RIP Peter L. Bernstein – Father Of Risk

The investment community suffered a sad loss Friday when Peter L. Bernstein, one of the finance world’s foremost experts on the nature of risk, passed away at the age of 90.  According to a New York Times article, Bernstein died Friday of pneumonia contracted after fracturing his hip.

The Father Of Risk

Perhaps Bernstein’s most enduring contribution to the finance world his clear and concise explanations of the nature of risk, making the concept of risk directly relevant to modern portfolio selection in a way non-academics, and Wall Street movers-and-shakers, could easily understand.  The importance of his role as interpreter and communicator between academic economists and the mainstream financial community cannot be overstated.  Without Bernstein, the fundamental tenants of risk management we take for granted today (diversification, studying the risk profiles of various asset classes, etc) could never have penetrated so deeply into modern finance culture, leaving us all even worse off than we currently are.

His 1991 book Capital Ideas: The Improbable Origins of Modern Wall Street is must-read history of the origins of modern Wall Street and how a small band of academic economists revolutionized the way America’s wealth was managed.  And his fascinating 1996 tome on the origins of the concept of risk from early human societies to the present, Against the Gods: The Remarkable Story of Risk, ranks as one of the most interesting finance-related books I have ever read.  In it, Bernstein lays the theoretical foundation, brick by brick, for understanding the plight of the modern individual investor as well as theoretical underpinnings of diversification.  Both books are mandatory reading for anybody attempting their own portfolio.

Defender Of Efficient Markets

Bernstein was also instrumental in facilitating the acceptance by Wall Street of the Efficient Market Theory and the modern principles of risk management.  Although not the originator of the Efficient Market Hypothesis, Bernstein had a way of explaining the complex mechanism by which liquid markets regulate prices almost instantaneously in an easily-understood manner that was eventually embraced by his peers.

In a nutshell, Bernstein explained that the near-instantaneous self-adjustment of market prices negated the possibility of any reliable information advantage of any single market player, making the act of consistently beating the market averages on a risk-adjusted basis via skill a statistical impossibility.  While many have doubted the veracity of the Efficient Market Hypothesis over time, none have doubted Bernstein’s contribution to the world of finance and portfolio management.  Before Bernstein, investing was a crap-shoot with results mostly stemming from luck.  Bernstein succeeded, along with many other luminaries, in turning portfolio management into as much a science as an art.

Buy Peter L. Bernstein’s two finance classics Capital Ideas: The Improbable Origins of Modern Wall Street and Against the Gods: The Remarkable Story of Risk from Amazon.com.