Actuaries love dealing with risk. Actuaries hate dealing with uncertainty. Their tool kit of creating well structured problems with defined probability distributions and parameters falls apart when dealing with uncertainty.
Barry Ritholtz had a good discussion on this distinction in 2012 regardin the stock market and political risk:
When we don’t know what any future outcome will be, but we understand the probability distribution — think of dice or a multiple choice exam — we have risk, but we do NOT have uncertainty. We never know what the roll of the dice will be, but we do know its one of six choices.
Is that uncertainty? The answer is of course not — it is an unknown outcome with well-defined possibilities. We may not know precisely which outcome will occur in advance, but we do know its either 1, 2,3, 4, 5 or 6. Call that risk….
Consider alternatively what is the true definition of Uncertainty: That occurs when we have no idea of what the possible outcome might be. The probability distribution is unknown (or so extremely large as to functionally be the same as unknown).
Let’s bring this out to an absurdly fun example. Next summer, I will be taking my kids to the North Carolina beach several times. If I give an actuary the name of the beach, the weekend that I will be there and whether or not my kids have any open bleeding scabs, that actuary can create a model. That model will rely on known data of shark migration patterns given the time of year, it will rely on a species distribution, it will rely on a deep data set of the past. The actuary will run that model a couple of thousand times through a Monte Carlo program and spit out a probability distribution that my kids will get bitten by a shark. If I pay the actuary a bit more, I’ll get an expected cost of insuring my kids against shark bites.
This is risk management. There is known data with identifiable distributions. The estimate will always have a bit of fuzz to it but the estimate will be close.
Now let’s replace this scenario. If I give an actuary a map of an unknown location where the only useful information on it is “There be monsters” the actuary will have a nervious breakdown if I ask them to give me a model of monster attacks. That is a model of extreme uncertainty as the data provides no guidance.
So let’s keep this in mind when we think of risk (sharks) and uncertainty (monsters).
What about mentally unstable sea monsters surrounded by sharks?
How about the risk of an infantile mentality in charge of the US military, including the uncertain ability of those around him to control/redirect his impulses.
@Drunkenhausfrau: My $ is on the mosasaurs.
Get hurricane insurance when you go to the Outer Banks. Also, the further south you go the better. Kitty Hawk suck, Buxton is great!
Risk is fun. I loved doing Monte Carlo simulations in Excel in a college finance class. Most of the other students didn’t.
Sister Rail Gun of Warm Humanitarianism
@raven: Second this. And don’t miss the Karen Beasley Center at Topsail!
Monte Carlo simulations don’t provide much insight when you forget to include the sea monster in the model, or assume it’s just another shark.
Nunca El Jefe
@Weaselone: or neglect to include different kinds of monsters (cone snails, jellyfish, ceviche).
“C’mon, dad, let’s go to the beach already!”
“Hold on, kids. Daddy’s trying to figure out whether he wants to take out shark insurance on you before we go.”
Sea monster ceviche sounds like the perfect dish to eat while pondering the irony that the MAGA crowd voted to end the USA’s reign as global Superpower.
You have to take the family to Carolina Beach during the summer. I mean, if you want a true North Carolina beach experience. Thursday night is fireworks night, the kids will love the carnival rides, you’ll fall in love with Britt’s Donuts, and there’s plenty of hard drugs and Confederate battle flags to be found! Seriously, the kids will love the beach in the day and the carnival rides at night.
Save the Outer Banks (aka the Yankee beaches) for the off season. I don’t even want to imagine what the traffic is like during the summer when there’s only a single road going up and down the beaches. Someone upstream mentioned Buxton and I agree, but wait ’til October when it’s just you and the people fishing on the beach. That way, you’ll have the Orange Blossom Bakery all to yourself!
Visit them (the outer banks) while they are still there. There may be some uncertainty about sea level rise but it’s no “monster”.
@Jerry: It’s not that bad before Memorial Day and the fishing is awesome then!
@Jerry: It’s not that bad before Memorial Day and the fishing is awesome then!
Yeah, “when school is still in session” is a much more accurate statement. That’s one of the reasons why I love my kid being in year round school. We can do the Outer Banks/mountains thing in March and September and still give her a shot at a real summer vacation experience by going to Carolina Beach/mountains in June.
@Jerry: Yea and I my input is based on not having kids and being a fishing maniac. We did Topsail a couple of years ago and it was OK but not really my cup of tea.
My actuary husband never gets to work with sharks.
The Outer Banks has become way too built up in the past two decades. It has been lulled into complacency since there have not really been a major hurricane season since the 90s. A good Cat 3 will wipe Duck into the ocean.
Sometimes I get lost in the weeds in your posts, but this explanation was just right for me.
@Walker: Yup. And it doesn’t even have to be a hurricane. A good Nor’easter will take off the shingles and ruin the living room ceiling and floor. Been there, did that for 20 years. Got rid of the sucker in 2005 at the top of the market and have breathed a sigh of relief every day since. Just isn’t worth the hassle. And those who tell you you can make money on it via renting it out are idiots.
Would not Megalodon rate as BOTH shark and monster? Not that they still exist.
@evodevo: I’m happy to rent a place at Durant Station and leave it at that.
Little known fact: Willie and Waylon initially tried to cut a song called “Mama don’t let your babies grow up to be actuaries”, but found the meter of “actuaries” too awkward to make work. And so, they made the song about cowboys instead.
Gin & Tonic
@cmorenc: I learn something new here almost every day.
Or, if you want a week-long quiet “family beach” experience, try Sunset Beach in the far southeast corner of NC – very wide, sandy beach, the front-row beach houses are set 500 ft back from the dune line by a low coastal forest wetland across most of the island, with public access boardwalks every block that provide a pleasant, scenic walk out. And there’s unpopulated Bird Island you can walk or bicycle to out on the beach strand (no roads to there), which isn’t really an island since the inlet closed two decades ago, but just an extension of Sunset Beach out to Little River inlet. I say “week-long” because all the houses rent for a week in summer, though there is one small fairly upscale inn on the island.
Mike in NC
@cmorenc: We’ve lived here in SB for eight years after fleeing crowded NoVA. Summer population is 4-5 times that of winter. Many of our neighbors are northerners who hated Florida.
Do the sharks have fricking lasers, and if so, how does that figure in your risk calculations?
Asking for a friend.
Seriously, I echo MaryG’s comment. This example of analytical thinking in looking at an issue and having some handy tools to break it down and understand it is going to come in real handy in these times.
@laura: Of course they have Fricking Laser Beams
Economist Daniel Davies once commented (over on Crooked Timber) that many — social scientists? politicians? — types help themselves to a distribution to which they are not entitled. (Wish I could find the original remark.)
Hey, interesting. I didn’t know that’s how some fields use the term “uncertainty”. In others fields, it’s different. Most work in reasoning under uncertainty, in artificial intelligence, is about reasoning with probabilities; uncertainty is Shannon entropy in information theory. At least, if I’m remembering correctly.
@cmorenc: this song actually exists, written by an actuary mamas
Also, some consider “fuzz” as uncertainty. As in we expect the number of shark bites between 0 and 100.