This chapter discusses several mathematical concepts that are critical to smart investing, from calculating cash flow discounts to probability theory, variances, regression of the mean, and uncertainty vis-à-vis risk. It begins by considering where and how such concepts originated, how they have evolved over time, and how they contribute to an investor's latticework of mental models. In particular, it examines Warren Buffett's investing philosophy based on mathematics and John Burr Williams's theory of discounted cash flow. It also looks at the history of the fundamental concept of risk, focusing on the ideas of intellectuals such as Blaise Pascal, Pierre de Fermat, Jacob Bernoulli, and Thomas Bayes. Finally, it considers how mathematical tools such as decision theory and probability theory help reduce uncertainty that exists in markets.
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