Nico Aspinall introduces systems thinking and explains why it is important to increase its use in actuarial work
On 30 September the IFoA Resource and Environment Board hosted a systems thinking workshop to explore the importance of systems thinking with a group of senior actuaries and to ask how to incorporate it more widely in actuarial practice. The event was well received and we are now developing future initiatives in this space.
In a nutshell, systems thinking is a process of broadening out your thinking to include an understanding of the wider system your clients and employers operate in. It is a holistic discipline, seeking to understand link between actors in a system, in contrast to reductionist approaches, which seek to understand how one specific aspect of the system works in isolation. There are many different systems thinking techniques, including systems dynamics modelling, agent-based modelling and Bayesian networks. Essentially they each approach problems in a different and distinctive way, but have in common a sense that the answer will not be found in a single static equation. Instead it might be a series of insights as to the stability of systems under different interventions by the actors in them.
Systems thinking is crucial to actuaries because there are a number of important behaviours which emerge from the collective actions of agents in the financial system and cannot be understood without a wider view of links between those agents.
In fact, progress can only be made on almost all of the really important actuarial problems with a holistic mindset. Systems thinking is essential in understanding the behaviour of financial markets, the funding of defined benefit plans and, closest to the heart of the Resource and Environment Board, the impact of efforts to curb global warming.
Although a number of pioneering actuaries have been working on problems with systems thinking techniques, it is early days for the actuarial profession in this field. Indeed, systems approaches have only recently been gaining traction in academic circles outside the faculties that originated them. Part of the reason for the increased interest is the well-publicised failures of reductionist approaches (exemplified by the Queen's famous question on the global financial crisis: "Why did nobody notice it?") and part of the reason is the low-cost availability of computer processing power - systems models tend to require greater power than reductionist models.
The Resource and Environment Board wants actuaries to take the lead in adopting systems thinking approaches, becoming professional advisers with greater awareness of the systemic impacts of their work, and of the impact of system dynamics on their clients and employers. And to do this we'll need your help.
We are setting up two initiatives: a steering group to coordinate the IFoA's efforts in this space; and an informal email group for actuaries to discuss systems thinking and how they can incorporate it into their work. We know that this is a challenging topic.
Our recent workshop included fascinating sessions by Dr Aled Jones, Neil Cantle FIA, Dr Devrim Yilmaz and Andrew Slater FIA on systems thinking, followed by table discussions on how these approaches could be incorporated into our work as actuaries. We reached consensus that the topic was very important to develop further, although there are significant gaps to close across education, policy, regulation and research before systems approaches can become embedded in mainstream actuarial practice. This will be a multi-year project offering many great opportunities for volunteers to shape the future of the profession, so please do get in contact if you would like to be involved.
In the meantime, if you would like to brush up on your systems thinking, we recommend Donella Meadows' Thinking in Systems: A Primer as a great place to start; or Eric Beinhocker's The Origin of Wealth as a focused read on complexity and evolution in the economic system.
If you would like to join the email group, please email: [email protected]
Nico Aspinall is an actuary and founder of Nico Aspinall Consulting