Tuesday, May 26, 2009


An Actuary’s job is to predict mortality. Death is certain in life but the timing is uncertain. Using the rule of large numbers (statistical jargon on converging expected value), an actuary can make some reasonable forecast.

Forecast in general is applied in many aspect of life: GDP, employment, sales revenue, weather, and so on. Guessing what is going to happen next is never easy. But experience and logic usually make some forecasting possible. There is some margin of error but within range. These forecasts are what you depend on for decision making.

When making a decision, you also weigh the benefit of upside and the risk of downside on you options. In other words you consider both the severity and the probability. If one of the outcomes can be catastrophic, you want to insure against it even if the probability of happening is low. You should not be paranoid about risk, though, as risk taking usually has a benefit, too. By assessing both upside and downside, the severity and probability, we can make decisions methodically, systematically, and rigorously.

No comments: