Are Actuaries Evil? No, Just Their Estimates.

In the murky waters of life lurks an evil that has haunted man for ages:  estimates.

Financially speaking, estimates are everywhere and affect the consumer and investor alike.  Estimates affect everything from the complexities of pricing insurance and revenue recognition on long-term contracts to the simplicity of a grocery store ordering enough milk or company on the verge of hiring another employee.

There are some popular quotes about opinions being foul smelling.  But what's the difference between an opinion and estimate?  Most likely, a sick Excel spreadsheet.


So what happens when estimates are wrong?  Often a price adjustment is required.  Yesterday's price was based on yesterday's assumptions, if the assumptions changed today the price must adjust accordingly until it finds equilibrium.  That's the beauty of the invisible hand of the free market.

Nerds everywhere share a common love for Excel, because you can set up a system of formulas that will calculate a result based on a series of inputs.  And then you can punch in different values for the inputs and see what happens to the results!  #NerdAlert

Have all of the non-nerds been weeded out by the previous stanzas?  Good.  Here's the piece from the WSJ Opinion section that inspired this post: Andy Kessler: The Pension Rate-of-Return Fantasy

John Mauldin of Mauldin Economics addressed this issue a couple months ago (his letters are well worth the length of the read, and only costs your email address), so it's somewhat heartening to see the topic brought up again.  Maybe the message will gain enough traction that even states who don't have imminent pension disasters looming can take action soon enough to avert extreme pain.

No Governor, no State Auditor, no one anywhere wants to be the first to stand up and say... "uh, you know that input we have in our fancy spreadsheet?  I think it's wrong... and I don't think we're going to like the answer when we change it."  It's a hairy discussion to have, but it's necessary to prevent estimates from hiding real problems.