History lessons and the perils of less-than-critical critiques
Power of long memory was a long time in the making
Faisal Zai's article ('The Power of Long Memory', p23, January/February) was excellent. It was, however, slightly marred by his crediting Mandelbrot with being the man who persuaded people "that stock returns are not normally distributed and that stock markets and most asset return processes are not memoryless". If he did it took a long time. Almost all financial economists either ignored or derided Mandelbrot's work throughout the 1960s, 1970s, 1980s and 1990s.
Similarly, nearly all younger (now late middle-aged) actuaries derided or ignored the work of Plymen, Clarkson, Fitzherbert, Arthur and those of us with real investment experience, who had been expounding similar doubts about higgledy-piggledy growth, as it was then called, even before Mandelbrot.
A study of Clarkson's contributions to sessional papers will note that he was referring to the Hurst component, at least by the 1970s. But when some 20 years later, as a member of the profession's finance and CPD working party, I tried to introduce two of Hurst's original papers as additional reading none of my much younger colleagues on that committee could see their relevance to investment.
I hope that a newer generation of actuaries will be encouraged by your choice of Faisal Zai's article to read beyond the profession's present inadequate courses on finance and investment in an attempt to gain real understanding of how stock markets work.
S. J. Green, 1 March
Earth is Room Enough
Earth is Room Enough is the title of a book by Isaac Asimov, a collection of short science fiction stories published in 1960. It also seems an appropriate title for a response to the shallow logic of the Malthusian article 'The World is Not Enough' (p28, January/February).
The article asks us to believe that it is reasonable to estimate that, without heavy government intervention, the number of years the world's supply of minerals will last can be calculated by dividing current reserves by the annual level of consumption. This ignores many market factors that influence consumption: market price, further discovery, substitution and particularly the ingenuity of humans for developing greater efficiencies in the use of resources, and their capacity for research and invention to improve quality of life.
In forecasting doom and gloom, the article also ignores the ready ability of humans to adapt to changing conditions.
However, it is not the purpose of this letter to critique the article or the paper on which it is based. My concern is with the failure of the Resource and Environment Group (REG) to do so.
The actuarial profession has traditionally been proud of its aim to base projections of outcomes on sound analysis of all relevant and available data and statistics, producing logical assumptions clearly stated and accompanied by comment regarding their limitations. The REG's input to the paper, which has been written largely by non-actuaries, appears to be little more than some generalised comments on factors influencing actuarial assumptions. While I would expect that they were involved in the choices made under the different scenarios presented, the assumptions are not stated and not qualified in the normal actuarial way. Projections for up to 100 years must be subject to major uncertainties, even without the inevitable need to make subjective assumptions regarding the consequences of government interventions.
I have always been enthusiastic about the profession moving into 'wider fields', with actuaries using their skills to assist the current participants in those fields. However, in this case, the underlying paper appears to reflect more a group of actuaries simply climbing on the back of experts in another field, accepting their philosophies and methods without question. Indeed, the whole tenor of the paper is that of a political polemic rather than a realistic analysis of the limits to economic growth. Certainly, the suggestion that the only way world order, such as it is, can be preserved over the next century is by the development of a global consensus government process for distribution of resources appears to represent the narrow desire of the authors rather than the result of an objective assessment of possible outcomes.
I would challenge the REG to provide a proper actuarial critique of the paper, analysing assumptions and reasons for their adoption, and focusing on the uncertainties in arriving at the model outcomes - particularly in relation to the questionable success of governments in market manipulation.
Geoff Dunsford, 15 March
Look back before you look forward
This year is the 400th anniversary of a landmark book, Richard Witt's Arithmeticall Questions, published in 1613. It provided a pioneering and very practical insight into one of the foundations of actuarial science - compound interest. The subject is clearly explained and the author takes great care to ensure accuracy, probably thinking in much the same way as modern actuaries. The book contains interest tables and 124 worked examples on the valuation of leases and annuities. One of the simpler examples describes calculation of annual payments on a debt due in two years' time, which is now to be paid off in instalments over the next five years.
Richard Witt was a 44-year-old mathematical practitioner from London, who was consulted on a variety of commercial and property matters. The profession is fortunate to own a copy of his important book, which is on display in the library at Staple Inn this year.
The library's holdings of historical material have been considerably strengthened in recent years. I hope that all members will take pride in this unique resource - and that some may even use it occasionally as a source of inspiration when dealing with today's issues. We can often benefit by looking back before looking forward.
Chris Lewin, 3 March