of willingness to accept risk. Weighing the uncertainty
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of outcomes and acceptances of risks are everyday activities for many people:
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questions such as "If I drink eight shots of tequila, will I get sick?",
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"Which job should I take?" (or conversely, "Who should we hire for this
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position?"), and "Which stocks should I buy/sell?" are commonplace in our
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society. With the willingness to accept risk comes the weighing of
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uncertainties. When most people are aware of the presence of uncertainty,
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they are almost always (to use Bernstein's term) risk-averse. They seem to
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accept the biblical adage that "My people are destroyed for a lack of
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knowledge..." (Hosea. 4.6) as the literal truth. Leaving out the destruction,
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the biblical adage is the dictionary definition of uncertainty. People know
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to be wary of uncertainty, for if it is ignored and risk is taken lightly,
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destruction can follow. Risk and uncertainty are thus inextricable from one
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another. The relationship of risk and uncertainty has been studied to one
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degree or another by researchers of many disciplines, including psychologists
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and mathematicians. In fact, the study of their relationship with the goal of
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reducing uncertainty and managing risk has engendered the growth of its own
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branch of mathematics: probability.
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Probability is the branch of mathematics most concerned with uncertainty
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and the quantification of risk. It is "the chance that a given event will
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occur" (Merriam-Webster 928). Probability is a measure of the likelihood of an
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event. It also gives a measure of the likelihood that all other possible
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events will not occur. When a situation with several possible outcomes is
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encountered, one most often determines (or attempts to determine) the relative
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probability of each outcome, as well as the risk involved with each. Ideally,
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use of the principles of probability leads to reduced uncertainty and
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effectively manages of risk. Whether or not to accept the risk can then be
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determined based on the likelihood of the desired outcome. But how does one
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determine relative probabilities of situational outcomes that lead to specific
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events? Statistical methods are employed in the search for uncertainty
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reduction.
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Statistics deals with the analysis of past experiences in the hope of
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predicting future outcomes. It is the branch of mathematics that deals with
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large quantities of data: collecting the data, analyzing the data, and
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interpreting the data. Statistics and probability often go hand in hand.
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When attempting to determine the relative probabilities of outcomes, numerical
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data about previous occurrences of the same (or similar) situation(s) are
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compiled and examined in detail. The data are analyzed to provide an educated
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guess as to the relative probabilities of outcomes. Statistical data -
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information about the past - is widely accepted as an accurate representation
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of the future. In many cases, statistics can be used to predict probabilities
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of future outcomes quite accurately. For instance, in Galton's pea plant
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research, the diameters of the plants' stems regressed to the mean over
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several generations (Bernstein 166-167). This example shows that statistical
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data is used to determine the probability of an outcome (stem diameter, in
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this case) when the sample size is large enough. But this is not always the
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case.
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Statistics is not an exact science, at least not in respect to predicting
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the future. A past occurrence of an event does not necessarily prove that the
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event will occur again, even under the same circumstances. One could, for
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example, determine the average price per gallon of gasoline over the last year
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(or any suitable amount of time). While it is possible that the price will
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continue at about this level, there are many unseen factors affecting the gas
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price: tension in the Middle East, U.S. trade relations with petroleum-
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producing nations, the value of the U.S. dollar in the world market, etc.
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While each of these will possibly remain at the current status quo, there is
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no way to tell with any degree of certainty whether they will continue to do
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so. There is also no way to tell with certainty if they will affect gas
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prices at all. As Bernstein notes: "the past seldom obliges by revealing to
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us when wildness will break out in the future" (334). Predictions of future
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outcomes based on statistical data are not necessarily accurate.
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Probability and statistics are tools used to reduce uncertainty and
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effectively manage risk. They are used for the prediction of future outcomes
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in which there is a degree of uncertainty. Probability uses statistical data
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to provide as much information as possible about a situation based on similar
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situations that have already occurred. Based on past experience, we assume
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that the sun will come up tomorrow. There is no way to prove this with 100%
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certainty, but the sun's rise every day for as long as we care to remember is
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proof enough for the majority of us. But the principles of probability and
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statistics are not a guarantee of future outcomes by their nature.
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Probability and statistics are merely guides for risk management and
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uncertainty reduction based on past experience.
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Bernstein's Against the Gods is very interesting. The aspect of the work
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that is perhaps the most interesting is Bernstein's own definition of risk.
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He declares that the "heroes" he has discussed "have transformed the
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perception of risk from chance of loss to opportunity for gain, from FATE and
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ORIGINAL DESIGN to sophisticated, probability-based forecasts of the future,
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and from helplessness to choice." (337). These men who have questioned and
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fought the established order of their respective times - who have truly gone
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against the gods - have given us the modern definition of risk. A chance for
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gain is included, and the future no longer looks so bleak. Perhaps we are not
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truly condemned to repeat history.
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Bernstein's definition of risk provides hope that careful calculations of
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probabilities of future outcome based on past experience and risk management
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can pay off. Using Bernstein's definition of risk and one's own knowledge of
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probability and statistics, one can often make the right choices (or at least
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the best choices given the situation) regarding risk. [Is this an over-
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generalization? Yes.] Bernstein's definition of risk admonishes us to be
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risk-aware rather than risk-averse. There is still much to learn about
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mankind's reactions to risk and uncertainty, but perhaps science does remove
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the terror of the gods after all.
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-----
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-= References =-
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Bernstein, Peter L. _Against the Gods: The Remarkable Story of Risk_. New
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York: John Wiley & Sons, 1998.
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Dobbs, J.R. _The Book of the SubGenius_. New York: Simon & Schuster, 1983.
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The Holy Bible. Revised Standard Version. Second Edition. Park Ridge:
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Cokesbury, 1963.
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"Probability." _Merriam-Webster's Collegiate Dictionary_. 10th ed. 1993.
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"Risk."
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"Statistics."
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"Uncertainty."
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--- -- - -- --- -- - -- --- -- - -- --- -- - -- ---
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Issue#105 of "GwD: The American Dream with a Twist -- of Lime" ISSN 1523-1585
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copyright (c) MMI Otis/GwD Publications /---------------\
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copyright (c) MMI GwD, Inc. All rights reserved. :RIGHT AND TASTY:
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a production of The GREENY world DOMINATION Task Force, Inc. : GwD :
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Postal: GwD, Inc. - P.O. Box 16038 - Lubbock, Texas 79490 \---------------/
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FYM -+- http://www.GREENY.org/ - editor@GREENY.org - submit@GREENY.org -+- FYM
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