Coastline Fair Value

Close your eyes and take a guess at the Australian coast length? Answer : 'Exactly' 25,760 km.

1. Right, according to Wikipedia
2. Wrong! Because the exact coast length depends on the length of your ruler!

If you would measure the Australian coastline with a 1-mm ruler, you would get a length of more than 100 .000 km!

This leads to the question:

Does a 'coastline fair value' exist?

After all, as the ruler gets diminishingly small, the coastline's length gets infinitely large.
This phenomenon is also known as the Richardson Effect (or the coastline paradox).

Coastline Formula?
In 1967 a document called "How long is the coast of Britain?" was published by the great mathematician Mandelbrot

In 1967 he revived the original formula, earlier developed by Richardson :

L(G) = F . G^(1-D)

with

L=length of the coastline as a function of G

G=Ruler length

F=positive constant factor,
D=constant (D>=1). D is a ‘‘characteristic’’ of a frontier, varying from D=1 for a straight frontier to D=1.25 for a very irregular coastline like Britain. It turns out that D = 1.13 for the Australian coast and D=1.02 for the very smooth South Africa coastline.

Fractals
The constant D also stands for 'Dimension' and in 1975 Mandelbrot develops this Dimension- idea to what is called the Fractal Dimension.

Fractals turn out to be the perfect (math) language for describing all kind of natural phenomenas like leaves, trees , etc.

Fractals are even used to describe the stock market, the credit crisis or the coastline of the law.


Coastline Formula & Valuation
What can we learn from this fractal coastline measurement with regard to valuations?

1. Stop changing the rules
   If accounting standards like IFRS , GAAP and IAS or legislation are constantly changing (e.g. amendments) and getting more and more specific, valuing a company becomes like measuring the coastline with different rulers.
   
   In this case management, supervisors, stake- and shareholders lack a sustainable view on their business. You can't justify the results and value of your company if you have to measure yourself with a dynamic ruler!
   
   
2. Stop digging
   More and more deep going risk research will eventually lead to an substantial increase or even 'infinite' Value at Risk.
   
   Therefore it's important to define portfolio-, market- and product-risk- limits and structures first, right from the companies (risk) strategy.
   
   These instruments reduce the needed depth of risk research and therefore increase the control- and efficiency-level of the company.

Try to think scale free and have fun by applying fractals in actuarial science!

Actuary Quiz

Take the actuary quiz!

1. Qualify as U.S. Actuary?
2. The likelihood of death?
3. Skills quiz for students

Have fun !

Longevity escape velocity

Aubrey de Grey, a British biomedical gerontologist, states in his book "Ending Aging," that that the fundamental knowledge to develop effective anti-aging medicine mostly already exists.

In a Ted Show presentation he states:

Why should we cure aging?

Because it kills people!

Age damage
There are seven types of aging damage :

Damage rising with age	Proposed as contributing to aging by
Cell loss, cell atrophy	Brody (1955) or earlier
Extracellular junk	Alzheimer (1907)
Extracellular crosslinks	Monnier and Cerami (1981)
Cell senescence	Hayflick (1965)
Mitochondrial mutations	Harman (1972)
Lysosomal junk	Strehler (1959) or earlier
Nuclear [epi]mutations (cancer)	Szilard (1959) and Cutler (1982)

Although, for more than 25 years, science suspiciously didn't seem to develop, all kind of medicines to repair these damages are already within reach for mice.

Age damage for human beings is strongly age related:



As the chairman of the Methuselah-Foundation, De Grey stimulates scientists to develop medicines that repair age damage for this living generation.

Experiments on mouses showed that medicines didn't only slow down the aging process, but could reverse it as well (condition: start in time!). It turns out that every time a new medicine is developed and applied, it restores - above a certain threshold of reserve capacity - the lost reserve capacity for about 50%.

This would imply that if new medicines for human beings would be developed within the next decade and the rate of developing new medicines will be fast enough to stay 'ahead of the game', all people of 50 years and younger would be able to live a thousand years or more and people just slightly older could still live for hundred years or more.

In 2006 Technology Review announced a $20,000 prize for any molecular biologist who could demonstrate that De Grey was wrong. Nobody succeeded!

If De Grey is right, actuaries don't even have to start calculating new life expectancies or other (financial) consequences. Life insurance and pension will have to be redefined.
Even stronger: We'll have to redefine our life!

Sources: Ted Show presentation, Pres. 1, Pres 2

Related links:
A model of aging as accumulated damage matches observed mortality ...