Twenty Third Floor
Technical Business Advantage

Lightstone have a trick up their sleeves. Their raison d’être is collecting, analysing, understanding and packaging data for themselves and others to use to understand past, current and future property valuations.

Their housing price index is more robust (and more independent) than those of the banks based off their own data and target markets. Rather than consider only the average price of houses sold in that particular month (which is a function of house price growth / decline but also how the type, condition, size and location of the houses sold that month differ from the prior month and year) they consider repeat sales where the same property has been bought and sold more than once.

This data is combined or “chain-linked” to provide a continuous measure of house price inflation over time.

House Price Inflation 2010 source: lightstone.co.za

The result of all of this data, best-in-class methodology and analysis? When Lightstone says “opportunities abound in local market” I actually listen. Since their business model is to sell information, I’m more likely to trust what they say.

Tyler Reed blogs about entrepreneurs having to make decisions with limited information.

It’s almost all unknown

I don’t disagree.  It’s just that almost every meaningful decision ever made is made without all the information.

Unknowns can be categorised a hundred different ways. One way is to think about:

1. Unknown past information
2. Uncertainty around the current situation or position
3. Unknown future outcomes

Even a game like chess, where the past history of the game is easily known by good players, the current position is clearly visible and all the possible moves are knowable, it is not possible have all the information about how your opponent will react to your move.

How to deal with decision making under uncertainty – part 1

Tyler suggests that gut-based decision making can be effective much of the time – and it can. It there genuinely is no time for anything more than an instinctive reaction, you probably are best going with your gut.

Even if you have plenty of time, listening to your guy to formulate an idea is a great idea. Insight comes partly from experience and the reinforced neural pathways of our learning brain. If you stop with the gut though, you are missing out. There is a tremendous amount of research showing how ridiculously badly our instincts perform in many areas, particularly those relating to uncertainty and complexity! (more…)

I haven’t played Monopoly in a while (preferring Settlers of Catan, Carcasonne, Tigris and Euphrates and even Cranium), but after a recent conversation I started thinking about the game dynamics. There is surprisingly much that is relevant to the current story of our economy.

1 The Competition Commission is necessary

Monopolies serve to increase prices for consumers. In Monopoly, the “rents” charged are instantly higher as soon as a player has a monopoly on property in a certain area.

Worse than the increase in prices and decrease in supply, the additional profit for suppliers is not equal to the cost to consumers from higher prices, resulting in an overall “dead weight loss of monopoly” or an overall cost to society. (more…)

Apparently, car thieves don’t want your pink car. It’s not because they don’t like the colour (although they probably don’t). It’s also not only that it’s too distinctive and will be easily spotted (see the discussion later about red cars).

It’s that nobody else wants it. The resale value is much lower than other vehicles, and the risks and costs of stealing it are no lower.

Unlike the conclusion around high risk vehicles in my post on hijacking, this actually means you should be safer in a pink car. Just not safer from ridicule.

Dutch professor, Ben Vollaard, studied theft rates for vehicles as part of his research area of the economics of crimes. The data covered 109 vehicles from 2004 to 2008. Not the largest sample size, but enough to start thinking. (more…)

In a previous post, Mumbling in the Dark, I argued that too much attention was being paid to Eskom’s proposed increased charges and too little at 5 separate points, the first being their actual cost of production.

It seems that NERSA has been looking at this and has discovered some areas where Eskom was incorrectly estimating their future costs. The numbers are large, but not so large in the greater budget of Eskom. This is more like a snowflake on an iceberg than anything meaningful, but it does show the value of looking at the real issues.

Interconnect fees and the reasons for their reduction are possibly the most misunderstood “big” news story over the last twelve months.

The hype and hoopla around this topic is fueled by our feelings as consumers of being charged too much big big monopoly companies. So I should start by saying that I’m not saying that we are paying too much. I’m not saying that because I don’t know enough about the costs of providing cellular services in South Africa. Maybe we are, maybe we’re not. Also, I’m not saying there aren’t monopolistic practices in the market – again I simply don’t know. Given the other stories torn from inside companies by the sharp teeth and salivating jaws of the Competition Commission, it’s understandable that many suspect consumer-unfriendly play by most large South African companies, particularly those in industries with a small number of players.

What I am saying is that most of what you read in the news about interconnect is horribly misguided.

The biggest misconception is that interconnect fees are an expense for cellular providers, and that the removal of this expense would allow them to reduce tariffs to consumers. Well, it is an expense, but it is also a source of revenue. Every time one company pays an interconnect fee, another company is receiving it.

Interconnect does not change the total amount of profit within the cellular industry. It may redistribute it a little, and there may be negative medium term competitive implications arising from interconnect, but lower interconnect won’t automatically increase profits that could allow competitive price lowering for the benefit of consumers.

TechCentral has an interesting article: Bain warns consumers not to expect cellular price cuts.  Of course, it also include some done-to-death flawed statements (whether from Bain or inserted by the zealous staff writer) such as:

Because new players have few customers at first, most calls on their networks will be to networks of other operators. High interconnection fees make it difficult for them to enter the market.

It’s not that this statement is incorrect (it is in fact correct) it’s just that it is horribly misleading because it only presents one side of the story. I’ve reworded it to provide the stunning insight: (more…)

This post is a little different from usual.  It concerns VBA macros for MS Excel. Writing macros is quite easy, but writing efficient macros that run in an acceptable time requires a few tweaks.

Commonly known tweaks include turning off screen updating (see the code below for an example of how this works) and then updating the statusbar to show the user progress (also in the code below).

However, what often frustrates me is the inelegant ways in which a user can exit a macro which could take hours to run. I struggled a little to find the approach demonstrated below so I thought it might be useful for others. (more…)

I gave a presentation on a holistic approach to ratemaking using predictive models yesterday to the Lebanese Insurance Association (ACAL, the acronym for the association in French). Over a hundred people attended, and there certainly seemed to be interest in the topic.

A common response though was that Lebanon isn’t yet ready for that, because rates are so low and nobody is prepared to change their approach. I accept that changing the “way things are done” in a fundamental way takes time and courage, but I expect that some players will start collecting the data, doing the analysis and improving their pricing in the next few years. By 2013, the market here will not be the same. The advantages across general insurance, banking, sales and cross-selling are simply too great. The techniques available are fantastic and can be implemented quite easily.

I’ve given the official press release below, and presentation ACAL GI Pricing 2008 (pdf version) is available under Resources on this site.

Insurance companies can generate a competitive advantage through accurate ratemaking, systematic risk-adjusted pricing, and careful analysis of policyholder price sensitivity at renewal dates. Single variable techniques can provide valuable insights into risk factors, but do not perform well in the presence of multiple drivers of risk.

Generalised Linear Modelling (GLM) is the preferred approach for robust, multivariate analysis of claim severity and frequency modelling. GLM can model several rating factors simultaneously, including interactions between different rating factors on risk. It is used extensively in the UK, the US and other highly competitive and developed insurance markets.

Judgement and experience are required when assessing different models and interpreting the diagnostic tests used to ensure accurate and robust results. A good model can make dramatic improvements in the separation of high and low risk policyholders.

These advanced approaches all have increased data requirements. Companies looking to reap the rewards of improved ratemaking will need to develop the databases and systems to store exposure, claims and rating factor data. There is a range of software available to perform the statistical analysis, from expensive purpose-built systems to freely available, open-source statistical platforms.

Successful implementation of an advanced rating system depends on commitment of key staff to the project and the inclusion of marketing, underwriting, legal, IT and actuarial skills in the project team. Market characteristics and reluctance to change are constraints to the adoption of advanced techniques. These have been faced and overcome in many other markets. It is only a matter of time before insurers must use these techniques even to maintain their competitive position.  Early movers will enjoy an improvement in their competitive position, market share and profitability.