What's a world without Jobs?

On Wednesday night 5th October, Apple co-founder, former CEO and chairman Steve Jobs, passed away..



Steve Jobs' life is an example to all of us. In an excellent and catching speech, Steve urged graduates to pursue their dreams and pick up the opportunities in life's setbacks at the university's 114th Commencement on June 12, 2005.



What - besides Steve's phenomenal contributions to computer technology and marketing - did Steve contribute to the profession of Risk Management?

Steve Jobs' Risk Management Lessons
Here are (derived from his 2005 Stanford speech) some inspiring lessons from Steve. Lessons we can apply 'one to one' on Risk Management (my comments in Italic):

• Connect 'the dots' in life
  It's impossible to connect the dots looking forward,you can only connect them looking backwards, later in life.  Do so!
  
  
  
  To turn Risk Management into an opportunity, we can't look in a crystal ball. We'll have to explore and have to allow ourselves some experiments and non-conventional ideas to finally see the bigger picture that turns marginal new business developments into one new final integral success!
  
  Try to develop 'Risk Oversight' (connecting the dots) as Risk Oversight is negatively related to risk and positively related to shareholder value (Research Stanford University).
  
  
• Trust
  You have to trust that the dots will somehow connect in your future.
  Believe in something and follow your heart, even if it leads you of the well-worn path..
  
  Make Risk management supportive and not dominant to what you want to achieve in life or business. It's positive when  companies Ideas and Vision sometimes conflict with inner and outer notions.
  
  To grow a plant (company)  in soil (society) is takes opposite 'nutrients' (and circumstances) like water and sun that feed your seed (idea).
  
  
  
  
  Accept that your heart, gut feeling and helicopter view are sometimes more leading than the rationale of your Risk management (what your brain thinks). The more and the longer you are able to manage this paradox, the more likely success will come your way eventually. 
  
  Keep all the above decision elements in ('a paradoxical') place. Remember  Shareholder Value and Sustainability are a function of Risk, so don't pull the plug too soon!
  
  
• Love and Loss
  
  
  Making mistakes is an inherent part of life and doing business.
  
  If you (or something you started) fails, start over!
  
  The effect of less sureness by 'starting over', inspires for exploring new directions and becoming creative again.
  
  'Love what you do' is the most important leading statement to proceed in life and business.
  
  'Sometimes life hits you with a brick'. Don’t lose faith.Your time is limited, so don’t waste it living someone else’s life.
  
  Risk Management exists by the grace of losses that occur. Accept that as a fact. Therefore, if no losses occur anymore, your Risk Management program is actually dead without a clue. It will certainly fail eventually.
  
  
  
  Getting knocked down by a 'brick' like in the current financial crisis, is a sign that we have to redesign our Risk Management programs instead of intensifying existing programs like Basel II /III and Solvency II. Get out!
  
  New Risk Management will have to focus on how to prevent and to DEAL with risk, instead of sophisticated capitalizing risk as Dead Risk Capital. Rather than focus on reducing risk, risk-transformation — that is, capitalizing risk in such a way that its value creation potential is maximized - seems the right way forward.
  
  
• Death
  If you live each day as if it was your last, someday you'll most certainly be right. Remembering you'll die is the most important tool to help you make the big choices in life. Because almost everything — all external expectations, all pride, all fear of embarrassment or failure - these things just fall away in the face of death, leaving only what is truly important.
  
  Remembering that you are going to die is the best way to avoid the trap of thinking you have something to lose.
  
  
  
  
  Risk Management is about making choices and giving up less important issues for more important.
  It's about generating focus on what really matters for sustainability or results, instead of trying to manage everything.
  
  Good Risk management therefore urges for CEO and Board rewards that reflect the downside risk of a company's default instead of just rewarding upward and short term profit.
  
  Company bonuses should therefore be positive as well as negative performance related.  

 Remember, just like Steve Jobs, Risk Management is about 'failing better than anyone else' .....


Related/Sources:
- Steve Jobs: He Thinks Different (2004)
- Was Steve Jobs Practicing Proactive Risk Management? (2010)
- The Role of the Board in Corporate Risk Oversight (Stanford University 2010)
- Dead Risk Capital

Pension Gamification

For years you deny it, then you doubt it, then you know for sure:

Life is a Game

This blog is specially written for (1) those who are still in the denial phase and (2) 'actuarial life gamers' who just want to enjoy actuarial gaming....

Pension Game
Games are an excellent way to involve people (employees) in a complex and (two fold)  'low interest product' like pension.

Pension games stimulate clear communication and understanding of pensions (The Nest Phrasebook:Clear communication about pensions Version 1.1).

Games, like the above pension game, conquer the world more and more.

Gamification
It looks like everything that has to be sold or communicated, succeeds better with the help of a game. Gamification gets people more engaged, helps change behaviors and stimulates innovation. In other words:

Gamification rules our life

As an example of gamification, Gartner cited the U.K.’s Department for Work and Pensions, which created an innovation game called Idea Street to decentralize innovation and generate ideas from its 120,000 people across the organization. Idea Street is a social collaboration platform with the addition of game mechanics, including points, leaderboards and a “buzz index.”

The employees went wild for it. Within 18 months, Idea Street had approximately 4,500 users and had generated 1,400 ideas, 63 of which had gone forward to implementation.

Other gamification examples are the U.S. military’s “America’s Army” video-game recruiting tool, and the World Bank-sponsored Evoke game, which crowdsources ideas from players globally to solve social challenges.

All and more of this in the 2011 report of  Gartner that states that by 2015, more than 50% of organizations tat manage innovation processes will gamify those processes.

Consequences

Mainly as a consequence of the overdose of gamification in our society, people get confused and lose sight on the difference between reality and illusion. 

This confusion is exacerbated by the fact that negative effects of the current financial crisis have been 'managed away' in stead of letting people and organizations 'perceive' and 'experience' the (negative) financial consequences of their handling.

The 'Hocus Pocus Society'

This way, we gradually created a 'Hocus Pocus Society' where all our (actuarial) models and convictions are doomed to fail as the 'game of life' seems to be to:

• challenge the established (good governance) rules to raise profit and returns to an unrealistic level, by introducing uncontrolled and uncontrollable mechanisms and financial instruments like 'market value', 'derivatives', 'sub-prime mortgages', 'High Frequency Trading', etc.
• try - at the same time - to capture and control these volatile 'unwanted' effects of these mechanisms and instruments by an overdose of hypocritical additional regulation (Solvency (II), Governance, etc.)
• transfer and lay back fundamental complex risk to consumers and communicating this in such a (so called) 'transparent' but oversimplified 'way', that consumers for sure lose their trust in financial institutions as a whole.
• end up in new, for the financial institutions, 99,9% risk free financial products and offerings on the marketplace with a non corresponding stock holders dividend level.

This illusory way of communication about pensions is well demonstrated in the next 'Pension game' video: The myth of your (401K) pension





Way out

To get out of this down spiral cycle in the fiancial industry, we'll have to learn from other industries.

Just like in the case of introducing new medicines , new financial products will have to meet a number of tests and need explicit approval by in and external regulators before they are allowed to be  introduced on the market place.

Anyhow: Don't end up like a 'Hocus Pocus Actuary' and game up your actuarial life!



Related and additional links:
- Idea Street
- Gartner: Over 50% firms may gamify processes 
- Youtube: The Pension Game
- The Annuity Game - Heads Government Wins Tails Pensioner's Lose
- 5 Cent "Old Age Pension" Dice Game 


Calculators:
- life expectancy calculator
- Retirement Withdrawal Calculator

Small Population Compliance Samples

My last post, Compliance Sample Size, demonstrated the set up of an efficient sample method for compliance tests in case of large populations.

What if population size is relatively small ?, some actuaries asked me....

In this case you can ( instead of the beta distribution) make use of the hypergeometric distribution for calculating confidence levels.

Here's the same example as I used in my blog 'Compliance Sample Size', but now for a population of 100 .


'Compliance Check' Example (N=100)
As you probably know, pension advisors have to be compliant and  meet strict federal, state and local regulations.

On behave of the employee, the sponsoring employer as well as the insurer or pension fund, all have a strong interest that the involved 'Pension Advisor' actually is, acts and remains compliant.

PensionAdvice
A professional local Pension Advisor firm, 'PensionAdvice' (fictitious name), wants 'compliance' to become a 'calling card' for  their company. Target is that 'compliance' will become a competitive advantage over its rivals.

You, as an actuary, are asked to advise on the issue of how to verify PensionAdvice's compliance....... What to do?

• Step 1 : Compliance Definition
  First you ask the board of PensionAdvice  what compliance means.
  After several discussions compliance is in short defined as:
  
  
  1. Compliance Quality
     Meeting the regulator's (12 step)  legal compliance requirements
     ('Quality Advice Second Pillar Pension')
     
     
  2. Compliance Quantity
     A 100% compliance target of PensionAdvice's portfolio, with a 5% non-compliance rate (error rate) as a maximum on basis of a 95% confidence level.
  .
  
• Step 2: Check on the prior believes of management
  On basis of earlier experiences, management estimates the actual NonCompliance rate at 8% with 90% confidence that the actual NonCompliance rate is 8% or less:
  
  If management would have no idea at all, or if you would not (like to) include management opinion, simply estimate both (NonCompliance rate and confidence) at 50% (= indifferent) in your model.
  
  
• Step 3: Define Management Objectives
  After some discussion, management defines the (target) Maximum acceptable NonCompliance rate at 5% with a 95% confidence level (=CL).
  
  
• Step 4: Define population size
  In this case it's simple. PensionAdvice management knows for sure the portfolio they want to check for compliance, consists of 100 files: N=100.
  
  This is how step 2 to 4 look in your spreadsheet...
  
  
  
  
  
  
• Step 5 : Define Sample Size
  Now we get to the testing part....
  
  
  
  
  
  Before you start sampling, please notice how prior believes of management are rendered into a fictitious sample (test number = 0) in the model:

• In this case prior believes match a fictitious sample of size 25 with zero noncompliance observations. 
• This fictitious sample corresponds to a confidence level of 77% on basis of a maximum (population) noncompliance rate of 5%.

[ If you think the rendering is to optimistic, you can change the fictitious number of noncompliance observations from zero into 1, 2 or another number (examine in the spreadsheet what happens and play around).]


To lift the 77% confidence level to 95%, it would take an additional sample size of 20 - with zero noncompliance outcomes (you can check this in the spreadsheet).
As sampling is expensive, your employee Jos runs a first test (test 1) with a sample size of 10 with zero noncompliance outcomes. This looks promising!
The cumulative confidence level has risen from 76% to over 89%.


You decide to take another limited sample with a sample size of 10. Unfortunately this sample contains one noncompliant outcome. As a result, the cumulative confidence level drops to almost 75% and another sample of size 20 with zero noncompliant outcomes is necessary to reach the desired 95% confidence level.

You decide to go on and after a few other tests you finally arrive at the intended 95%cumulative confidence level. Mission succeeded!

Evaluation
The interesting aspects of this method are:

1. Prior (weak or small) samples or beliefs about the true error rate and confidence levels, can be added in the model in the form of an (artificial) additional (pre)sample.
   
   
2. As the sample size increases, it becomes clear whether  the defined confidence level will be met or not and if adding more samples is appropriate and/or cost effective.
   

This way unnecessary samples are avoided, sampling becomes as cost effective as possible and auditor and client can dynamically develop a grip on the distribution. Enough talk, let's demonstrate how this works.

Another great advantage of this incremental sampling method is that if noncompliance shows up in an early stage, you can

• stop sampling, without having made major sampling cost
• Improve compliance of the population by means of additional measures on basis of the learnings from the noncompliant outcomes
• start sampling again (from the start) 

If - for example -  test 1 would have had 3 noncompliant outcomes instead of zero, it would take an additional test of size 57 with zero noncompliant outcomes tot achieve a 95% confidence level.  It's clear that in this case it's better to first learn from the 3 noncompliant outomes, what's wrong or needs improvement, than to go on with expensive sampling against your better judgment.

D. Conclusions

On basis of a prior believe that - with 90% confidence - the population is  8% noncompliant, we can now conclude that after an additional total sample of size 40, PensionAdvice's noncompliance rate is 5% or less with a 95% confidence level.

If we want to be 95% sure without 'prior believe', we'll have to take an additional sample of size 25 with zero noncompliant outcomes as a result.

E. Check out: DOWNLOAD EXCEL
You can download the next Excel spreadsheets to check the Demo or tot set up your own compliance test:

- Small population Compliance test DEMO
- Small population Compliance test BLANK
- Large population Compliance test

Enjoy!