Showing posts with label how. Show all posts
Showing posts with label how. Show all posts

Jan 18, 2011

Actuarial Chess?

As actuaries we often have to explain HOW variables like profits, mortality, investments or costs will develop in the future.

In doing so, it would really help and strengthen our credibility if we were able to explain also WHY these variables developed in the past as they have developed, as a result of certain circumstances (other 'explaining' variables).

On basis of these WHY-arguments and the specific expected future circumstances, we could increase the credibility and diminish the volatility of our predictions.

This HOW-WHY-Insight urges us for example to analyze "medical developments" in case of predicting longevity and to study "economic developments" with regard tot predicting future costs, inflation or investment rates.

Moreover this understanding obliges us to develop our capabilities and competence to explain certain given outcomes like "increasing longevity" and "increasing stock return volatility".

Test Your 'Outcome Explanation Competence'
This 'Outcome Explanation Competence' (OEC) is key in actuarial science. No actuary can do without!

To test your OEC level, solve the next chess problem.

Black has made the last move... Which move?

You'll find the solution of this chess problem as a part of the next 5 minute 'Thinking Out of the Box' test ( on SCRIBD)......

5 Minute 'Thinking Out of the Box' Test

Just like in 'climate change predictions', our OEC (the 'competence to explain past phenomena') is necessary for us actuaries to be confident about our theories and predictions about the future.

However, developing OEC might not be enough as the explanations of the past could turn out to be fundamentally invalid with regard to the future. New techniques  like High-frequency trading (HFT) might come up. Or... in chess vocabulary: 'A pawn may promote to a Bishop' (frequency: 0.2%)

The conclusion must be that Actuarial predictions are a kind of 'Actuarial Chess':
So start practicing as an Actuarial Chess Master by Explaining the past and Guiding the future.