Inside;Track;lIndA MAllon
Human Nature
IF tHere Were An olyMPIC event For MAkInG IntuItIve leAPS, I’d be a medal contender. I
consider this ability, for the most part, to be a gift. My instinct generally has served me well over the years,
particularly in the parts of my job that require creative thinking. but I’m not naive about its limitations. If I had
chosen a different career path (say, actuarial science—an improbable choice considering my proven allergy to
higher mathematics), my reliance on intuitive thinking certainly would be a liability.
The thing is, new research in the field of cognitive science has revealed that most people (even those who consider
themselves to be plodding empirical types) are just like me:
More often than not, they make snap decisions based on incomplete information.
In his article that begins on Page 16, James Guszcza takes
a look at the best-selling book Thinking, Fast and Slow by
psychologist Daniel Kahneman. A synthesis of the work of
Kahneman and his late collaborator, Amos Tversky, in the
area of human cognition and behavioral economics (for
which Kahneman won Nobel’s 2002 Prize in Economic Sci-
ences), the book argues that most of us routinely ignore the
laws of inductive logic when we make decisions. This isn’t
because we’re lazy or stupid. Rather, it reflects the way our
brains evolved to favor story over statistics. We instinctively
prefer a causal narrative, particularly if it’s emotionally vivid.
So prone are we to make judgments based on sketchy evi-
dence, Guszcza writes, that Kahneman calls the human mind
“a machine for jumping to conclusions.”
The implications in the area of risk management are
profound. The bad news is that a lot of us are making bad
decisions based on incomplete information (perhaps that’s
not really news). The good news, says Guszcza, is that sta-
tistical thinking is a skill that can be taught and a habit that
can be instilled. (For actuaries, that’s probably not news, ei-
ther.) Growing awareness and interest in business analytics,
predictive modeling, and enterprise risk management (ERM)
certainly underline the value of the actuarial profession. It
also opens up whole new areas into which actuaries can bring
their expertise and unique skills.
In the wake of the recent financial meltdown, most large
corporations have gotten religion about the need for ERM.
But small businesses—arguably the sector most in need of
risk management—lag behind. In his article on Page 30, Jay
Vadiveloo describes an initiative of the Janet and Mark L.
Goldenson Center for Actuarial Research at the University of Connecticut that connects actuarial science students
with small businesses. The center pays students a stipend to
work with small businesses in identifying and prioritizing
the risks in their enterprise, modeling and quantifying those
risks, and ultimately developing risk-mitigation strategies.
The student’s report, along with any software tools that have
been developed in the course of the project, is presented to
the participating business owner at no charge.
The effort seems to be a win-win all around. Actuarial students gain valuable real-life work experience in their chosen
field, business owners get individualized evaluations that offer specific suggestions for improving their operations, and the
center amasses valuable data on ERM principles that are unique
to the small-business sector. Oh, and the entire economy benefits as small businesses, which account for approximately half
the gross domestic product and more than half of employment
in the United States, get an important lifeline in an economic
climate in which they still struggle to thrive.
I’m a great believer in narrative and have always embraced
its importance in helping people to make creative sense of the
world in which we live. But I also appreciate the importance
of dry statistics in spelling out important truths. The actuarial profession is small. But it clearly plays an outsize role
in protecting the rest of us from ourselves.
