Against the Gods: The Remarkable Story of Risk (31 page)

King Nagoro found it hard to believe that there were places in the
world inhabited entirely by people with white skins. To him, Galton
and his friends were rare migratory animals or some kind of anomaly.
One of Galton's companions had to undress repeatedly before the king
to prove that he was white all over.

Galton's curiosity was insatiable. When a traveling circus came
through Cambridge while he was studying there, he walked straight
into the lion's cage, only the fourth person to have done so in that circus's history. He kept himself from falling asleep during his favorite
studying hours of 10 p.m. to 2 a.m. with his "Gumption-Reviver
machine," a gadget he had invented that kept his head wet with cold
water. Later in life, he invented a device for reading under water; he
nearly drowned on one occasion when he submerged himself in his
bath while enjoying a good book.

As we shall see shortly, Galton's fascination with measurement and
his talent for innovation had loathsome consequences. Still he must be
credited with a remarkable contribution to statistics and to risk management. As with Cardano, his insistence on testing his ideas through
experimentation led to new statistical theory even though a search for
new theory was not his primary objective.

Galton moves us into the world of everyday life, where people
breathe, sweat, copulate, and ponder their future. We are now far removed from both the gaming tables and the stars, the means chosen by
earlier mathematicians to get their theories right. Galton took the theories as he found them and went on to discover what made them tick.

Although Galton never alludes to Jacob Bernoulli, his work reflects
Bernoulli's insistence that the study of probability is an essential tool for
the analysis of disease, mental acuteness, and physical agility. And he
follows in the footsteps of Graunt and Price, whose main interest was
the organization of human society rather than the science of nature.
What Galton and these other innovators learned along the way led
ultimately to the emergence of today's complex instruments for the
control and measurement of risk in both business and finance.

Galton grew up in an environment of affluence and lively intellectual
activity. His grandfather, Erasmus Darwin, was among the most famous
physicians of his time and a man with many interests beyond medicine.
He invented a ferry driven by machinery instead of pulled by animals and
a lavatory that flushed, experimented with windmills and steam engines,
and wrote The Loves of the Plants, 2,000 lines of poetry describing in scientific detail the reproductive processes of many different plants. In 1796,
when he was 65 years old, Erasmus published a two-volume work called
Zoonomia, or the Theory of Generations. Although the book went through
three editions in seven years, it failed to impress the scientific community
because it was rich in theory but poor in facts. Nevertheless, Zoonomia
bears a striking resemblance to The Origin of the Species, published 63 years
later by Erasmus's more famous grandson, Charles Darwin.

At the age of four, Galton claimed, he could read any book written
in English. He could recite "all the Latin Substantives and adjectives
and active verbs besides 52 lines of Latin poetry" and could multiply by
2, 3, 4, 5, 6, 7, 10.6

He began to study medicine in Birmingham when he was 16 years
old, but described his visits to the wards and the postmortems as
"Horror-horror-horror!"7 After Charles Darwin advised him to "read
Mathematics like a house on fire," Galton hdaded to Cambridge to
study math and the classics.8

Galton was 22 when his father died, leaving a substantial estate to
his seven surviving children. Deciding that he could now do anything
he liked, he soon chose to give up formal studies. Inspired by Darwin's
voyage to the Galapagos, he made the first of two trips to Africa, sailing up the Nile and then traveling by camel to Khartoum-a total distance of a thousand miles. After his return to England, he idled away
four years and then made a second trip to Africa. He wrote a book
about Africa in 1853 that gained him membership in the Royal
Geographic Society, which awarded him a gold medal, and won him
acceptance by the scientific community. In 1856, he was made a fellow
of the Royal Society.

His second trip to Africa when he was 27 left Galton "rather used up
in health," the result of a combination of physical exhaustion and bouts
of depression that were to recur often though briefly throughout his life.
He referred to himself on those occasions as someone with a "sprained
brain."9

Galton was an amateur scientist with a keen interest in heredity but
with no interest in business or economics. Yet his studies of "the ideal
mean filial type," "the parental type," and "the average ancestral type"
led him to a statistical discovery that is essential to forecasting and to
risk management.

The study of heredity has to do with the transmission of key characteristics such as intelligence, eye color, size, and behavior from generation to generation. It takes note of the outliers-individuals whose
characteristics do not conform to the norm-but it pays more attention
to the tendency of all members of a species to look pretty much the
same. Hidden within that tendency toward homogeniety-the tendency of the average to dominate-is a powerful statistical tool that
relates to many aspects of risk management.

Galton's primary goal was to understand how talent persists through
generation after generation in certain families, including the Darwin
family-and, not incidentally, the Bernoulli family. Galton had hoped to
see that persistence of talent in his own progeny, but he and his wife were
childless, as were both of his brothers and one of his sisters. Most of all,
he sought to identify "natures preeminently noble" among members of
the families he classified as the most highly talented.

In 1883, he labeled this field of study "eugenics," a word whose
Greek root means good or well. The adoption of the term a half-century later by the Nazis was associated with the extermination of millions of human beings whom they identified as utterly without talent,
or any kind of worth.

Whether Galton should be charged with responsibility for that evil
outcome has been the subject of spirited debate. There is nothing about
the man to suggest that he would have condoned such barbaric behavior. For him, the good society was a society that had an obligation to
help and educate "highly gifted" individuals, regardless of their wealth,
social class, or racial background. He proposed inviting and welcoming
"emigrants and refugees from other lands" to Britain and encouraging
their descendants to become citizens. Yet at the same time he seems to
have been looking for ways to limit the reproduction of people who
were less talented or ill; he suggests that the good society would also be a society "where the weak could find a welcome and a refuge in celibate
monasteries or sisterhoods."10

Regardless of the uses to which others put Galton's work in eugenics, its significance extends far beyond the parochial questions he addressed directly. In brief, it gave further credibility to the truism that
variety is the spice of life. When Enobarbus paid homage to Cleopatra,
he remarked, "Age cannot wither her, nor custom stale her infinite variety." Though always the same woman, she was alternately lover, friend,
cool, hot, temptress, enemy, submissive, and demanding. One person can
be many.

We can recognize as an individual every one of 5.5 billion people
alive today. Countless maples grow in the forests of Vermont, each of
which is different from all the other maples, but.none of which could be
mistaken for a birch or a hemlock. General Electric and Biogen are both
stocks listed on the New York Stock Exchange, but each is influenced by
entirely different kinds of risk.

Which of the many guises of Cleopatra, of the billions of human
beings alive today, of the maples, birches, and hemlocks in Vermont,
or of the stocks listed on the New York Stock Exchange is the prototypical exemplar of its class? How much do the members of each class
differ from one another? How much does a child in Uganda differ
from an old woman in Stockholm? Are the variations systematic or
merely the results of random influences? Again, what do we mean by
normal anyway?

In searching for the answers to such questions, Galton makes little
mention of early mathematicians and ignores social statisticians like
Graunt. He does, however, cite at great length a set of empirical studies
carried out in the 1820s and 1830s by a Belgian scientist named
Lambert Adolphe Jacques Quetelet. Quetelet was twenty years older
than Galton, a dogged investigator into social conditions, and as obsessed
with measurement as Galton himself."

Quetelet was only 23 years old when he received the first doctorate
of science to be awarded by the new University of Ghent. By that time,
he had already studied art, written poetry, and co-authored an opera.

He was also what the historian of statistics Stephen Stigler calls "an
entrepreneur of science as well as a scientist."12 He helped found several statistical associations, including the Royal Statistical Society of
London and the International Statistical Congress, and for many years
he was regional correspondent for the Belgian government's statistical
bureau. Around 1820, he became leader of a movement to found a new
observatory in Belgium, even though his knowledge of astronomy at
the time was scant. Once the observatory was established, he persuaded
the government to fund a three-month stay in Paris so that he could
study astronomy and meteorology and learn how to run an observatory.

During his time in Paris, he met many of the leading French
astronomers and mathematicians, from whom he learned a good bit
about probability. He may even have met Laplace, who was then 74
years old and about to produce the final volume of his masterpiece,
Mecanique celeste. Quetelet was fascinated by the subject of probability.
He subsequently wrote three books on the subject, the last in 1853. He
also put what he learned about it to good-and practical-use.