1 / 14

Nobel Laureates in Economics: The Implications of Their Work for Actuarial Analysis

Harry Shuford, Chief Economist National Council on Compensation Insurance CASE Annual Meeting September 23, 2004 Atlanta, Georgia. Nobel Laureates in Economics: The Implications of Their Work for Actuarial Analysis. Today’s Discussion. Background on the Nobel in Economics

sal
Download Presentation

Nobel Laureates in Economics: The Implications of Their Work for Actuarial Analysis

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Harry Shuford, Chief EconomistNational Council on Compensation InsuranceCASE Annual MeetingSeptember 23, 2004Atlanta, Georgia Nobel Laureates in Economics:The Implications of Their Work for Actuarial Analysis

  2. Today’s Discussion • Background on the Nobel in Economics • Areas with Implications for Actuarial Analysis • Financial Economics • Asymmetrical Information • Behavioral Economics/Finance • Econometrics • Valuable Insights/Observations – part 1 • Valuable Insights/Observations – part 2 2

  3. Today’s Discussion Background on the Nobel in Economics 3

  4. Financial Economics • Markowitz - 1990 for work in the late 1950s • Modigliani & Miller – 1990 for work in the 1960s • Sharpe- 1990 for work in the 1960s • Scholes and Merton – 1997 for work in the 1970s 4

  5. Asymmetrical Information • Mirrlees – 1996 for work in 1970s • Akerlof – 2001 for work in mid to late 1960s • Spence – 2001 for work in early 1970s • Stiglitz – 2001 for work in mid 1970s 5

  6. Behavioral Economics/Finance • Kahneman – 2002 for work in the 1970s 6

  7. Econometrics • Trygve Haavelmo – 1989 for work in the 1940s • Engle – 2003 • Granger – 2003 7

  8. Financial Economics • Markowitz - microfinance portfolio theory • Mean variance • Efficient frontier recognizing covariance of securities • Quadratic objective function • Modigliani & Miller – corporate finance • Capital structure per se (I.e. debt/equity) no effect on value of the firm • Expected return on stock increases linearly with debt/equity ratio • Stockholders can offset in the market any undesired change in firm’s structure • Sharpe – market focus - CAPM • Systematic vs. Diversifiable risk • Risk premium based on covariance with market return • Market portfolio and lending/borrowing @ risk free rate • Scholes and Merton – option pricing model • Risk is embedded in price of underlying asset • Contingent claim concept applies to insurance • Strike price - /expected share value +/volatility of share price +/time+/risk free rate + 8

  9. Asymmetrical Information • Mirrlees – optimal income taxes • Moral hazard • Disincentive to work to avoid taxes • Hide income to avoid taxes • Akerlof – sellers have more/withhold info re: buyers - market for lemons • Adverse selection • Why would I want to buy if he wants to sell? • Medical insurance pricing – esp. elderly • Spence – better informed incur costs to improve outcomes • Signaling • Factory mutuals and fire protection services • Auto warranties - • Stiglitz – poorly informed extract info from better informed • Screening • Insurance deductibles • MGAs and retentions 9

  10. Behavioral Economics/Finance • Kahneman – decision making under uncertainty/irrational behavior • Expected utility is not entirely convex • Different response to the same problem depending on how it’s presented • Loss aversion • Prospect theory • Ignore/overlook prior information 10

  11. Econometrics • Trygve Haavelmo – made econometrics probabilistic • Statistical inference/hypothesis testing • Simultaneous interactions/identification problem • Engle – changing volatility over time • autoregressive conditional heteroskedasticity (ARCH) • Granger – time series with common trends • cointegration 11

  12. Valuable Insights/Observations • Friedman – policy lags/positive vs normative • Lucas – rational expectations • Arrow – theory of insurance • Simon – satisficing vs. maximizing • Tobin – Tobin’s Q/risk free asset vs market portfolio • Heckman – selection bias • Fogel & North – technology and development • Samuelson 12

  13. Valuable Insights/Observations • The standard model: • Self interested rational behavior • Full information • Akerlof’s “Market for Lemons” story • Article rejected twice as being trivial • Article rejected as undermining standard model • Article finally accepted • Today’s models are varied and include: • The standard model • Models to explain behavior with incomplete and asymmetrical info • Behavioral finance – irrational exuberance • Auctions (Vickery & Smith) • Measuring “happiness” • How effective are today’s actuarial methods? • Are they seasoned or just stale? 13

  14. Thanks for Your Interest Questions and Comments 14

More Related