Showing posts with label simpson's paradox. Show all posts
Showing posts with label simpson's paradox. Show all posts

Apr 16, 2009

The ideal schizophrenic actuary

According to Philip Zimbardo, human beings - that includes actuaries - develop a specific attitude towards time (Time perspective).

In The Time paradox Zimbardo explains that people turn out to be primarily past, present or future orientated. Each perspective has a detailed orientation (focus):

Based on research and his own definition of a 'healthy thinkstyle' in life , Zimbardo developed an ideal time perspective score (red dots):

If you wonder what your Time perspective score is, take the test:

Actuary Time Perspective Paradox
Probably we all more or less agree with the position of the red dots as definition of the ideal situation. However, as an actuary it is our job (duty) to focus exactly on the opposites of that ideal situation.

In order to achieve a sound advice, we have to look seriously at the negative past experiences. We can't afford to dwell in hedonism or to deny a fatalistic view in the present, we have to be realistic!.
And last but not least it's our professional responsibility to estimate the future in a prudent way.

The 'Actuary Time Perspective Paradox' challenge is to develop an ideal personal time perspective with regard to our personal lives and an opposite professional time perspective at the same time, as it comes down to our professional life as an actuary.

So, keep being a happy ideal schizophrenic actuary!

Jul 7, 2008

Simpson's paradox

Let's take a look at a simple fund management score card.

Fund 1

Fund 2

Fund 1+2

Return Assets Rate Return Assets Rate Return Assets Rate
Fund manager A
8 200 4,0% 72 800 9,0% 80 1000 8,0%
Fund manager B 48 800 6,0% 22 200 11,0% 70 1000 7,0%
Total Fund managers 56 1000 5,6% 94 1000 9,4% 150 2000 7,5%

Clearly Fund manager B performs 2% better in both Fund 1 and 2 than Fund manager A. However, across both funds, Fund manager A seems to perform better.

This effect is called Simpson's paradox.

Keep in minds:
  • Always be critical in ranking mix funds (managers) on overall performance
  • Even if the risk profiles of Fund 1 and 2 are the same, Simpson's paradox may show up
  • Besides choosing the right Fund manager, choosing the right asset mix is just as important

Another nice example of Simpson's paradox is:




Survived # Start Rate Survived # Start Rate Survived # Start Rate
Treatment A 3135 3300 95 4020 6700 60 7155 10000 72
Treatment B 7395 8700 85 650 1300 50 8045 10000 80

A cohort or a series of people receive treatment A, and another cohort receives treatment B. The survival rate of treatment A is better for woman as well as for man, but not for people!

Simpson's Paradox Actuary Links:

  1. Ratemaking: The CEO asks the actuary...
  2. Smokers and survival rates
  3. Credit Score really explains Insurance Losses?