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

Happy Life Expectancy

As we know, Life Expectation can be measured in many ways. The three most common methods are:

• LE = Life Expectation (standard), the average number of years that a newborn can expect to live.
• HALE = Health Adjusted Life Expectation, the average number of years that a newborn can expect to live in "full health"
• HLE = Healthy Life Expectation, the average number of years that a newborn can expect to live in "full perceived health"

As comparisons between LE an HALE show, 'living longer' doesn't necessarily mean 'living longer in good health'. However, it has become clear that a strong Healthy Working Life Expectancy at age 50 or higher is the best guarantee that people will be able to work longer as they live longer.

One step further. Living in "good (perceived) health" doesn't automatically mean that people are living a happy life.

Happiness is one of the most important lifestyle statistics. Optimizing the number of 'happy years' in our life is therefore an important issue.

Happy Life Expectancy
Here is where Prof.dr. Ruut Veenhoven (Publications), comes in.

Veenhoven defines a different HLE as:

Happy Life Expectancy

In formula:

HLE = LE x Happiness-score/10

The Happiness-score (H) is the average happiness as expressed on a 0-10 scale.

Let's compare the HALE an HLE (Happy Life Expectancy) scores with each other for different (top-30 ranked) countries:

A full list and data is available at the World Database of Happiness.

It's clear that in most top-30 countries we spend about 90% of our life in healthy conditions and only about 70-80% in happy conditions. There room for improvement here! I'll leave the other conclusions up to yourself....

Let's conclude with two other correlated interesting findings:

1. Happy Life Expectancy Determination
What public policies are most conducive to happiness? This requires a view on the determinants of happiness in nations:

It turns out that six societal qualities (wealth, security, freedom, inequality, brotherhood and justice) explain 83% of the differences in Average happiness, 71% of the differences in Inequality of happiness and no less than 87% of the differences in Happy Life Years.
Enough for an interesting discussion between actuaries and politicians, I would say....

2. Wealth and happiness correlation
As expected wealth (expressed in GDP per capita) and happiness (e.g. highly satisfaction) are strongly correlated in clear distinguished regions.
Also the 'mean life satisfaction' turns out to be correlated to different age-groups and countries:


These graphics are food for thought on the relationship between mortality and wealth. More about that soon......

Paradox of Cautiousness

Actuary, Accountant, Supervisor or Consultant, life is full of paradoxes....

Let's examine a very interesting statement made by the respected President of the Dutch Supervisor DNB, Dr. A.H.E.M. Wellink, in a recent interview on Dutch television (2009;Pauw & Witteman, in Dutch):

"If the (economic) growth fall is between minus 1 and minus 2, and I think it is minus 2, I would express myself in a very subtle and nuanced way, by saying:
"I think it's closer to minus 2 than minus 1". And then, if you listen well, you would know it's actually minus 2.
To be sure, we - me and my (supervisory) colleagues - say it in a more cautious way ..."

What can we conclude from this short prodigious statement?

Communication fuzz
What first becomes clear in this statement is that responsible board members of (local) supervisors, due to media attention and unrealistic expectations, are forced to communicate in euphemisms or coded idiom.

As a consequence, professionals as well as the public, can only have a best guess at what the real message could be, with communication fuzz as a result.

President Wellink should be allowed to simply state that what he actually means, in this case:
"I think the economic growth will be around minus 2 percent".

Diferent meaning
Second problem with trying to communicate in a 'cautious' way, is that the word 'cautious' has a different meaning for different stakeholders.

For example: an investment will have a different risk profile for the investor, the asset management company, the company's shareholder or the supervisor. Each of these stakeholders will therefore have their own definition of the word 'cautious'.

As a consequence, last but not least, it is the question whether it's 'cautious' if you state the negative growth higher (less negative) than what you really think it is. Most people in the public domain will probably qualify this statement as incautious.

Paradox
Life of supervisory board members is not easy. They are confronted with a persistent paradox, the Paradox of Cautiousness.

If board members report 'early warnings' they are treated as 'messengers of bad news', accused of market interference or irresponsible actions and launching self fulfilling prophecies. On top of this they may get fired or even be held responsible for the negative financial impact of their statements.

On the other hand, if they don't report their findings public and try to solve the problems in a diplomatic way behind close doors, they may get accused afterwards for not having warned in an earlier phase.

Life is full of risks, not only financial risks, but also the risk of the consequences of (non) communication.

Actuaries
As actuaries, we're often in the same difficult situation as President Wellink. We also have to act cautious, realize our 'cautious' advise regarding the Pension Fund, could implicate an 'incautious' advice for the sponsor or the participants of the pension fund.

Not only actuaries, but also accountants, investors or - in short - everyone who has an advisory or controlling function, have to deal with this 'Paradox of Cautiousness'.


Risk Escalation Management & POP
In most cases the Paradox of Cautiousness can be avoided by proactive Risk management.

If (recalculation of) your Risk Management Models or Scenario's indicate a significant change of risk in the (near) future, immediately take action, propose measures and demand adequate decisions. Don't postpone your actions in order to be sure of the observed changes nor on the advice of friendly 'experienced' stakeholders that tell you with a smile there'll be no problem at all and you're overreacting.

Once you're in the phase where incidentally ad-hoc repair management by the board has failed and serious structural repair management scenario's have to be put on the table, you're too late!

You'll have past the so called point of no return - in this case - the Point of Paradox (POP), you're caught in

The Paradox of Cautiousness

If you put your warnings and proposals in this phase on the table, stakeholders will tell you they felt caught by your actions. Soon board members and other stakeholders will blame you for not having warned them earlier and will question your accountability. Before you realize what's going on, you're in phase three: Crisis management, your head is on the block.

Rules of Thumb
From Wellink's simple example, we may conclude several rules of thumb about being cautious:

• Dimension cautioness
  Never state that you are cautious in general, always dimension cautiousness with regard to the different stakeholders and the type and size of risks.
  
  
• Early stage warning
  In line with "good governance" always try to warn in an early stage, before the Point of Paradox (POP) when things are (about) to move in the wrong direction, but are still manageable. Warn in a transparent way, open and visible to all stakeholders. Arrange a board level discussion and make sure you've got a completely free hand in what and how you put your findings and vision on the table.
  
  
• External Advice
  Make sure that you're allowed (and have budget) to hire external consult whenever you think this is necessary. In case of discussions or decisions that may have substantial financial impact, don't doubt, but hire external legal or financial consult to assist you and to validate your findings.
  
  
• Contract & Access
  Make sure your contract includes conditions that prevent your employer from firing you during your report findings period and make sure you have (formal) access to any (supervisory) board member when you think this is opportune.

After this heavy stuff, let's conclude with a nice parable...

Parable of the Cautious Actuary
There was a very cautious actuary,
who never laughed or cried.
He never risked, he never lost,
he never won nor tried.
And when he one day passed away,
his insurance was denied,
For since he never really lived,
they claimed he never died.
- Unknown -