God must be an Actuary

Let's dive back in history and take a look at a unusual 'biblical' article in The Actuary of 1986 (Vol. 20, nr. 6 ; page 8).

In a amusing article Mark W. Campbell develops a simple lifespan equation with regard to our 'Greatⁿ Grandfathers'.

This is the original (somewhat restyled) article:

You Should Live So Long

Sir:

In the January issue, Murray Projector quotes Genesis 6:3 as follows:

“And the Lord said: ‘My Spirit shall not abide in man forever, for that he also is flesh; therefore shall his days be a hundred and twenty years.’ “

Mr. Projector suggests the interpretation that 120 years is the maximum age or “omega” for man. This is an interesting idea when one considers the recorded life spans of Noah (of whose generation Genesis 6:3 speaks) and his descendants. The enclosed graph shows these life spans down to Moses, of whom Deuteronomy 34:7 states:

“And Moses was a hundred and twenty years old when he died: his eye was not dim, nor his natural force abated.”

The curve which has been fitted to the data is of the form y = A + B-C^-X. With “A” set equal to 120, the R- squared of the fit is approximately 92% (the R-squared can be increased slightly using a lower value of “A”). This is a remarkably good fit to biological data.

I am not sure what all this means, except that, as always, there is more to the Bible than meets the eye. I welcome the comments of other readers.

Mark W. Campbell

In his original article Campbell doesn't mention the values of the variables A,B and C. However, in the following magazine of The Actuary (nr. 7), Samuel L. Tucker, defines those variables in an equation that 'fits the Campbell curve quite well' :

y=120+830*1.407 ^-x

the variable 'x' stands for the 'xth generation'.

In the same article, nr. 7, Tucker concludes that the Campbell equation overestimates the lifespan and therefore fails in case of earlier great-great grandfathers, back until Adam. He challenges Campbell to develop an integral equation regarding all 26 generation.

26 Generation Equation
Well, here it is. The formula, a logistic equation fitted at ZunZun, is now expressed into our modern western time line (t):
With a= 792.40, b= 1307204394.9 and
c= -0,00881292

In graphics:

The simple formula and good fit undoubtedly prove that:

God must be an Actuary! ;-)

The results in table form:


De equation is again modelled with an age limit of 120, as it appears that, although longevity in modern times is increasing, the 'omega age' (120) seems hard to beat.

More information about our great-great grandfathers at:

Noahs Age

For those who are interested, please download the corresponding spreadsheet.

Have fun in combining actuarial math and the bible.......

Swine Flu Counter update Sept 2009

Here you'll find the September 2009 update of the

Global Swine Flu Counter

Although there is still an increasing risk of underreporting, the counter has been renewed on basis of the latest available global reports as provided by Wikipedia/ECDC.

Swine Flu under Control?
The September 2009 developments suggest the Swine Flu development is under control, as the reported infections changed from a exponential growth recent months, to more linear growth in August 2009. In September the increase of infections was already declining.

New Model
The above developments are the main reason why data in the Swine Flu calculator have now been modelled by a logistic function.
Well considered curve fitting at ZunZun, showed a Gompertz function (with offset) resulted in a satisfying approximation :



Life actuaries will be familiar with good old Gompertz. The Gompertz equations are - by the way - also used to model Plant Desease Progres.

The number of death have now been modelled ruffly as 1.8% of the infected people a month earlier [Death=0.018*I(t-30)]

Results update
The results the new approximation show that the number of reported infections increases asymptotically towards a limit of about 323,000.

Correspondingly, the number of death, , increases to a limit of ruffly 6000.

All provided the actual controlled development continues and no new mutation of the H1N1 will develop in the next months.....

Risk
The risk of underreporting is not negligible . Modeling on basis of excluding the September data would result in a limit of 528,000 infects and about 9500 deaths. We'll just have to wait how H1N1 develops.....
But as becomes clear, the explosion of swine flue cases looks under control.

If necessary, the counter will be updated again on a on a regular basis. The latest data you'll find in this XLS spreadsheet.

Install Swine Flu Counter
How to implement this Swine Flu Counter on your web site?

• Put the next HTML-script (without the outer quotes) just before the end of the body tag:' <script language="javascript" type="text/javascript" src="http://sites.google.com/site/boooming/actuary/swine-flu-2009-update1.js"> </script>'
  


• Put the next HTML-line (without the outer quotes) where you want the Swine Flu table to appear on your site :
  ' <div id="swineflutable"></div> '
  
  
• Ready!

Why an actuary succeeds!

What's that special gift an actuary has, that he always succeeds?

Never mind how complex the situation, an actuary always has that one missing magic equation ready to astonish his audience....

Some accuse actuaries of always talking their way out of a problem. They stress that actuaries misuse their formulae to force decisions 'their way'.

We all know that's not true. Yes, an actuary always survives and actuaries are not biased or irrational.

It's the study, our experience and our trained 'gut feeling', that makes us succeed, as the next cartoon shows!

(Click [twice] on the cartoon for the enlarged version, to get a clear sight at the equations)


So now you know why an actuary is not easily daunted!

DCF: Discounted Crash Flow

I remember in a 2007 client panel discussion I was chocked to hear that three large company CFOs of name and fame, without blinking an eye, stated that they were running their company on basis of a narrow quarterly time schedule, no longer. Long term investments? Out of the question. Pension obligations? Rather not, please... Project payback periods: 3-6 months, in exceptional cases a maximum of a year.

What was happening?
How come, CFOs have become that short term focused?

Answers
It's easy to come up with answers that pass the buck:

• Extraordinary shareholder demands
• Bonus Structure,
• Greed, Grab Culture

However, despite and behind all this, there is a deeper cause.

Thinking concept
This short term focus, that is not limited to CFOs, is the logical consequence of the way our thinking and modeling has developed during the last decades:

• we try to exclude risk at any price, instead of managing it.
• we struggle and sometimes even fear to transform long term cash flows into discounted cash values or NPVs

According to a 2002 survey, more than 85% of the CFOs say they use NPV-analysis in at least three out of four decisions.
As actuaries we're also part of this family of Discounted Cash Flow (DCF) Experts. Some of us might even have thought there's nothing more to learn about DCF...

Of course we understand every technical detail of our DCF-model, but let's take a look at some classical aspects of the DCF technique from a different angle. I'll call this angle the I-View, with the I of Important.....

DCF properties
As we know the value of a future cash flow (cf ) , depends strongly on the choice of the discount rate (r) and the moment in time (t) of the cash flow. The further away (in time) the cash flow and the higher the discount rate, the lower the DCF value.



I-View
From an I-View perspective one might say that in the DCF of a constant cash flow, the contribution of the cash flow in year 10 is ruffly half as Important (UnImportant-effect) as a cash flow in year one, assuming a discount rate of 7%.

Another way of saying: This one off cash flow is only of 51% Importance to us.

Although this might not surprise you, a often heavy underestimated effect is that the UnImportant-effect rapidly increases in case a particular discounted cash flow in year (t) is part of and expressed as a percentage of a discounted fixed term (or perpetual) cash flow stream. This is illustrated in the next graph (base: r= 10% discount rate).


De relative contribution of a cash flow t, soon loses more and more Importance when it's part of a constant cash flow stream. As the term of this cash flow increases to infinity, the relative contribution of any 'one year cash flow' becomes rapidly UnImportant.

I-View 1: Discount Rate Adjustments
As we know, the choice of the discount rate depends on the type of cash flow. Cash flows with substantial risks are often discounted with an adjusted (higher) r, according to the (CAPM) formula:

r = r_f + β×(r_m - r_f)

with: r_f = risk free rate, r_m = expected return on the market and β = (beta) a measure of the (opposed to the market) cash flow risk.

It's obvious this CAPM-method amplifies the mentioned 'UnImportant-effect' of long term cash flows.

In times of financial crisis, when we're inclined to become more risk averse, the 'UnImportant-effect' grows even more, as we are inclined to adjust r for fear:

r = r_fear + r_f + β×(r_m - r_f)

Moreover in general, the longer the cash flow term, the higher the (compound) expected risk, and therefore the higher the discount rate (r). Instead of a constant r, there's a need for a variable r, r_t, that increases in time, intensifying the 'UnImportant-effect'.

I-View 2: Discount Rate of Liabilities
Another DCF example: A pension fund has extremely long term liabilities. A cash flow of - let's pick - 50 years ahead, is no exception, but only accounts for about 14% of its cash flow in the discounted liabilities of the pension fund (abstracting from mortality and assuming a discount rate of 4%), and is therefore implicit considered (rated) less Important compared to more recent cash flows. Because there's no real or substantial market for long term cash flow pension obligations, r is even harder to define. Increasing r for this risk is like putting the cart before the horse: The UnImportance effect will increase. For internal valuation r should be decreased instead of increased, but how.....?

I-View 3: Short term Ruin Probability Nonsense
A third effect is that a 0.5% yearly ruin probability sounds safe, but nevertheless compounds up to a risk of 14% over a period of 30 years and even more on the long term.

Years	Cum.Ruin Risk
1	0.5%
10	4.9%
20	9.5%
30	14.0%
40	18.2%
50	22.2%
60	26.0%
70	29.6%
80	33.0%
90	36.3%
100	39.4%

FCLTOS, Financial Companies with Long Term Obligations, like banks, insurance companies or pension funds are by definition companies that have to stay ruin proof on the long term. Managing these kind of companies on short term ruin and certainty models is completely nonsense.

However, there's nothing much FCLTOS can do about it. A long-term certainty level of 99.5% (0.5% ruin risk) over a period of 40 years would imply a yearly certainty level of 99.9875% (0.0125% ruin risk). Even if it would be possible to minimize the technical risks to such a low level, it would be overshadowed by unquantifiable external outside risks (e.g. nature disasters). Anyhow, government regulators should define a target with regard to an appropriate choice of a long-term certainty level and should distinguish between short term and long term certainty in their models.

These examples illustrate that the management FCLTOS, giving these DCF-like methods, do not have another choice than to focus on the near future (5-10 years) and - by method - are not obliged and therefore also not will focus on the long term effects.

Navigating
Managing FCLTOS, is like navigating an oil tanker from A to B between the ice floes. You have to avoid the short term (nearby)
risks (the ice floes) while at the same time keep sight and hold direction on your long term target (port B) in order to succeed.

Translated to a pension fund: manage your liquidity on the short term and your solvency and coverage-ratio on the long term. Any captain of an oil tanker would certainly be discharged immediately when he would make a dangerous change in course today to avoid an actual clear, but in the future certainly changing (moving targets) ice floe situation 50 km ahead. Yet, government regulators and supervisors are forcing pension fund 'captains' to undertake such ridiculous actions.

Steering on short term recovery plans , publishing and publicly discussing coverage-ratios and finally 'valuing pension funds' solely on market value (given that the market for extreme {> 30 years} long term assets and liabilities is extremely 'thin' and volatile), is therefore dangerous and apparently wrong (nonsense) and leads to discounted crash situations.

But there's more that contributes to discounted crash management......

One off negative cash flow in the future
Let's compare two (almost) equal cash flows, CFa and CFb:
- CFa: 30 year constant cash flow of yearly $1,
- CFb: like CFa, but in year 25 a one off negative cash flow : -$1

Although a negative cash flow of $1 in year 25 will probably ruin the activities an cash flows in later years, the NPV of the two cash flows only differ slightly and the calculated IRR of CFb (9.76%) is also just slightly lower than the IRR of CFa (10%).

One might argue that because CFb is obviously a more risky cash flow, the adjusted r has to be raised. This is true, but nevertheless intensifies the so called UnImportant-effect: the relative weight of the 'year 25 cash flow' in the NPV decreases.

Last but not least, what explains the short term attitude and those extreme short periods of several years or months, some CFOs practice as a time frame to run and control their company ?

Certainty Erosion
These extreme short periods are the consequence of the No. 1 concern for CFOs:

The fundamental and increasing lack of ability to forecast results

Let's do some rule of thumb exercise....

Assume the certainty level of calculating a sound financial forecast in the next period (year, quarter, month) is estimated by a CFO at C%.

Now take a look at the next table (on the right) that shows the average extrapolated certainty level (AC) over a number of periods P.

In formula:


Some examples from the table:

• A CFO that estimates the 'next quarter result' with a certainty level of 70% (C=0.7), will probably not burn his fingers by presenting a full year forecast with an average expected certainty level of 44%.
• A CFO of a company hit by the current financial crisis, estimates the certainty of his companies January results at 60%. The board announces it's not able to estimate the full year result. Right they are, with a 60% monthly certainty level, the full year result would have a certainty level of only 12%.....
• Even a CFO with a superb forecast certainty level of 90%, will be cautious with a 5-year forecast (certainty level 74%).
• A 'best of class actuary' that estimates the certainty level of his data at 90% on a yearly basis, will have a hard time in answering question about the certainty level of his projections over 14 years (50%?).

The I-View consequence of this 'compound certainty development' is that even at high levels of (yearly) certainty, the (average) certainty of cash flows after already a few years in the future, erodes.

The effects of Certainty Erosion are enormous. The wall of haziness that is created in a few years - at even high levels of certainty - is astonishing. Never 'believe' a long term one point forecast. Always request variance and certainty level(s) of presented forecasts.

Conclusion
We may conclude that DCF is a superb technique as such to analyze and value cash flows. To prevent ending up in a 'crash flow', DCF has to be implemented by professionals who realize that the essential point of DCF is not just the technique itself, but the way the parameters, used in the DCF-models, are defined.

In order to be able to really take responsibility in managing a company, the Board of a company should be involved in the selection and consequences of the deeper and underlaying DCF-parameters. Enough work for actuaries it seems....

Related Links:
- Some comments on QIS3, (Long term certainty levels)
- Quantifying Unquantifiable Risks
- NPV

Actuarial Fallacies

Just some light stuff, to chew the cud during holidays...

A good friend tells you that a certain 'John Nevermet' is an introverted professional and is either an actuary or a salesman.

Which one do you think John most probably is?

If your first thought was: an actuary, congratulations(!), you just got caught in what is called a classical

Thinking Trap

Most people - not actuaries of course ;-) - are tempted to think John is almost certainly an actuary.On the other hand, they think of a salesman as 'outgoing', 'extrovert' or maybe 'pushy', but certainly not as 'introvert'. Wrapped up : John is an actuary....

Sorry, but - as you know - this logic conclusion is definitely wrong. It neglects the fact that salesmen outnumber actuaries at most 100 to 1. Before you would even start to consider John's character, you should have concluded that even when all the actuaries were introvert, there would only be a small 1% probability that John is actually an actuary (only in the unlikely case that less than 1% of the salesmen would be introvert, this option would be logically to consider).

Top 10 Thinking Traps
This foregoing simple example is just one of the fabulous Top 10 Thinking Traps Exposed by Luciano Passuello.

On his blog Litemind, Luciano explains in a 5 minute 'must read' called 'How to Foolproof Your Mind' the next interesting and most harmful Thinking Traps, including suggestions on how to avoid each one of them. :

1. Anchoring Trap: Over-Relying on First Thoughts
   Your starting point can heavily bias your thinking
   
2. Status Quo Trap: Keeping on Keeping On
   We tend to repeat established behaviors
   
3. Sunk Cost Trap: Protecting Earlier Choices
   Sunk cost shouldn’t influence a decision, but it does
   
4. Confirmation Trap: Seeing What You Want to See
   Being less critical of arguments that support our initial ideas
5. Incomplete Information Trap: Review Your Assumptions
   Overlooking a simple data element can mislead our intuition
   
6. Conformity Trap: Everybody Else Is Doing It
   Other people’s actions do heavily influence ours
   
7. Illusion of Control Trap: Shooting in the Dark
   The tendency to overestimate our personal control
8. Coincidence Trap: We Suck at Probabilities
   A “miracle” is - given enough attempts - possible!
   
9. Recall Trap: Not All Memories Are Created Equal
   “Special events” have the potential to distort our thinking
   
10. Superiority Trap: The Average is Above Average
    People have much inflated views of themselves
    

Thinking traps are a special form of fallacies.

Example
A nice and triggering example of a composition fallacy is:
I fit into my shirt... My shirt fits into my luggage...
Therefore I fit in my luggage...

Can you tell what's going wrong here?
Yes? Then get ready for the next fallacy phase.

Although there a complete list of fallacies, another new interesting subset could be defined as 'Actuarial Fallacies'....

Actuarial Fallacies
Except for a 1988 homonymous, humorous intended, nevertheless still actual and relevant document by Charles L. McClenahan, nothing much has been published on actuarial fallacies.

Apparently fallacies are not an issue on the Actuarial Globe.

Therefore, I'll confine my remarks to a few actuarial events, of which each one could easily be nominated for the fictional 'Grand Actuarial Fallacy Prize':

1. Longevity risk can be easily managed
   Longevity slowly but steadily increases. It's not a yearly smashing or impressing risk, but over the years it has the characteristics of a killing sniper: when you finally discover the accumulated longevity loss after a few years, it's almost too late to handle and take appropriate measures.
   
   Actuaries could have foreseen a few decades ago that the average life span would keep rising and adequate measures had to be taken at once. Instead, actuaries failed to catch the implications of the rise in longevity and were caught by the proverbial 'boiling frog effect'. In short: actuaries failed to act in time....
   
   
2. Stocks are a hedge against fixed-income liabilities
   Already in 1994 in a document called 'On The Risk of Stocks in the Long Run', nobody else than Zvi Bodie already proved that stocks are not a hedge against fixed-income liabilities even in the long run.
   
   
3. Credit Crisis
   Actuaries have failed in foreseeing the credit crisis. We have greatly underestimated the developments and put our head in the sand. We have trusted business plans promising ROEs of 15% and more.Read more in Actuary-Info's : "Wir haben es nicht gewußt!"
   
   
4. VAR Model
   As an article in The Actuary shows, we got intimidated and overruled by the 'magic' quants with their Value at Risk (VaR) models. We did and do know better as actuaries, but missed the boat. Actuaries should be more than professionally trained in giving 'push back'.
   
   
5. The relationship between risk and return
   As we know this risk-return relationship is central to strategy research and practice.
   
   In measuring risk as the variance of a series of accounting-based returns, Bowman obtained the puzzling result of a negative association between risk and mean return.The expected positive association between risk and return turns out to be elusive.
   
   Henkel explains in two must-read articles 'Risk-Return Fallacy' (2000) and The Risk-Return Paradox for Strategic Management: Disentangling True and Spurious Effects the problems and solutions in this field.
   
   Instead of only following what's happening on the other side of the balance sheet, actuaries should mobilize themselves and add some new insights!
   
   Asset Actuaries, please rise!
   
   
   Es ist nicht genug zu wissen, man muss auch anwenden
   - Johann Wolfgang von Goethe -
   
   

Now that we've unmasked several fallacies, in special the 'introvert actuary fallacy', let's conclude our fallacy course with a 'lessons learned?' actuarial anecdote:

Why it's better to work with an imperfect actuary
We all know: A perfect actuary draws perfect conclusions form perfect datasets.

Then of course : A perfect actuary certainly draws "wrong conclusions" from imperfect data.

It's a fact that the data are always imperfect.

So that we can conclude that there is at least a small chance that an imperfect actuary may draw the right conclusion.


That's why it's better to work with an imperfect actuary.

Client Quote
As we know, clients are always right. Remarkably, the next client quote seems to stress the mentioned successful outcome of the imperfect actuary:
I once had an actuary tell me that, because the future is uncertain, his numbers were almost certainly wrong, but he believed they were less wrong than guessing outcomes with no analysis.

You think - by now - you know everything about fallacies?
Well, test it by taking the next fallacy Quiz:

How logical are you?

Success!

Original source :
The November 1983 Random Sampler article Actuarial Fallacies

Actuary Core Qualities

Apart from an official outstanding actuarial education, what core qualities does an actuary need to be successful?

Summarized, here are some of the main qualities:

• Great Mathematical skills and experience
• Outstanding multi level, oral and written communication skills
• Interpersonal and social skills
• Being able to downgrade complex problems to simple decisions to be taken
• Self-motivated, ambitious, creative, independent, team worker
• Conflict solving capabilities; Empathic but also decisive
• Professional integrity, commercial outlook
• A professional discussion partner for professionals in other areas as Pension, Investment, Health, Risk, Governance, ICT, Finance, Administration, Marketing, HR, Legal & Fiscal affairs, etc.

To put is simply: an actuary has to be a kind of 'White Raven', a 'one in a million professional'.....

However, actuaries are just like humans, they do not only have their core qualities, but also their pitfalls.

Besides, how can you find out what your core quality is?

Core Quality Test
Well, the simple answer is that -thanks to Daniel Ofman - you can find out in a one minute online test what your core quality is.

This test doesn't only defines your core quality, but also your pitfall, challenge and allergy.

TAKE THE CORE QUALITY TEST

Now you know what your qualities and pitfalls are, you may as well start working on them!

Links: Core-Qualities
Sources : Wiki, RSS,

Central Bank Risk Management

Facing 2009, leads us back 300 years in history, when funding 'credit demand' was one of the main reasons for founding Central Banks in England (1694), the USA (1790) and the Netherlands (1814).

Let's go back in history and have a short look at the situation in the Netherlands 200 years ago...

More history DNB
English, Dutch

Monetary Stability

Nowadays the importance of monetary stability is just as important as a few eras ago. It cannot be underestimated.

The years of the gold standard are behind us. Question is: are there any stable new alternatives?

Learning from the past, one way or the other, we will have to introduce new trustful standards. Maintaining the current situation will probably not lead to a sustainable financial system on the long term.

To stress the importance of a stable standard, just take a look at the development of the next Federal Reserve Balance Sheet:


The above graph clearly shows that Central Bank Risk Management is not an unimportant issue....

Fed Example
Example: As more 'bad loans' and up on the U.S. federal balance sheet, to prohibit downgrade U.S. credit rating , the FED - one way or the other - will have to standardize itself.

Central Banks are monitoring themselves
The past has shown that self-regulation in private financial markets doesn't work. Be confident, it won't work on a Central Bank level either: balance size figures and federal stakeholder interests have grown to enormous proportions.

Central Banks are in fact regulating and monitoring themselves and - except for the Eurosystem - they don't fully comply to international accounting standards as well, a risk society clearly cannot permit itself.

Split up Central Banks
To regain control of central banks, governments will have to split their Central Banks into:

• A regular "Reserve Bank" (monetary function) and a
• An objective independent Regulator, that regulates private banks as well as the State Bank.

If a Central Bank is also operating as a State Bank, this Bank should also be separated from the Reserve Bank business, to guaranty an objective monetary policy by the Reserve Bank in a specific country.

In the mean time, Central Banks will have to become innovative and come up with a collectively supported new standard alternative. They have to act fast, before the market creates his own new wild and probably risky standards out the financial market chaos.

Actuaries and Economists could work together to develop such a stable risk-free standard.

Influenced Decisions

As sincere actuaries, we all think our decisions are made in a pure professional and rational manner. Upon our turn, the board we advise, takes decisions based on our 'objective' unbiased advices.

Too bad, nothing is less is true! Decisions are strongly influenced by the way we present our proposals.


Influenced Decisions
In a splendid TED Video Presentation called 'Are we in control of our own decisions' (half an our fun and learning!) , Dan Ariely, an Israeli professor of behavioral economics and head of the eRationality research group at the MIT Media Lab, shows the astonishing effect of how decisions can be fundamentally changed by adding dummies in proposals:

First experiment
Ariely tested the next ad on the website of the Economist.com on a group of 100 MIT students:

As expected, most students wanted the combo deal (84%). Students can read, so nobody wanted the middle option.

But now, if you have an option nobody wants, you can take it off. Right? So Ariely tested another version of this ad on another group of students, eliminating the middle option. This is what happened:

Now the most popular option (84%) suddenly became the least popular (32%). And the least popular (16%) became the most popular (68%) option.

What happened was that the 'useless' option in the middle, was useless in the sense that nobody wanted it. But it wasn't useless in the sense that it helped people figure out what they wanted. In fact, relative to the option in the middle, which was get only the print for $125, the print and web for $125 looked like a fantastic deal. And as a consequence, people chose it.

The general idea here is that we actually don't know our preferences that well. And because we don't know our preferences that well we're susceptible to all of these influences from the external forces.

Second experiment
People believe that when they see somebody, they immediately know whether they like that person or not. Ariely decided to put this statement to the test.

He showed his students a picture of Tom and a picture of Jerry (real people in practice). Then he asked "Who do you want to date? Tom or Jerry?" But for half the people he added a slightly less attractive (photoshopped) version of Jerry. For the other half of the students he added a slightly less attractive (ugly) version of Tom.

Now the question was, will ugly Jerry and ugly Tom help their respective, more attractive brothers?

The answer was absolutely YES. When ugly Jerry was around, Jerry was popular. When ugly Tom was around, Tom was popular.


Conclusions: The Dummy Effect
What can we conclude from these two experiments?

When a board has to take a decision between two main proposals, their decision might be positively influenced by adding a third 'slightly less attractive version' (the dummy) of the proposal you - as an actuary - value as most favorable.

The danger that you - unaware of this dummy-effect - add slightly other proposals is substantial, as - in searching for the best decision - you'll be naturally inclined to add a few solutions nearby the optimal solution.

From now on...
Now that you've become aware of this dummy-effect, your next board proposals will be 'cleaner' than before and 'undummied'. Also you'll have a more enriched look at third party (or employee) proposals that are on your or on your boards table. From now on your board advise will not only focus on the technical or actuarial matters, but also include a professional opinion about the way a proposal is structured and presented.

Good luck in developing proposals.....

Links
- Book Predictably Irrational by Dan Ariely
- MIT Center for future banking

WolframAlpha Actuary Wages

The new search engine WolframAlpha, is really a big hit for actuaries and mathematicians. Just fill in a formula like x^2 sin(x) and enjoy what WolframAlpha makes of it....

Some typical handy features for actuaries and other finance whizkids are available.
Just click on the next links to see what WolframAlpha makes of the word:

• AEGON , General Motors
• continuous interest PV=$3800, rate=6%, periods=5
• derivative of x^4 sin x

Click this video to learn more about the use of WolframAlpha.

Let's conclude with an interesting example. Here's what WolframAlpha makes of the word "actuary":

Computed by Wolfram Mathematica

Actuary Thyl Ulenspiegel?

Anyone with a little mother wit knows one plus one equals exactly two, not more, not less.

Smart people, like the historic Thyl Ulenspiegel, made a profession out of counting. Every time bystanders gave Thyl the choice between a rix-dollar (a 'two and a half dollar' coin) or 2 dollars coins, he opted for the 2 dollars.

"Two is more than one", Thyl - clearly not an actuary - used to say. People felt pity for 'poor Thyl Ulenspiegel'. That someone like him could be that stupid!


Modern Counting
Today (2009) little has changed. Modern gurus made us believe that, through M&A's, synergy, cooperation, in or outsourcing, the whole becomes greater than the sum of the parts. One plus one could easily equal three or even more.

However, research has shown that the majority of mergers and acquisitions fail. Hindsight shows that one plus one doesn't add up to three, but only to one point five, or in some cases even to zero. Cause? Synergy benefits and future market are extremely overestimated and cultural differences, despite continued 'slippery warnings', remain underestimated.

Shareholders and management of an acquired company cash their future notional profit surplus, that -at first - appears in the balance sheet as 'goodwill' and than subsequently, over the years, becomes visible as a loss in the P&L.

However there are other modern counters - not actuaries - that can even do better, as will be illustrated next.

Some youth memories never fade..
As a young boy I discovered an unstamped stamp in the attic of our house.

The stamp was worth 50 billion Deutsche Mark, dated 1923.

Completely overwhelmed I tumbled down the stairs to report my parents we'd become billionaires.

A few minutes later, completely disillusioned, I'd learned a new word: Hyperinflation.


Hyperinflation
The hyperinflation back in the twenties of the the last century is only a trifle of the current (hyper) credit inflation:

U.S. $ 1.000.000.000.000

A trillion dollars, the Fed 'invests' in buying up debt. By coincidence this equals the amount of money that Europe, the G20, will be pumping in the economy.

For all of 2009, the U.S. administration probably needs to borrow about $2 trillion. That money doesn't really exist, but that's no point of concern! The debt crisis is simply solved with more debt. What was not legitimate for the banks, is now legitimate for the 'bankruptcy proof government'. Frankly, my intuition really starts to falter now ...

Russian Credit Roulette
Modern Ulenspiegels, playing a variant of 'Russian Credit Roulette', have now left the roulette tables. With borrowed money, doubling their bet for five consecutive times in a row, they bet and lost on 'credit red'.

Instead of taking their loss, the government has taken their place at the table and decided to double the bet on red for the sixth time in a row, now playing for a trillion dollars.

All of this under enhanced risk management, governance and supervision of course.

To get a really confident feeling: the probability of consecutive six times black seems both rational and intuitive almost impossible, but is in any case less than the "safe" smaller 2.5% ruin probability (2.5% probability of insolvency) of a pension fund. Some people state there's light at the end of the 'financial crisis' tunnel.

Now let's hope this light is no oncoming train and roulette tables turn out to have a memory after all.

Maybe it's time actuaries get involved in government finance....

Chinese Actuary - Computer - Crisis

One of the interesting aspects of the Chinese language is that words are like little pictures, pictograms or logographs, the so called 'characters'. Moreover, some words are a combination, or (better) a superposition, of several of those characters.

So the meaning of a Chinese word can be deducted by interpretation of the pictograms and relating them. And, as the saying is "A picture is worth a thousand words", you don't need to be an actuary to calculate the enormous expression-power of the Chinese language. Every word is like a book of words and expresses not only the rational meaning but also the embodied feeling (mood) that goes along with the the formal meaning.

The power of the Chinese language can be illustrated by three simple examples, the Chinese words for Actuary, Computer and Crisis:

1. Actuary
The Chinese word for Actuary is :精算师

Pronunciation: jing suan shyr

The Chinese word Actuary consists of three characters:

1. Jing, 精, means Skilled or Elite
2. Suàn, 算, means 'to calculate' or 'to count'
3. Shyr, 师, a suffix meaning 'a profession of' or a skilled or 'qualified practitioner of certain professions'

So, as a consequence, a stripped and therefore 'shortcoming' translation of the Chinese word for actuary would be: 'a skilled and qualified calculator'

Sources: Masteringmandarin, Translation, Wei Liu Dictionary,
Actuary Translated: A statistician who computes insurance risks and premiums.

2. Computer
The pictogram on the right means "computer" in Chinese. Actually, it consists of two characters that literally mean "Electric Brain", which the Chinese read as "computer".

However, as you may notice, the two main characters each exist of several sub-characters that also contribute and add meaning to the word 'Computer'.

Source, and more info at: Ebrain


3. Crisis
With the current credit crisis ( 信贷危机 xìndài wēijī) in mind, let's look at the Chinese word for 'crisis'. It consists of two characters




So in Chinese crisis means something like

Crisis = Danger + Opportunity

Let's apply this to daily business life.

No matter how great the danger in a crisis is, it also means a change of circumstances that creates space for new opportunities. It's an art to spot those opportunities when you're in the middle of a crisis.

But what if you're caught in a storm crisis:

Golden Rules Crisis Risk Management
In terms of risk management: If you're caught in the storm (trouble) and can't get out, don't try to. Try to get to the eye of the storm, where it's calm.

So when you're in the middle of a (credit) crisis :

• Don't run
• Set time still (Let time do the work)
• Keep your head together
• Wait for the opportunity, no matter how hard it is or how long it takes
  

Some more tips on how to behave in crisis situations you'll find on



APPROACHING A CONFLICT SITUATION

Hoax Investment Management

You and I always wanted to believe that in banking or investing business, with an overdue of compliance and regulations, we could trust on management, based on highly ethical standards.

Geraint Anderson – a successful star analyst -makes an end to that believe.

Anderson was so outraged by the greed and lust of the Square Mile that he resigned from his immoral job.

After his resign he published a book - Cityboy - about the excesses and wrongdoings within London’s financial market.

Anderson truly believes the credit crunch is a direct result of short-term gambling and the bonus culture.

Investment Technique Examples

Now, as interested actuaries, let's dive a little deeper.

To 'level up your actuarial skills' and to 'open up your eyes', just two simple examples Geraint Anderson gives of the sick making list of secret modern investment techniques:

• Pump & Dump
  Manipulation of shares is chiefly done by small teams of hedge fund operators spreading false rumours. Day in, day out, you see the shares rise slightly. Rumours go round that a certain company will be taken over. These nasty little toerags work in little groups, on mobiles, and it’s very difficult to prove who started the rumour. The shares would go up by 30%. Then they would sell.
  
  
• Trash & Cash
  The opposite of Pump & dump – Trash & Cash – also happened quite a bit. You would spread false rumours that shares were going down. At which point the hedgies would “short” the shares, namely borrow them from, say, a pension fund, sell them, watch the rumour do its work and then buy them back.

The reason why these techniques are so nasty is that they lead to financial instability, according to Anderson.

Hoax marketing
The most frightening aspect is however that no matter how strong the design of a regulation or supervisory system, it can not prohibit the negative effects of the above mentioned hoax marketing techniques.

As our investment models become more and more sophisticated, it looks like 'informal market information' is the only option to get an outperformance and 'make the difference'. At least in case of a a 'short performer'.

Solution
The solution to this problem is therefore very simple:

Set out a long term investing strategy, so you don't have to worry about (short term) volatility and never ever act on rumours or incidental high risk opportunities in the marketplace.

As actuaries - for decades - we proved that we could manage the right side of the balance sheet long term. Now let's apply that same kind of advise and strategy on the left side of the balance sheet. Success!

SOURCE

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:

Take the Zimbardo Time Perspective Inventory

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!

Model Collective Behavior?

Take a look at the next picture:

It's clear that the little fish here, have a problem.

What's also clear, is that random actions of an individual fish are not likely going to change the situation.


In the next picture, by coordinating behavior, a way has been found to solve 'the problem' :



This solution looks very simple, the question is how to organize this kind of collective "big fish" behavior?

The problem is that often first movers will not benefit from a collective approach:

It turns out that one way to get individuals to coordinate their behavior is through morality.

Interested?
In an excellent essay called A Business Plan for Catalyzing Collective Action , The Point explanes how how these cooperative mechanisms can be created.

Actuarial Models
Collective (organizing) mechanisms are important stuff for actuaries. For example, they play an essential role with regard to all kind of solidarity aspects in pension- and insurance-contracts.

Moreover, collective rational or even emotional behavior often plays a decisive role in our society, as may be clear from the 2009 credit crisis turmoil and the escalating bonus madness.

Be aware, study "collective behavior mechanisms" and take them into account when you set up your actuarial risk model.

EU Banks : US $ 8 Trillion assets

Are European banks desperate to avoid recognizing a possible loss on their 8 Trillion Dollar US-Holding assets?


US assets, owned by European banks, increased from $2 trillion in 1999 to around $8 trillion in 2009.

In 2008 the Fed lent $600 billion to European central banks to make up for collapse of dollar funding from US money market funds.



What do, as an actuary, make up from this?

Interested? Read more about this possible time bomb at:

Market Skeptics

Moreover the Fed moves that would more than double its balance-sheet assets by September to $4.5 trillion from $1.9 trillion.

This will imply a 15-Fold Increase In US Monetary Base in September 2009.

"Trust" will be a key word in 2009!

Credit Crisis Visualized

As an actuary, your friends or family often ask you to explain the credit crisis in simple words.

Questions like: Mr. Actuary, what is a CDO?

Don't waste any more time explaining, just show them the next Vimeo.



The Crisis of Credit Visualized from Jonathan Jarvis.

Saves you hours of explaining.....

Actuary Dilbert Mashup

Do you like this Dilbert Mashup?
Create your own at Dilbert.com

How Defined Benefit Plans work(ed)

Pension plans suffer, from a rare disease....

UK
According to IPE more than 90% of UK Defined Benefit (DB) schemes are underfunded. The aggregate funding position of almost 7,800 schemes reported a deficit of £218.7bn at the end of February 2009.

NL
The situation in the Netherlands is hardly better.Figures from the Dutch regulator,DNB, show around half of the country’s 650+ pension schemes are under-funded. The Dutch government has extended the recovery period for pension funds from three to five years. The main question is: "Is that long enough?"

How Defined Benefit Plans work(ed)


Pension funds, especially DB schemes, have to face that their worst dreams, a complete doom scenario, is becoming true :

• First the subprime market collapsed
• Then, as trust broke down, the stock market went down as well
  
• On top of that Interest rates dropped dramatically

Titanic lessons
Just like the 'unsinkable' Titanic was protected by compartments, we had protected our pension schemes with diversification. And just like the Titanic, we actuaries, asset managers, and quants made a fundamental mistake. We underestimated the correlation between the different compartments (bonds, subprimes, stocks). One hit in the vital front compartment was enough to draw our pension dreams to the bottom of the ocean.

Optimistic view
But let's not stay pessimistic.

Do you know how long it took the market to recover after 1929? .....

ONLY 25 YEARS!

Global Investment Returns Yearbook 2009
And there are more reasons to stay positive about the equity results on the long term, as is shown in the very interesting downloadable Credit Suisse Global Investment Returns Yearbook 2009, that analysis returns from 1900 until the end of 2008.


As this yearbook shows us in more detail, it is only a matter of statistical faith, that equity performance on the long term will recover.

So the only thing we can do is, just like a sick patient: stay cool, rest (don't move), don't panic and wait until trust and the markets recover.

God bless you....