With all its complexity, the modern world often seems to resemble what Winston Churchill said of the old Soviet Union: “a riddle wrapped in a mystery inside an enigma”, with Kremlinology replaced by “Putinology”, or the equivalent in respect of, say, ISIS in the Middle East, or the outcome of debates within the Chinese Communist Party elite. What do they intend? How far will they go to achieve their aims, whether stated or unstated? What will be the impact and who will be affected? Markets move and decisions are made based upon how others analyze and assess such factors.
In the (re)insurance industry any underwriter or manager of risk is always making judgments and assessing probabilities, often based upon imperfect or asymmetric information; and trying to ensure that he or she does not makes a decision that causes losses which are so far outside the expected parameters as to threaten the viability of a business line, or even a company.
At Awbury, a key focus is to help our clients manage and mitigate risks that we characterize as economically catastrophic (hence our E-CAT franchise). As such, we take very seriously the process of how to identify, assess and judge the importance and probability of critical components of our risk assessment, because, if we are wrong in any material way, bad things will happen!
Therefore, we are students of the discipline of exercising judgment in a rational, dispassionate and effective manner; and try to read and explore widely relevant work and studies in the area. Many of our readers are probably familiar with Michael Lewis’ “Moneyball”, or the work of Nate Silver (e.g., summarized in “The Signal and the Noise”) on using observation and data to make effective, probabilistic decisions, but there is much beyond that.
Conversely, the (in)famous “gut instinct” can be a powerful factor in avoiding bad outcomes. However, it is not really an “instinct”, but rather a combination of knowledge, relevant experience and the ability to decide rather than procrastinate- which, strange as it may seem, is all too prevalent, particularly in large, hierarchical and bureaucratic organizations.
Somewhat paradoxically, there is by now ample evidence that so-called experts are often no better at assessing the probability of outcomes in areas in which they are supposedly “expert” than the proverbial dart-throwing monkey.
We shall explore this point, and how it can be addressed and managed, in our next post.
In the meantime, ask yourself exactly how you make your own key decisions.
-The Awbury Team