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Random Sampler
TANSTAAFL!
by Bob Conger, CAS President-ElectThirty-some years ago, while a student in high school, I was astonished to discover that a lot of what I needed to understand about the physical sciences, life, economics, and many other human endeavors seemed to be contained in a single book. Well no, not a single book: a single phrase within a single book. Reading Robert A. Heinlein's science fiction work, The Moon is a Harsh Mistress, I first encountered an articulation of the TANSTAAFL principle, shorthand for "There ain't no such thing as a free lunch." Over the years, TANSTAAFL has become one of my oft-used, favorite, and most consistently reliable tools to understand and anticipate how things work.
At the time of my first encounter with the TANSTAAFL principle, I naturally applied this concept to my high school environment. TANSTAAFL implied, for example:
The various "conservation" laws that I was studying in the physical sciences: I can't add mass to one part of the chemical equation without taking mass from another part of the equation.
If I choose to play tennis with Paul this afternoon, I can't also play golf with Tom, and under either alternative I have given up other valuable uses of the same time, money, and energy.
If I want to get an "A" in a course, I must work for it.
A person who cheats will pay a price certain: loss of integrity and trust (and may also pay a tangible, though uncertain, price: punishment).
The only way for a less fortunate person to receive a helping hand, is for someone to offer a helping hand.
A few years later, studying economics in college, I came to understand that the TANSTAAFL principle closely relates to a fundamental economic and social challenge. I am referring to the challenge of allocating scarce natural, financial, and human resources—whether that allocation occurs through the mysterious workings of Adam Smith's "invisible hand" of supply and demand, or through the more visible hand of public policy decisions. A particular resource can be used to make swords or plowshares, but not both. Even the use of a "free" resource (using the atmosphere as a dumping ground for toxic chemicals) carries a cost for someone: loss of clean air for the folks downwind.
Oddly, Heinlein's writings never have appeared explicitly on the CAS Syllabus. (If they had, I would have volunteered for a longer stint on the Exam Committee!) Nonetheless, I discovered pretty early in my actuarial career that the TANSTAAFL principle is woven throughout the basics of actuarial science.
There is a cost (premium) to transfer the uncertain financial implications of an undesired contingent event to a third party.
A stream of income in the future may be traded for a block of resources today.
A class of insureds that is responsible for more claims should pay higher premiums.
If an underwriter or regulator charges an inadequate price to one group of insureds, some other group will have to pick up the difference (perhaps another group of insureds who pay an elevated price, or an investor who receives a reduced return on investment).
If an insurer chose to enjoy the "lunch" (premium income) of writing a block of business yesterday, the resulting claims will have to be paid tomorrow. The inevitability of paying these claims is not altered if the insurer charged an inadequate premium yesterday or establishes an inadequate loss reserve today. (My first employer, now defunct, chose the painful way to learn this application of the TANSTAAFL principle.)
As I invoked TANSTAAFL to help understand and guide my personal and professional life over the years, various subtleties and nuances emerged, like the patina of age on a treasured but well-used piece of furniture—TANSTAAFL's bi-directionality, for example. I originally perceived TANSTAAFL to mean that I could not receive a free lunch. I gradually learned that I also cannot give a free lunch—I find that I always receive some benefit from the act of giving, regardless of whether receiving such a benefit is my intent or desire. Another subtlety that has become evident over the years is that the form, amount, and timing of the price we pay (or receive) for "lunch" usually has more dimensions and complexities than we anticipated. In pricing a personal auto policy, for example, we first studied how to forecast and evaluate this year's expected claims and expenses. Later, we began to understand important pricing implications of considering the probability and profitability of future renewals, cross-sales, and referrals of new customers arising out of the customer relationship.
In my role as a member and volunteer of the CAS, I feel as though I have been rediscovering an old friend, as I have observed the TANSTAAFL principle at work within the dynamics of our organization and in the profession more broadly.
Our predecessors invested their individual and collective time, energy, careers, and reputations building the CAS into a highly respected organization within a highly respected profession. Each of us gains a certain amount of credibility each time we append the initials FCAS or ACAS to our name. These gains that we enjoy are the "lunch" that was paid for, in large part, by the investments of our predecessors.
Of course, the right to append these initials to our names is hardly "free" to us as individuals. Each of us invested many hours, days, nights, and weekends qualifying for that right. And we continue to pay for that right through the time and money invested in continuing education, and by going the extra mile and maintaining the extra vigilance to be sure that ethics and professionalism are guiding our actions. But what a banquet (never mind lunch!) is available to us as a result. I cannot imagine an alternative career that would have presented the same array of personal and professional opportunities.
TANSTAAFL is evident in many of the issues surrounding Exams 3 and 4, about which there has been much discussion over the past year or so. With hindsight, we may have put too many topics, with too much theoretical detail, on these exams without paying for that "lunch" by pruning other topics or preparing sufficient study materials. TANSTAAFL demanded that a price be paid: in this case, unacceptably low initial success rates on the exams and adverse reactions to these exams. Having deemed that to be an unacceptable price, the CAS and SOA are in the process of substituting a much more acceptable price: eliminating some topics and materials, preparing better study materials, and reviewing other aspects of these exams for improvement opportunities. But remember, whatever your personal favorite solution to improving the educational system, TANSTAAFL always insists that there be trade-offs.
We have made many explicit decisions over the years to maintain a volunteer-driven organization and culture. The price we pay is that we individually (and with the support of our employers) must be willing to sustain this organization and culture with our own contributed time and effort. And sometimes we pay a price collectively: if one part of a volunteer organization is not working as well as it should, corrective action may be a bit slower (and kinder and gentler) than in some other types of organizations. The lunch we gain is an organization that is us, that is ours, that goes where we collectively take it; that does not change direction violently with the whims, preferences, biases, and personalities of each new leadership team. One leader, no matter how energetic or opinionated, cannot accomplish much of anything if unable or unwilling to work in a collaborative fashion with the entire volunteer structure. There is no "they" in the CAS.
The TANSTAAFL principle applies to us individually in our volunteerism efforts as well. Yes, I have contributed my time and energy to the CAS over the years, and I like to think I would have done so without the prospect of any specific personal benefits, simply because it was the right thing to do. But I have in fact reaped benefits: learning new skills; gaining new opportunities; and, most importantly, having the opportunity to meet, know, and work with some wonderful people.
Just as our predecessors prepared much of our lunch, so too will we affect the richness of the CAS banquet for our successors. If we choose negative words and actions; if we spend our energy destroying and criticizing; if we fail to maintain through our own personal and collective actions high standards of expertise, quality, professionalism, and collegiality; then we are choosing to leave some slim pickings for those who follow. But we have a choice. If we choose to build on what we have; to work both individually and together as a team to make it better; to be constructive rather than destructive; and to travel the high road of quality and professionalism in all that we do personally and as a profession—then we are choosing to prepare a truly extraordinary lunch for ourselves and for successive generations of actuaries. I look forward to seeing you in the kitchen, as together we work hard and conscientiously to prepare a bounteous banquet for those who follow. TANSTAAFL!