Monthly Archives: September 2012

The Protection Gap Puzzle

The Protection Gap puzzleMuch has been said about underinsurance in various populations. In recent years, this statement has been made about life insurance protection in Singapore (e.g. People of Singapore Found Underinsured) and another Protection Gap Study for Singapore was released. Conscious of the fact that Singapore has a relatively high savings rate, this puzzled me somewhat.

A bit of delving into the report pieced this puzzle together:

1) All the compulsory insurance under the DPS (Dependent Protection Scheme) amounting to roughly SGD100 billion in the CPF (Central Provident Fund) scheme is ignored in the assessment (section 6.3 of the study)

2) Many financial assets owned by the population (in particular cash, shares and property) are ignored in the assessment (section 5.5 of the study)

Let’s say, Mr X, aged 45, has cash in fixed deposits worth SGD200,000, which comprises all his savings over the last 20 years. (For simplicity let’s ignore the CPF scheme.) Let’s say also, his protection need has been calculated to be SGD200,000 now (which includes the oustanding mortgage on his residential property, future family expenses etc). The gap for Mr X, according to the methodology used in the study would be SGD200,000 because the SGD200,000 worth of assets in fixed deposits are simply ignored.

Many of us may reasonably regard the gap for Mr X as being closer to zero, as the ‘savings in fixed deposits’ asset may be used to meet Mr X’s protection needs. Similarly, if Mr X had invested his savings in shares or an investment property etc. instead of the fixed deposits, this could reasonably be used to meet his protection needs. (Of course, it may be debated whether a life insurance policy would have suited Mr X better than these financial assets, to meet his protection needs; however, that need not be a forgone conclusion.)

It is true that in any society there are segments of the population that are underinsured (and in this case, probably some individuals who are overinsured) and it is most useful to assess individual needs carefully. However, to regard a nation as grossly underinsured, while ignoring certain insurances people have and their financial assets seems a little odd. It helps to understand the situation better and put things into perspective.

Raspberry Headaches

Raspberry HeadachesI met up with a friend for dinner today and we picked a dessert from the menu, strangely named “White Chocolate Mousse with a Raspberry Headache”. Being one for culinary adventure, I half expected to get a surprise when it arrived. The dessert in fact turned out to look pretty normal – 4 pieces of frozen white chocolate mousse, 4 raspberries and 2 types of sauce at the side. It seemed like an interesting, very creative name for what it was.

Still curious when I got home, I googled “raspberry headache” and was surprised to discover an article from almost exactly a century ago, August 11, 1912, indeed about raspberry (and other summer fruit) headaches. Ha!

Well, well, we learn something new everyday! Thankfully, neither of us is allergic to raspberries or other summer fruit, as far as we know. I’ll have to say I just enjoyed the outing and the 100-year old piece of wisdom.

Narrative Fallacies Galore

Narative Fallacies Galore“Narrative Fallacy” is a term I first came across in the book, “The Black Swan” by Nassim Nicholas Taleb.

The narrative fallacy addresses our limited ability to look at sequences of facts without weaving an explanation into them, or, equivalently, forcing a logical link, an arrow of relationship upon them. Explanations bind facts together. They make them all the more easily remembered; they help them make more sense. Where this propensity can go wrong is when it increases our impression of understanding.

“Storytelling” and “business narratives” are increasingly touted as the effective way to get the message across – politicians, business leaders and motivational speakers all have this indispensable tool in their armoury – the more wonderful the story, the more we are blown away and buy into it, so the more correct these successful storytellers must be, apparently. True, pure facts and figures bore most of us; we need a compelling story to bring the message to life. The problem though, is that people are often so enamoured by any good, well-articulated story that we fall into the “narrative fallacy” trap without asking the tough questions about whether it all really makes sense.

An example of story-telling gone horribly wrong was in the sub-prime mortgage crisis. The facts and details were too difficult, too tedious or too boring for most people to process; even experts fell into this trap. Conversly, the stories were exciting, compelling, marvellous. Most people bought the stories. It took someone like Michael Burry (as told in the book “The Big Short” by Michael Lewis), with Asperger’s Syndrome, to see the pattern of a mortgage bubble forming way ahead of others, even experts, and bet against this, making good returns for the investors in his fund, Scion Capital. (Those with Asperger’s Syndrome sometimes possess great talents in seeing patterns, but unfortunately, for various reasons, have difficulties with other abilities and with fitting into society.) Of course, a number of factors can be blamed for leading to the sub-prime crises; our vulnerability to get carried away by narratives just added fuel to it.

Narrative fallacies trap us everywhere – politics, commerce, belief in the paranormal etc. etc. It helps to be cognizant of how our brains unwittingly deceive us and not place undue faith in great narratives and good storytelling.

Truth-O-Meters and Lies

Truth-O-MeterThere is a new iPhone app called “Settle It!”, applicable for US politics. It is used to resolve dinner-table arguments by checking political facts with PolitiFact. PolitiFact runs a website dedicated to checking facts and assigning degrees of truth to statements by politicians. The result is displayed on a device called a “Truth-O-Meter” (see image). This is used for facts only, and not opinions and that, of course, makes sense.

That’s nice and fun, but in a perverse sort of way. To think kids spend a good 12 years or so in school with tonnes of red ink spilt on their work or report cards for getting facts wrong (yes, the poor kids are made to feel really guilty); yet lying (or at best a failure to check the correctness of facts) seems to become commonplace in adulthood with those who make public statements – that’s bad, bad, really bad.

Talk is cheap! The concept is a great one that PolitiFact came up with to save the public from being hoodwinked (if they care to refer to the Truth-O-Meter), although it’s too bad it’s even needed.

Book Review: The Believing Brain – by Michael Shermer

The Believing Brain – by Michael Shermer

TheBelieving Brain Everyone gets something different out of a book. The opinions here are mine only.

There is so much about the brain and its complex workings that we do not understand. Every time an expert explains a little more, learnt through scientific study and controlled experiments, this becomes quite helpful.

I found the book particularly useful as it it very well written, very readable and informative; at the same time, it is not too technical (except for a few small sections) for the lay person. The author takes on a number of the “strange” phenomena witnessed in the world head-on (such as sensed presences, experienced by athletes, mountaineers and in Charles Lindburgh’s transatlantic flight), describing real, specific examples, and explains what goes on in the brain during those times. The way human brains work gives us the tendency to look for patterns and infuse them with meaning (whether correct or not).

Michael Shermer also presents in some detail, the various cognitive biases that affect us when forming  beliefs. Most of us are vaguely aware of some of this (e.g. anchoring bias and framing effects) but having such a comprehensive list explained is very helpful. I see the usefulness of applying this knowledge whenever we are presented with a persuasive argument, thinking about what traps we may be falling into.

Story Tennis

TennisSomeone recently introduced me and a few others to the concept of “Story Tennis”.

We are a foursome. The first player writes 200-500 words of a story, hits it over to the next player to continue, then it’s his or her turn and so on. We have no idea what’s coming next in the story as that depends on the imagination of three other people in sequence, but have to read carefully to ensure continuity. Amusing at times, to uncover the unexpected twists and turns in the story, it has kept us each in suspense. We get the pleasure of reading, writing and interacting with each other all in one game.

Thinking about unexpected twists and turns, I am suddenly reminded of the most shocking plot I ever read in a detective novel. This has got to be “The Murder of Roger Ackroyd” by Agatha Christe, which I read decades ago. We are ameteurs, writing for fun and I would not in my wildest dreams make any comparison to one of the great writers of all time. With four people thinking very differently, though, we could be in for quite a few strange surprises. It’s a nice experiment. I wait in anticipation for my third round of writing!

Smarts and Nonsmarts

“Smart people believe in weird things because they are skilled at defending beliefs they arrived at for nonsmart reasons.”

This would have to the quote of the day for me. It comes from the book “The Believing Brain” by Michael Shermer.

“Smart” here refers to having a high IQ; “nonsmart” reasons refer to our unscientific filtering through our coloured lenses (coloured by worldviews, heros, prejudices etc), selecting facts that confirm what we already believe and rationalizing away those that condradict our existing beliefs. I would be inclined to replace “weird” with “weird or nonsmart”.

This is at the heart of multi-billion dollar industries (advertising, self help) as well as politics, the paranormal, etc. Hard science is well, hard, so we resort to the unscientific – half-baked facts, testimonials, etc and fill in the rest. This was alluded to in another book I read recently, “Redirect” by Timothy Wilson. We know this but I just wish there would be less of it and more of the hard scrutiny in the choices we make.

Quants, Risks and After-Work Drinks

Carpet at Marina Bay SandsI attended an after-work drinks event recently, attended mostly by quants. It was intriguing for me to enter this world for a while.

I am not a quant, though, given my background (science, finance, risk, business) there is some chance I might have gone that route, given the right influence, had I stumbled upon this world when I was choosing career paths a long, long time ago. Nevertheless, I’m not one now but it’s always interesting to discover new worlds.

There was no doubt, this was a bunch that were passionate about what they do, launching every now and again into discussions about various models, the gammas, thetas, vegas and the rest of the greeks. Contrary to popular belief, I didn’t find this group nerdy or geeky – they engaged in lively chatter with the very few non-quants, and had a genuine interest in travel, hobbies, education, volunteer work, and making the world a better place.

What I perhaps did find a little disturbing was that dealing with risks, to this group, seemed mostly about problems with the models, and improving the models. The risk management problems were about technical problems – market risk, credit risk etc, so the models needed to be improved. Hang on, but what about all the other contributing factors, I thought – compensation design, miscommunication, groupthink, thinking short-term (shortsightedly) to keep shareholders happy and the more commonsense stuff? These must be for other people to deal with, I gathered.

We all (quants or otherwise) love our comfort zones – after all we are all uniquely wired up, aren’t we? I enjoyed the evening – the company and the drinks – but couldn’t help coming away thinking risk management is still happening in silos despite all the talk about it needing to be all-encompassing recent years.

Book Review: Zero Degrees of Empathy – by Simon Baron-Cohen

Zero Degrees of Empathy – by Simon Baron-Cohen

Everyone gets something different out of a book. The opinions here are mine only.

The author’s aim in writing the book was to stimulate discussions on the reasons for human cruelty (or treating other humans as objects) from a realm of science. The focus is on studying empathy and the social and biological factors contributing to it. Zero degrees of empathy (or being at the lowest end of the “empathy spectrum”) is what leads to “treating people as objects”.

What is appealing about the book is that it is concise and presents the explanations in an easy-to-understand and structured way. The author presents an “empathy spectrum”, with the shape of a bell curve. He also introduces another spectrum, representing degrees of “systemizing”, which is also bell-shaped. The human mind looks for patterns and ways to systemize information. A high degree of systemizing can indicate strength in mathematics, science, music or other systemizing fields. However, extreme (high) degrees of “systemizing” can be associated with Asperger Syndrome and classic autism (an example of a symptom of this is going beserk when something is not exactly in its expected place in a room).

Those with zero degrees of empathy can be “zero-negative” (no positive effect) – this includes borderlines, psycopaths and narcissists. On the contrary, others with zero degrees of empathy can be “zero-positive” (with a high degree of systemizing) and therefore with extraordinary abilities but who also treat humans as objects.

The very last section of the book talks very briefly about the importance of empathy (perhaps just for completeness), but for a discussion on this, I would read books by authors such as Daniel Goleman and Stephen Covey who tackle this topic in depth.

The book provides valuable insights through scientific study. For a lay person like me with an interest in the subject, the simplicity of the presentation (apart from a few pages with technical terms on parts of the brain) made it a fascinating and enjoyable read. It is peppered with many true stories and examples to illustrate the points.