When this book was published, I was an active fx day trader who relied on technicals and economics to make my trading decisions. It was difficult to see how this book would be of any use to me so I passed up on reading it.

As my trading grew, my interest also expanded to other areas. First, to equities, where I learnt how to put a value on a company and now, to portfolio management, where I am learning how a combination of assets in my portfolio affects its level or risk and reward.

One of the key lessons in portfolio management is that when you combine a bunch of assets together the level of risk and reward in the portfolio is not just a product of the individual risk and reward profiles of the assets. In other words, it is possible to decrease the risk and increase the reward of the company by combining several assets which, if owned individually would produce the same reward but be riskier to hold. This book does a magnificent job of tracing how mankind developed theories of risk management such as this from the earliest beginnings. As such, it is a great book if you want to understand what risk management is and how it has evolved.

Then about 4/5’s into the book, the author goes onto explain subsequent research, especially on how human beings make decisions, improperly and sometimes irrationally. For me, this is the most interesting part, because as any trader will tell you, the market not always rational because human beings themselves are not rational.

Let me provide an example:

Suppose that a family is on a beach during a vacation, alongwith a hundred other families. Their child, alongwith several hundred other children are paddling in the water. Suddenly at a distance, there is a tsunami and the warning goes out to the families, who realise that the tsunami is almost upon them. There is only a slim chance that each family will be able to rescue their own child from the water because of the time it takes to locate the child. Let’s assume that only 4/10 families will be able to do so before the wave hits. However, it is possible that instead of trying to locate their own child, each family just rescues the child which is closest to them. This cuts down on the time taken to rescue a child and makes the whole process more effective. And if every family did this, the probability of the child surviving shoots up to 8/10. Twice as likely to survive.

However if the child were yours, would you adopt this strategy? The interesting this is that most people will say no.This is because human beings prefer to avoid loss rather than to seek a gain, and explains a lot about why people hold onto losing positions when they trade.

Questions like this are being considered at the forefront of the finance world, and whilst I do marvel at how far human beings have developed in their ability to play games and trade I am in awe of how little we still know about what drives financial markets.