Tuesday, August 23, 2016

Optimism and the history of formal risk

A friend wonders if it is possible or rational or logical to be optimistic about the future.  I say it is and that being optimistic can be an evidence-based stance.  Another friend has spent his career in finance and assures me that the actuaries and mathematicians and statisticians and bankers who designed social security got each and every assumption wrong.  

When you are planning, you have to make assumptions.  It is all very well to say you won't make any assumptions but you have to.  If you are planning financial payments in the future, you are assuming that the customer or subject of the plan or somebody will be around and in a position to make use of the funds.  You have to make some assumption about prices and needs.  Basically, you have to guess what portion of current earnings should be set aside for the future.  Saying nothing needs to be set aside or that all income must be saved are both unacceptable.  So, some portion between 0 % and 100 % will be proposed.  

Nutty as it may seem, one of the first things some planners do is ask how long you will live.  How do you know?  You don't but depending on your age, your health, your parents and grandparents and siblings, you can make an estimate.  These days

Calculators: Life Expectancy - Social Security


Social Security Administration

A man reaching age 65 today can expect to live, on average, until age 84.3. ... About one out of every four 65-year-olds today will live past age 90, and one out of …

So, more people are living to greater ages than ever before.  The above link says that 10% of people reaching 65 will live to 95 and you can bet (betting is the only way to plan!) that a good portion of that group will live to be 100 years old.

Ok, the next question is What sort of life quality will I have in old age?  Vegetable or marathoner?  Will I do yoga or will I have a feeding tube?  The wiley planners had experience with people so they added another question: What portion of people will simply get tired of working and paying into the system?  They estimated 20% and you can bet they had to justify that guess based on data and experience.  

My finance friend said that the real portion turned out to be 4%, one fifth the estimate.  

So, this means that humans are living longer, living better and healthier and happier lives and continuing to pay their bills.  So, don't bet against them.  Go with the odds.  They are going to face big challenges but they are used to that.  They are going to be around, nevertheless.

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