People are creatures of habit. Regularity brings comfort, removing the need to think about what is happening next and the effort that comes with it.
People are creatures of habit. Regularity brings comfort, removing the need to think about what is happening next - and the effort that comes with it. In 1979, Kahneman and Tversky developed prospect theory, a cornerstone of behavioural economics, to explain decision-making once certainty is removed. Two centuries earlier, Benjamin Franklin had announced that there are only two certainties: death and taxes.
We haven't written anything about taxes in this month's issue - I promise we have no intention to do so any time soon. And Mr Franklin can rest assured that we won't challenge his views on the certainty of death, although we couldn't resist discussing the slowdown in UK longevity improvements.This interesting phenomenon defies the widespread belief that life expectancy can continue to increase indefinitely. Matthew Edwards discusses the possible roots of changing longevity trends, while Chris Taverner analyses the implications of these changing trends for pension funds. Elsewhere, on a related subject, members of the IFoA's E-cigarettes Working Party outline its analysis of e-cigarettes’ impact on smoking habits and human lifespan.
I must confess that, until fairly recently, I would have added interbank indices to Franklin's list of certainties: Libor and Euribor have defined the payoff of financial transactions, from the smallest credit card debt to the largest swap, for decades. In hindsight, it was naïve to believe that a mechanism in which contributors don't always put their money where their mouth is could be robust enough. The Libor Reform Working Party discusses the challenges of replacing interbank indices, and the implications for the pensions, insurance and investment industries.
We also take pride in having interviewed Maurice Ewing, a leading authority in risk management. Among other innovative topics, Ewing discusses integrating concepts borrowed from behavioural economics into the risk management framework.
Enjoy the read!
Francisco Sebastian
Editor