October 2008 www.the-actuary.org.uk
LettersYour view
generally believed to contain cyclic variations
caused by, for example, sunspot maxima and
El Ni�o events.
My conclusion is that global temperatures
peaked in 2004 and have since fallen a little,
though it should be stated that smoothing
formulae are not an infallible guide to
the trend and others may reach different
conclusions. I do not claim to have any
expertise in climate science, and it is of
course unclear whether the current falling
trend (if I am correct in my judgment that
there is one) is a temporary feature or the
beginning of a longer-term movement.
William F. Scott
22 August 2008
Words of warning
I write to congratulate Solomon Green for
his very perceptive article in the September
issue. It is also very timely, since I am
certain that much of the responsibility
for the terrifying severity of the present
worldwide credit crisis can be attributed to
the unthinking use of dangerously unsound
financial models by US and European banks.
I should like to add two further eminent
warning voices to those cited by Solomon
Green. In a 1954 paper in Econometrica,
Maurice Allais (who won the Nobel Prize in
Economic Sciences in 1988, the year before
the modern finance trio of Markowitz, Miller
and Sharpe) draws attention to the very
serious dangers of building an apparently
rigorous mathematical theory on simplifying
assumptions that have no real world
relevance. Accordingly, he suggests that only
those who have extensive practical experience
gained over a period of many years should
attempt to formulate financial models.
In the second chapter of his General theory
of employment, interest and money, John
Maynard Keynes criticises unsound financial
models through a brilliant metaphor that
is as apt in today's distressed economic
conditions as it was in the Great Depression
years of the 1930s: "The classical theorists
resemble Euclidean geometers in a non-
Euclidean world who, discovering that in
experience straight lines apparently parallel
often meet, rebuke the lines for not keeping
straight -- as the only remedy for the
unfortunate collisions which are occurring.
Yet, in truth, there is no remedy except to
throw over the axiom of parallels and to
work out a non-Euclidean geometry."
With modern finance models, it is obvious
that the crucial axiom of rational behaviour
is at variance with the empirical evidence of
behavioural finance, that the Markowitz-style
use of correlation coefficients is inconsistent
with the existence of what are euphemistically
described as `volatility clusters', and that
attempts to extrapolate "99% confidence
levels" for financial losses from short runs of
historic data are misguided in the extreme.
However, what might not be so obvious
is the manner in which these and numerous
other failings have combined with one
another to create a vicious circle of financial
and economic destruction. This is the
`migration of risk' element to which Solomon
Green refers. To set out my preliminary
conclusions in this regard, I have posted an
article entitled Playing with fire on The Actuary
website (see www.the-actuary.org.uk/814325).
I am confident that a new and much better
theory of finance will emerge from the ashes
of the present economic dislocation, but if, as
I earnestly hope will be the case, actuaries are
to play a significant part in its construction,
as a profession we must put our own house
in order first. Too much of our education and
training is dominated by what I see as the
failed methodologies of modern finance. An
impartial high level review of this dominance
is long overdue.
Robert Clarkson
2 September 2008
Business as usual
Further to the Soapbox column on the
introduction of the UK Equality Bill (The
Actuary, September 2008), David Worsfold
may wish to take a look at the New Zealand
system. Similar requirements were brought
in back in the 1990s with the Human Rights
Act. To the best of knowledge, things are
ticking along fine. Perhaps our New Zealand
readers or the New Zealand society has some
comments of value to add?
Jefferson Gibbs
29 August 2008
Cultural awareness
Thomas Gataker, who in 1619 helped to
prepare the ground for probability theory,
was well aware of the writings of Aquinas
350 years before, contrary to the opinion
expressed by Dr Dermot Grenham (The
Actuary, August 2008). Gataker, who
studied at Cambridge University, was very
learned and his book contains numerous
cross-references to the works of his
predecessors, including Aquinas.
The latter seems to have envisaged the
existence of a two-part system, where God
determines certain outcomes himself but
has prescribed a framework where other
outcomes occur in accordance with a
multiplicity of underlying causes and may
not necessarily be outcomes of which He
would approve. Aquinas succinctly sums
up his conclusions: "And thus it [divine
providence] has prepared for some things
necessary causes, so that they happen of
necessity; for others contingent causes,
that they may happen by contingency [i.e.
chance], according to the nature of their
proximate causes... Therefore, whatsoever
divine providence ordains to happen
infallibly and of necessity happens infallibly
and of necessity; and that happens from
contingency, which the plan of divine
providence conceives to happen from
contingency." [Aquinas, Summa Theologica,
I, Q22, Article 4, translated by Fathers of the
English Dominican Province].
Thus, while it is true that Gataker was
influenced by Aquinas (among others), I do
not think it would be fair to dismiss his own
contribution to the development of thought
about chance events as unimportant.
Chris Lewin
13 August 2008
For the unabridged version of this letter go to
www.the-actuary.org.uk/815485
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