Humor: Actuarial Creativity

As actuaries we've studied a lot in life. And to keep up with actuarial science we'll probably keep studying until our personal mortality rate hits us finally in the back.

Although study brought us to the top of financial and statistic modeling, there's a small but fatal risk that we become so engrossed in our work that we loose our creativity or ability to solve things in a simple way.

Test

To test whether you're still a creative 'simplist', let's do a short 3 question test. Here it is:

Question 1

 "Show how it is possible to determine the height of a tall building with the aid of a barometer."

If you think you've solved this high school level problem, go to the next question

Question 2

 "Solve question 1 with another method."

If you think you've solved this problem as wel, go to the final question

Question 3

 "Solve question 1 with 4 other methods."

Evaluation
Although actuaries never give up, there's a slight chance you had to surrender and are longing for the answer.

In that case (only), read further for the answer.

Answer: The Barometer Fable

Bob Pease (Nat.Semi.) records the story of the Physics student who got the following question in an exam: "You are given an accurate barometer, how would you use it to determine the height of a skyscraper ?"

1. He answered: "Go to the top floor, tie a long piece of string to the barometer, let it down 'till it touches the ground and measure the length of the string".
   
   The examiner wasn't satisfied, so they decided to interview the guy: "Can you give us another method, one which demonstrates your knowledge of Physics ?"
    
2.  "Sure, go to the top floor, drop the barometer off, and measure how long before it hits the ground……"
   
   "Not, quite what we wanted, care to try again ?"
    
3. "Make a pendulum of the barometer, measure its period at the bottom, then measure its period at the top……"
   
   "..another try ?…."
    
4. "Measure the length of the barometer, then mount it vertically on the ground on a sunny day and measure its shadow, measure the shadow of the skyscraper….."
   
   "….and again ?…."
    
5. "walk up the stairs and use the barometer as a ruler to measure the height of the walls in the stairwells."
   
   "…One more try ?"
    
6. "Find where the janitor lives, knock on his door and say
   'Please, Mr Janitor, if I give you this nice Barometer, will you tell me the height of this building ?"

Find more than 140 solutions and read the original famous Barometer Fable, as published in 1968 in an article  by Alexander Calandra.

Warning!
Keep in mind that not every method leads to satisfactory results.
An uncertainty analysis of determining a building height using a barometer, developed by Israel Urieli, shows that this method is not accurate at all!

So the surprising news is that the first two alternative methods mentioned above are more accurate than the method you learn at high school.

Finally

It's always best when you can solve an (actuarial) problem in more than one way and the outcomes point in the same direction. The more a specific solution comes to front by applying different methods and/or data, the more confident you can be that the outcome is robust.

Used Sources

- The Barometer Fable (142 ways)

- The barometer fable (PDF)
- Uncertainty analysis of barometer method
- The Poindexter Theory (or why Nerd Economists can't be trusted)

Supervision on Supervision

On February 1 2013, the Dutch Minister of Finance, in close consultation with the Dutch Supervisor 'De Nederlandsche Bank' (DNB), announced he nationalized the Dutch Bank-Insurer SNS Reaal.

Intervention was necessary to prevent grave threats to the Dutch financial stability and economy.

This intervention shows again that the European stress tests fail, as was already predicted in a Quartz article called "Forget the stress tests: Europe’s banks are a worrisome mystery" on October 2, 2012. Risk managers have to to a better job. Work to be done!

Role of the Supervisor
The intervention also raised the question about the role of the Dutch supervisor DNB in this debacle. Officially the (Dutch) Minister of Finance is responsible for the supervision on the national supervisor. In practice this role is delegated to the national 'Supreme Audit Institutions' (SAIs).

A special  European Committee Working  Group assessed the scope of the mandate of Supreme Audit Institutions (SAIs) and its proper functioning with respect to the main financial supervisor  (FSA)  for
prudential oversight on banks.

Thirteen (of the twenty seven) European countries participated in the SAIs research.

Three aspects were analyzed:

1. Mandate: Has the local SAI a mandate to audit the supervisory role?
2. Access:  Has the local SAI actually access to audit bank files of the supervisor\supervisor
3. Test: Did SAI successfully test the completeness of the bank files

Here are  that are disappointing results of the work group for the main 11 countries:

Yes* = Yes , with condition of confidentiality

Conclusion

Although a general approach of (SAI) supervision on (Supervisor) seems useless and even silly, it's clear that the current supervisory grip and transparency is undeniably inadequate.

In this case, we certainly need a strong supervision on national supervisors in Europe to prevent accidents like SNS. In other words: Back to the old 'Four Eyes Principle'...


Finally
In a letter to the Dutch  House of Representatives the Dutch SAI states:
"The Council of Ministers agreed to the introduction of a European supervisory mechanism for banks, with a central role for the ECB, on 13 December 2012. 

To safeguard the information position of the European parliament and the member states, the European Court of Auditors should be able to audit the supervision exercised by the ECB.

The European Court of Auditors' current mandate does not allow it to do so. This creates an audit gap at European level: arrangements are not in place for the independent audit of the ECB's organisation and exercise of its supervisory tasks and authority. "

Links
- State of the Netherlands nationalises SNS REAAL
- Forget the stress tests: Europe’s banks are a worrisome mystery
- Points for consideration in the Dutch House of Representatives
- Points for consideration in the Dutch House of Representatives (Dutch)
- 4 Eyes Principle Cartoon

U.S. Inflation 1666-2012

As promised, a nice Mathematica overview of U.S Inflation history.

View and play around with these inflation data to 'grasp' inflation long and short term behavior...

Download the Mathematica CDF player if you haven't already, it's well worth it....

If you can't load the application on this blog, or the panel range becomes wider than the width of the blog column, go here: Stand alone U.S. Inflation website