One is tempted to assume that the lapse of time between the invention of the astragalus and the invention of the laws of probability was nothing more than a historical accident. The Greeks and the Talmudic scholars were so maddeningly close to the analysis that Pascal and Fermat would undertake centuries later that only a slight push would have moved them on to the next step.
That the push did not occur was not an accident. Before a society could incorporate the concept of risk into its culture, change would have to come, not in views of the present, but in attitudes about the future.
Up to the time of the Renaissance, people perceived the future as little more than a matter of luck or the result of random variations, and most of their decisions were driven by instinct. When the conditions of life are so closely linked to nature, not much is left to human control. As long as the demands of survival limit people to the basic functions of bearing children, growing crops, hunting, fishing, and providing shelter, they are simply unable to conceive of circumstances in which they might be able to influence the outcomes of their decisions. A penny saved is not a penny earned unless the future is something more than a black hole.
Over the centuries, at least until the Crusades, most people met with few surprises as they ambled along from day to day. Nestled in a stable social structure, they gave little heed to the wars that swept across the land, to the occasions when bad rulers succeeded good ones, and even to the permutations of religions. Weather was the most apparent variable. As the Egyptologist Henri Frankfort has remarked, "The past and the future-far from being a matter of concern-were wholly implicit in the present."14
Despite the persistence of this attitude toward the future, civilization made great strides over the centuries. Clearly the absence of modern views about risk was no obstacle. At the same time, the advance of civilization was not in itself a sufficient condition to motivate curious people to explore the possibilities of scientific forecasting.
As Christianity spread across the western world, the will of a single God emerged as the orienting guide to the future, replacing the miscellany of deities people had worshiped since the beginning of time. This brought a major shift in perception: the future of life on earth remained a mystery, but it was now prescribed by a power whose intentions and standards were clear to all who took the time to learn them.
As contemplation of the future became a matter of moral behavior and faith, the future no longer appeared quite as inscrutable as it had. Nevertheless, it was still not susceptible to any sort of mathematical expectation. The early Christians limited their prophecies to what would happen in the afterlife, no matter how fervidly they beseeched God to influence worldly events in their favor.
Yet the search for a better life on earth persisted. By the year 1000, Christians were sailing great distances, meeting new peoples, and encountering new ideas. Then came the Crusades-a seismic culture shock. Westerners collided with an Arab empire that had been launched at Mohammed's urging and that stretched as far eastward as India. Christians, with faith in the future, met Arabs who had achieved an intellectual sophistication far greater than that of the interlopers who had come to dislodge them from the holy sites.
The Arabs, through their invasion of India, had become familiar with the Hindu numbering system, which enabled them to incorporate eastern intellectual advances into their own scholarship, scientific research, and experimentation. The results were momentous, first for the Arabs and then for the West.*
In the hands of the Arabs, the Hindu numbers would transform mathematics and measurement in astronomy, navigation, and commerce. New methods of calculation gradually replaced the abacus, which for centuries had been the only tool for doing arithmetic everywhere from the Mayans in the western hemisphere, across Europe, to India and the Orient. The word abacus derives from the Greek word abax, which means sand-tray. Within the trays, columns of pebbles were laid out on the sand." The word calculate stems from calculus, the Latin word for pebble.
Over the next five hundred years, as the new numbering system took the place of the simple abacus, writing replaced movable counters in making calculations. Written computation fostered abstract thinking, which opened the way to areas of mathematics never conceived of in the past. Now sea voyages could be longer, time-keeping more accurate, architecture more ambitious, and production methods more elaborate. The modern world would be quite different if we still measured and counted with I, V, X, L, C, D, and M-or with the Greek or Hebrew letters that stood for numbers.
But Arabic numbers were not enough to induce Europeans to explore the radical concept of replacing randomness with systematic probability and its implicit suggestion that the future might be predictable and even controllable to some degree. That advance had to await the realization that human beings are not totally helpless in the hands of fate, nor is their worldly destiny always determined by God.
The Renaissance and the Protestant Reformation would set the scene for the mastery of risk. As mysticism yielded to science and logic after 1300 AD, Greek and Roman architectural forms began to replace Gothic forms, church windows were opened to the light, and sculptures showed men and women standing firmly on the ground instead posing as stylized figures with neither muscle nor weight. The ideas that propelled changes in the arts also contributed to the Protestant Reformation and weakened the dominance of the Catholic Church.
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 decisions.
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. The concepts of thrift and abstinence that characterize the Protestant ethic evidenced the growing importance of the future relative to the present. With this opening up of choices and decisions, people gradually recognized that the future offered opportunity as well as danger, that it was open-ended and full of promise. The 1500s and 1600s were a time of geographical exploration, confrontation with new lands and new societies, and experimentation in art, poetic forms, science, architecture, and mathematics. The new sense of opportunity led to a dramatic acceleration in the growth of trade and commerce, which served as a powerful stimulus to change and exploration. Columbus was not conducting a Caribbean cruise: he was seeking a new trade route to the Indies. The prospect of getting rich is highly motivating, and few people get rich without taking a gamble.
There is more to that blunt statement than meets the eye. Trade is a mutually beneficial process, a transaction in which both parties perceive themselves as wealthier than they were before. What a radical idea! Up to that point, people who got rich had done so largely by exploitation or by plundering another's wealth. Although Europeans continued to plunder across the seas, at home the accumulation of wealth was open to the many rather than the few. The newly rich were now the smart, the adventuresome, the innovators-most of them businessmen-instead of just the hereditary princes and their minions.
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. But capitalism could not have flourished without two new activities that had been unnecessary so long as the future was a matter of chance or of God's will. The first was bookkeeping, a humble activity but one that encouraged the dissemination of the new techniques of numbering and counting. The other was forecasting, a much less humble and far more challenging activity that links risk-taking with direct payoffs.
You do not plan to ship goods across the ocean, or to assemble merchandise for sale, or to borrow money without first trying to determine what the future may hold in store. Ensuring that the materials you order are delivered on t
ime, seeing to it that the items you plan to sell are produced on schedule, and getting your sales facilities in place all must be planned before that moment when the customers show up and lay their money on the counter. The successful business executive is a forecaster first; purchasing, producing, marketing, pricing, and organizing all follow.
The men you will meet in the coming chapters recognized the discoveries of Pascal and Fermat as the beginning of wisdom, not just a solution to an intellectual conundrum involving a game of chance. They were bold enough to tackle the many facets of risk in the face of issues of growing complexity and practical importance and to recognize that these are issues involving the most fundamental philosophical aspects of human existence.
But philosophy must stand aside for the moment, as the story should begin at the beginning. Modern methods of dealing with the unknown start with measurement, with odds and probabilities. The numbers come first. But where did the numbers come from?
ithout numbers, there are no odds and no probabilities; without odds and probabilities, the only way to deal with risk is to appeal to the gods and the fates. Without numbers, risk is wholly a matter of gut.
We live in a world of numbers and calculations, from the clock we squint at when we wake up, to the television channel we switch off at bedtime. As the day proceeds, we count the measures of coffee we put into the coffeemaker, pay the housekeeper, consult yesterday's stock prices, dial a friend's telephone number, check the amount of gas in the car and the speed on the speedometer, press the elevator button in our office building, and open the office door with our number on it. And the day has hardly started!
It is hard for us to imagine a time without numbers. Yet if we were able to spirit a well-educated man from the year 1000 to the present, he probably would not recognize the number zero and would surely flunk third-grade arithmetic; few people from the year 1500 would fare much better.
The story of numbers in the West begins in 1202, when the cathedral of Chartres was nearing completion and King John was finishing his third year on the throne of England. In that year, a book titled Liber Abaci, or Book of the Abacus, appeared in Italy. The fifteen chapters of the book were entirely handwritten; almost three hundred years would pass before the invention of printing. The author, Leonardo Pisano, was only 27 years old but a very lucky man: his book would receive the endorsement of the Holy Roman Emperor, Frederick II. No author could have done much better than that.'
Leonardo Pisano was known for most of his life as Fibonacci, the name by which he is known today. His father's first name was Bonacio, and Fibonacci is a contraction of son-of-Bonacio. Bonacio means "simpleton" and Fibonacci means "blockhead." Bonacio must have been something less than a simpleton, however, for he represented Pisa as consul in a number of different cities, and his son Leonardo was certainly no blockhead.
Fibonacci was inspired to write Liber Abaci on a visit to Bugia, a thriving Algerian city where his father was serving as Pisan consul. While Fibonacci was there, an Arab mathematician revealed to him the wonders of the Hindu-Arabic numbering system that Arab mathematicians had introduced to the West during the Crusades to the Holy Land. When Fibonacci saw all the calculations that this system made possiblecalculations that could not possibly be managed with Roman letternumerals-he set about learning everything he could about it. To study with the leading Arab mathematicians living around the Mediterranean, he set off on a trip that took him to Egypt, Syria, Greece, Sicily, and Provence.
The result was a book that is extraordinary by any standard. Liber Abaci made people aware of a whole new world in which numbers could be substituted for the Hebrew, Greek, and Roman systems that used letters for counting and calculating. The book rapidly attracted a following among mathematicians, both in Italy and across Europe.
Liber Abaci is far more than a primer for reading and writing with the new numerals. Fibonacci begins with instructions on how to determine from the number of digits in a numeral whether it is a unit, or a multiple of ten, or a multiple of 100, and so on. Later chapters exhibit a higher level of sophistication. There we find calculations using whole numbers and fractions, rules of proportion, extraction of square roots and roots of higher orders, and even solutions for linear and quadratic equations.
Ingenious and original as Fibonacci's exercises were, if the book had dealt only with theory it would probably not have attracted much attention beyond a small circle of mathematical cognoscenti. It commanded an enthusiastic following, however, because Fibonacci filled it with practical applications. For example, he described and illustrated many innovations that the new numbers made possible in commercial bookkeeping, such as figuring profit margins, money-changing, conversions of weights and measures, and-though usury was still prohibited in many placeshe even included calculations of interest payments.
Liber Abaci provided just the kind of stimulation that a man as brilliant and creative as the Emperor Frederick would be sure to enjoy. Though Frederick, who ruled from 1211 to 1250, exhibited cruelty and an obsession with earthly power, he was genuinely interested in science, the arts, and the philosophy of government. In Sicily, he destroyed all the private garrisons and feudal castles, taxed the clergy, and banned them from civil office. He also set up an expert bureaucracy, abolished internal tolls, removed all regulations inhibiting imports, and shut down the state monopolies.
Frederick tolerated no rivals. Unlike his grandfather, Frederick Barbarossa, who was humbled by the Pope at the Battle of Legnano in 1176, this Frederick reveled in his endless battles with the papacy. His intransigence brought him not just one excommunication, but two. On the second occasion, Pope Gregory IX called for Frederick to be deposed, characterizing him as a heretic, rake, and anti-Christ. Frederick responded with a savage attack on papal territory; meanwhile his fleet captured a large delegation of prelates on their way to Rome to join the synod that had been called to remove him from power.
Frederick surrounded himself with the leading intellectuals of his age, inviting many of them to join him in Palermo. He built some of Sicily's most beautiful castles, and in 1224 he founded a university to train public servants-the first European university to enjoy a royal charter.
Frederick was fascinated with Liber Abaci. Some time in the 1220s, while on a visit to Pisa, he invited Fibonacci to appear before him. In the course of the interview, Fibonacci solved problems in algebra and cubic equations put to him by one of Frederick's many scientists-in-residence. Fibonacci subsequently wrote a book prompted by this meeting, Liber Quadratorum, or The Book of Squares, which he dedicated to the Emperor.
Fibonacci is best known for a short passage in Liber Abaci that led to something of a mathematical miracle. The passage concerns the problem of how many rabbits will be born in the course of a year from an original pair of rabbits, assuming that every month each pair produces another pair and that rabbits begin to breed when they are two months old. Fibonacci discovered that the original pair of rabbits would have spawned a total of 233 pairs of offspring in the course of a year.
He discovered something else, much more interesting. He had assumed that the original pair would not breed until the second month and then would produce another pair every month. By the fourth month, their first two offspring would begin breeding. After the process got started, the total number of pairs of rabbits at the end of each month would be as follows: 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233. Each successive number is the sum of the two preceding numbers. If the rabbits kept going for a hundred months, the total number pairs would be 354,224,848,179,261,915,075.
The Fibonacci series is a lot more than a source of amusement. Divide any of the Fibonacci numbers by the next higher number. After 3, the answer is always 0.625. After 89, the answer is always 0.618; after higher numbers, more decimal places can be filled in.* Divide any number by its preceding number. After 2, the answer is always 1.6. After 144, the answer is always 1.618.
The Greeks knew this proportion and called it "the golden mean." The golden m
ean defines the proportions of the Parthenon, the shape of playing cards and credit cards, and the proportions of the General Assembly Building at the United Nations in New York. The horizontal member of most Christian crosses separates the vertical member by just about the same ratio: the length above the crosspiece is 61.8% of the length below it. The golden mean also appears throughout nature-in flower patterns, the leaves of an artichoke, and the leaf stubs on a palm tree. It is also the ratio of the length of the human body above the navel to its length below the navel (in normally proportioned people, that is). The length of each successive bone in our fingers, from tip to hand, also bears this ratio.t
In one of its more romantic manifestations, the Fibonacci ratio defines the proportions and shape of a beautiful spiral. The accompanying illustrations demonstrate how the spiral develops from a series of squares whose successive relative dimensions are determined by the Fibonacci series. The process begins with two small squares of equal size. It then progresses to an adjacent square twice the size of the first two, then to a square three times the size of the first two, then to five times, and so on. Note that the sequence produces a series of rectangles with the proportions of the golden mean. Then quarter-circle arcs connect the opposite corners of the squares, starting with the smallest squares and proceeding in sequence.
Construction of an equiangular spiral using Fibonacci proportions.
Begin with a 1-unit square, attach another 1-unit square, then a 2-unit square then a 2unit square where it fits, followed by a 3-unit square where it fits and, continuing in the same direction, attach squares of 5, 8, 13, 21, and 34 units and so on.
(Reproduced with permission from Fascinating Fibonaccis, by Trudy Hammel Garland; copyright 1987 by Dale Seymour Publications, P.O. Box 10888, Palo Alto, CA 94303.)
This familiar-looking spiral appears in the shape of certain galaxies, in a ram's horn, in many seashells, and in the coil of the ocean waves that surfers ride. The structure maintains its form without change as it is made larger and larger and regardless of the size of the initial square with which the process is launched: form is independent of growth. The journalist William Hoffer has remarked, "The great golden spiral seems to be nature's way of building quantity without sacrificing quality. "2
Against the Gods: The Remarkable Story of Risk Page 3