Category Archives: managing uncertainty

SA Bond Market – antiquated or efficient?

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[Update: for some incomprehensible reason the embedded video clips below only work on YouTube. Click the image for a link to the YouTube page]

Andrew Canter (of Future Growth) makes some strong statements about the “phone and dealer” approach to the South African bond market. When one of the arguments against Andrew’s preferred centralised, electronic order book is “we like the information we get from deal flow” I have to say I agree with Andrew.

and part 2 (which also includes some discussion of Covered Bonds with the clear links to Basel and indirect links to Solvency II and SAM) Continue reading →

A good explanation of the perceived problems of annuities

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There is much to recommend in purchasing an annuity at retirement to manage the risks and uncertainty of longevity. It’s well known though that surprisingly few people who have the option to purchase an annuity do so.

Richard Thaler presents some of the common perception problems with annuities in this article in the NY Times. The basic message is still as it has been for decades. Individuals are reluctant to pay a large portion (often the majority) of their life savings to an insurer with the risk that they will die in a few years and “not have got their money back”. The peace of mind that should come to the policyholder turns into a matter of stress.

The bequeath motive is strong – and amplified by a lack of understanding of exactly how long we’re likely to live in retirement these days and how much money will be required. Those to whom many plan to bequeath may ultimately become the source of support when the income draw-down products are depleted with no longevity guarantee to boost the funds available.

It’s a good explanation although he doesn’t break much new ground. He also doesn’t talk about the concerns some potential policyholders have, in some countries at least, of whether the insurance company who sells the annuity will definitely be around over the next 40 years come what may.  This is more common in developing markets with weaker regulation (probably a good reason to have concerns) and less history of annuities (a cultural bias that will probably disappear over time).

Mr Thaler doesn’t propose any solutions for the insurers in boosting sales – a common “fix” is to combine a traditional pay-until-death annuity with a guaranteed minimum period or a death benefit (either for a limited term or at any point).  These adjustments reduce the “risk” of “making the wrong decision but purchasing an annuity but only living for a short period”.

There’s no free lunch.  In the same way that cash-back bonuses on short-term insurance products actually increase the average cost of insurance and reduce the risk-transfer from insured to insurer, these guarantee periods increase the cost of annuities.

South Africa 7th most free internet

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Freedom House has released a survey of internet freedom around the world.

Freedom House is, according to themselves.

Freedom House is an independent watchdog organization that supports the expansion of freedom around the world.

South Africa does well, perhaps not unexpectedly, in the rankings coming in at 7th from a long list of countries. Up at number 1 is Estonia, then USA, Germany, Australia, the UK, Italy and then South Africa. China, Cuba, Burma and Iran take pride of place at the end of the rankings.

What’s interesting from the full South Africa internet freedom report is the “Press Freedom Status: Partly Free”.  Also perhaps not surprising but certainly disappointing.

Homeopathic air conditioners

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People love control. We all love to be in charge at least of our own lives.

Sometimes we get it and sometimes we don’t. Except that it seems many of the times when we get it we don’t. At least when we think we get it we don’t.

Head hurting yet? Go take a homeopathic headache tablet. I’ll wait.

Control versus quiet

My favourite example of how control has positive effects is from this research (paywall for full article). Here’s the abstract:

A laboratory experiment was conducted to investigate the behavioral consequences of adaptation to high-intensity aperiodic noise, under conditions where subjects believed or did not believe they had indirect control over termination of the noise. The findings showed that among a group of college males, the work of adapting to uncontrollable, in contrast to controllable noise resulted in heightened overall tension (tonic skin conductance) and impaired performance efficiency after termination of the noise. Several theoretical explanations of these results were discussed, including interruption-based helplessness. The relationship of the present experiment to previous noise research by the authors was also considered.

In other words, they took two groups, asking individuals in both groups to complete a set of difficult questions with loud noise in the background. Individuals in one group had a button to turn off the noise, the other didn’t. Perhaps unsurprisingly, the group with the button performed better on the test than those without. The interesting aspect here is that hardly any actually pressed the button to turn off the noise.

It wasn’t the noise that was causing poor performance, but rather the lack of control of the environment.

The illusion of control

On a slightly different note, there are several areas where individuals are tricked into thinking they have control.

The vast majority of “close door” buttons in lifts do not do anything.

The vast majority of buttons on pedestrian crossing in New York don’t do anything.

Many thermostats in office buildings are there only to provide the illusion of control over temperature for employees.

Makes me feel slightly philosophical about making fun of homeopaths. Although I’m not about to stop that just in case it works.

Prediction: models versus market

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This is not the best way to start serious analysis of models versus markets in the prediction space, but given that I’m writing an exam tomorrow I thought I should put the links out there now.  I’ll address this topic again in the future.

Steven Levitt (of Freakonomics fame) discussed an old paper of his and its usefulness in predicting US mid-term elections. This is now a 16 year-old model, which presumably could benefit with some updating for the last 16 years worth of data.

It does, currently anyway, give very similar answers to one of the biggest prediction markets operating, InTrade.com.

How not to lose money in Make a Million

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I have a clear strategy for how not to lose money playing the Make a Million competition. As I explain it, you may come up with some smart tactics to win the competition and enhance your returns, but you’re on you’re own there.

So, how does one not lose money with the Make a Million competition?

Don’t enter.


You are overwhelmingly like to lose money if you enter this competition. I’ve said this before, and I’ve been right before. I’m right again.

There’s also the little idea that the  structure of the Make a Million competition increases risks of  financial meltdown

Let’s look at some hard statistics to show what I mean.

Telling statistics (what they don’t show)

In the MaM presentation, the organisers include some interesting statistics about number of trades, trading activity and many other metrics.

They don’t show average returns or performance.

So let’s look at some of the numbers:

Raw return data (excluding prize money) based on 2009 MaM competition.

Average Return -11.49%
Expected Loss R 1,149
Median Return -15.06%
Mode Return -9.12%
Probability of breaking even 25.00%
Probability of earning less than 10% 83.00%
Probability of doubling money 1.78%
Probability of winning 0.20%

Suddenly the competition doesn’t look so great, does it?  (This isn’t the first time, here is my analysis of the Comedy and Tragedy that was the 2008 Make a Million competition.) Continue reading →