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 -

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....

Live Piracy Map

According to IMB Piracy attacks almost doubled in 2009 first quarter.

Pirating in the Gulf of Aden, transit way for a third of the world's commerce, set a record of 120 attacks in 2008. Estimates of ransom payments vary and are estimated at around $40 million last year.

Attacks, and ransoms, in 2009 are on a pace to top those records. In his column "Insurance companies' piracy policies can be a double-edged sword", David Greising -business columnist for the Chicago Tribune - states:

• In the business world, risks create opportunities, so you shouldn't be surprised to know that the scourge of piracy on the high seas has led to a nifty innovation: pirate insurance.
• Chicago-based Aon Corp. and other companies have begun offering policies to guard against the loss of ships, cargo or crews to pirates.
• If shippers become more willing to make ransom payments because they'll have insurance to cover losses, it may only add to the economic booty that tempts Somalis into piracy in the first place.
• One of the lasting lessons of the piracy epidemic is how some of the world's most powerful naval forces have been almost powerless against speedboat-driving outlaws from one of the world's broken-down states. It will be tough to solve the piracy problem so long as anarchy and economic deprivation persist in Somalia.

Nevertheless piracy insurance business is high profitable for companies like AON. So profitable that according to Workers World there are some pirates who don’t use firearms to seize vessels on the high seas.

Some even go further than that


IMB
The ICC International Maritime Bureau (IMB) is a specialised division of the International Chamber Of Commerce (ICC). The IMB is a non-profit making organisation to act as a focal point in the fight against all types of maritime crime and malpractice. IMB’s main task is to protect the integrity of international trade by seeking out fraud and malpractice.

IMB Live Piracy Map 2009
This map shows all the piracy and armed robbery incidents reported to the IMB Piracy Reporting Centre during 2009.

=

Actual Attack

=

Attempted Attack

=

Suspicious vessel

Sources: International Maritime Bureau,
Live Piracy Report, Piracy Map 2008, Piracy Map 2007

Any comment on where to find more information about the actuarial modeling of pirate risks (Kidnap and ransom insurance) and/or insurance quoting would be welcome.

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

Credit Default Swaps explained

Untangling credit default swaps from Marketplace on Vimeo.

SOURCE

DNB report on Credit Crisis

As experienced actuaries you'll probably know that 'De Nederlandsche Bank' (DNB) is the Dutch supervisor on banks, pension funds, insurers and mutual funds.

Recently DNB reported about the effects of the credit crisis.

You may find the report in the recently published:

Statistical Bulletin March 2009

Main articles in this interesting bulletin discuss the following topics:

• Capital market financing more difficult and more expensive in 2008
• Dutch banks scaled down foreign activities
• Dutch pension funds fail in realizing indexation ambitions in 2009

The bulletin also includes a description of the fully revised statistics of investment funds.

Indexation
The Dutch save massively for their pensions. To supplement their future state old age pension, nearly 6 million employees save for a pension at a pension fund. At end-2007, over 2.5 million persons received a pension benefit.

These savings have accumulated into a collective nest egg of around EUR 575 billion, i.e. nearly EUR 80,000 per Dutch household (end-2008).

For many households, pension savings are by far their largest financial asset. As a result of the credit crisis, pension funds saw their financial position deteriorate. In 2008, the pension funds’ average nominal funding ratio dropped from 144% to 95%

Chart: Funding ratio.
Broken down by interest rate effect and return on equities

According to a survey among the largest 25 pension funds, the pension sector, too, is being impacted by the credit crisis.

Following catch-up indexation last year, pension benefits will probably be indexed on average at a mere 0.2% this year. This means a loss of purchasing power for pensioners, even though the price level has fallen since the summer of 2008. Many pension entitlements accrued by employees, too, are not being indexed.

In 2009, pension contributions will rise, especially those of employers with an independent company pension fund. Employees, too, will be paying higher contributions.

Interested? More info at DNB

SOURCE

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

Job Application Interview

Most actuaries don't have to apply for a job....

This apparent advantage could turn out to be a disadvantage later in our career, when we suffer from an 'application experience gap'.

Anyway... Do you recognize the flabbergasted feeling that occurs when, after a 'splendid' job interview, you come home with a positive feeling and the day after you are rejected?

Although you thought you performed well in the interview, somewhere, somehow, you missed the boat.

What went wrong?

Well, apart from the general pitfalls in a job interview and the trivial explanations of a rejection, most probably things went wrong due to lack of proper communication.

Probably, when you're having an interview, you'll take notes.
Because you're focused on getting the job, you're inclined to (only) write down the positive aspects of the job and the conversation.

This will definitely give you a biased view on the outcome of the interview. You simply miss or underestimate the minor or negative remarks in the interview.

How to solve this?



This is what you can do to get a more realistic idea about the outcome of the interview.

• Listen
  First of all, make sure you listen well.
  
  
• Take Notes
  Be careful not just to write down your personally important or spectacular issues (e.g salary, benefits, car, etc), but especially note (and write down!) small remarks, advices or 'used adjectives' of the interviewer.
  
  
• Split in Negatives and Positives
  Split your note paper in left and right, and put the positive issues (the Positives) on one side and the negative issues (the Negatives) on the other side.
  
  
• Manage the Negatives
  Make sure to write down every single negative issue or negative adjective, no matter how small. Don't ignore these Negatives. By questioning, make sure you understand them right and manage them one by one. If you're not able to get those negatives from the table or to put them in quarantine, they might kill you in the end without you realizing it. So:
  
  
  Manage the Negatives instead of counting the Positives
  
  
  
• Feedback
  At the end of the conversation ask for feedback and check by asking the interviewer to summarize your Positives and Negatives. If any Negatives are left, handle them with care right there.
  
  
• Don't fake
  Don't try to reason away negatives that are clear facts. If that would imply a rejection, be happy, because you are not qualified for this job and therefor wouldn't be happy in this job as well.

Evaluating an interview is not simply balancing Positives with Negatives. Even a single Negative can screw it up.

P/N-Method
Anyway, this Positives/Negatives Method is not only applicable in case of a job interview, but can be used in every "beauty parade", contract negotiation or proposal you try to defend.

Next time, with a positive attitude, keep your 'sixth sense' on the potential Negatives and manage them!

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!

Credit Card Account Number

As an actuary you must be interested in numbers.

Of course you know what your credit card number means and how it is generated........


In case you're not a credit card nerd, just find out here how it works on Money, Matter, and More Musings

Source

Wiki Book of Actuarial Science?

Wikibooks is great!

Wikibooks is a Wikimedia community for creating a free library of educational textbooks that anyone can edit.

Since the start in 2003, Wikibooks has grown to include over 35000 pages (year 2009) in a multitude of textbooks created by volunteers.


Chess
A great example of Wikibooks is the Wikibook Chess.

In exactly 12 chapters a variety of aspects like, Playing, Notating, Tactics, Strategies, Openings and Endgames, are clearly explained.


Wikibook of Actuarial Science
There is also a Wikibook of Actuarial Science. Although all the required chapters of 'Actuarial Science' are already there and structured, the content has to be taken care of.

So, if you like to contribute? Work for voluntary actuaries!

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

Pension Recovery: Yearly Negative Indexation

Hold your breath...

Since 2008, according to Milliman, the average funding ratio of the top 100 US (largest) Pension Funds has fallen from 99,6% to 71,7%.

Dutch pension funds developments are comparable.

One way of the other, pension funds have to plan their way out of this financial crisis.

On january 29, 2009, on a NETSPAR meeting, Theo Nijman, Professor Investment Theory of the Tilburg University, gave a presentation called Optimal design of recovery plans.

Nijman's recovery model
Summarized, Nijman shows several recovery options:

1. Do nothing:
   Hope that financial markets will recover and the interest rates will rise
   
   
2. Use control instruments:
• Indexation cuts, or no indexation of entitlements
• Recovery contributions (sponsor, employee)
• Return on mismatch (gamble)
• Reduction, if no recovery plan can satisfy the criteria:
  Reduction of guarantees
  

Recovery by Maggid
Although all kind of (IRS) regulations are in place, basically there's no reason for panic....
Everything in life is based on trust. So are our (ALM and VAR) models.

This implies that the only way out, is to stick to our models and their corresponding strategies as much as possible, which means in principle: Do nothing.

However, what we do need to do, is to (re)define and maintain our indexation strategy as follows:



Yearly negative indexation
This strategy implicates that for pension funds with funding ratio's of 80% or less, we'll have to apply "yearly negative indexation".

One off reduction of entitlements is not necessary in this situation and would be 'clumsy', unless the funding ratio would be less than 60% (you have to draw the line somewhere).

In fact this 'negative indexation' is not really new, it's just that we haven't been in this kind of situation before and because we didn't think we would end up in this scenario, we didn't develop any policy. Let's do it now!
Yearly negative indexation is in fact no more than the logical natural opposite of (positive) indexation.

In good times there's positive indexation en in bad times negative indexation, it's a simple as that. Books closed.


Redefine risk strategy?
Last but not least: if we never ever want to end up in a (crisis)situation like this again, we should redefine our risk strategy and select an asset mix that fits to a lower risk/return level.

The question is, when it's the the right time to reallocate, will you actually do it?

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....