More Smart, Less Clever
By Paul E. Lacko

I wish the smart people in the financial services industries would stop being so clever. Sooner or later, somebody comes along and figures out how to figure out what's going on. Somebody smart, somebody clever. That "somebody" generally has a big stick and a serious disposition, and wants to make absolutely sure that none of the rest of us ever, ever, ever exhibits the same kinds of clever behavior in our own financial dealings. More often than not, the rest of the industry is seen as guilty until proved innocent. And proved innocent. And proved innocent. It takes a lot of complicated documentation every year to prove innocence over and over again.

We'll be doing all this extra work for years, long after anybody even remembers why we had to do it in the first place.

Thanks a lot.

I was struck by some words in a sentence in Steve D'Arcy's "From the President" column this month: actuaries around the world…attempt to quantify uncertainty. We need to emphasize this more in our work and in our communications with others. Ask us a question, and we can attempt to quantify the uncertainty. That is the best we can do, and then we can offer a "range of reasonableness." Dutifully and suitably qualified, of course. We can't supply the "right" answer.

Sometimes we get lucky, of course, and it turns out later that we did give a "right" answer. That doesn't mean we are growing more skilled at coming up with "right" answers. It was a fluke. It happens, we get over it, we move on.

The fact is that we cannot come up with the "right" answers very often. Most of what we do involves forecasting under a great deal of uncertainty, and the best answers we can give are approximations, if that. Mostly we speak among ourselves of ranges and distributions and related terminology that makes an accountant think we can't answer simple questions in simple terms at all. Actuaries know that the "simplest" questions are often the most profound. (Accountants know this, too, of course. We all look to other experts to give us simple directions to get where we want to go, and we can get short-tempered when the experts seem to be as lost as we are.)

Since we can't come up with "right" answers, we have to go with something that can't be judged in binary, "right/wrong" terms. The process, not the answers, must be judged. Judgments about the process become judgments about how our work measures up to certain standards.

The actuaries I have met are smart. But they seem to become very uncomfortable when they feel pressured to do something clever. This is a good thing. They take very seriously their commitment to follow the standards of practice set up by the Actuarial Standards Board of the American Academy of Actuaries. To help us distinguish between smart and clever is what standards of practice are all about. It's good practice now and then to read through the standards of practice (not necessarily all in one day), and notice what light they shine on the work we do and how we might improve it.

The world needs more smart, less clever. If we're smart, we will read through the standards now and then with extremely critical eyes, because we need to maintain high standards. If we don't set the bar high enough, somebody with a big stick and a serious disposition will do it for us.