Discount rates and error margins
Joseph Mariathasan
Director of GIST; Contributing Editor at IPE; Partner at Peak Sustainability Ventures; member of Advisory Boards of Moneyhub and of pinBox Solutions, Advisor to Bitelabs Healthtech
‘You can only manage what you can measure’ is a fundamental plank of any management approach – but if too much credence is given to the measurements themselves without understanding their limitations, it can create chaos.
One of the more revealing actuarial jokes I have heard (told to me by an actuary), was the story of an actuary standing next to a farmer who was surveying the sheep grazing in his fields. “How many sheep do you think I have?” asked the farmer. The actuary, after a few moments’ thought, answered: “1,007.”
The farmer looked astonished and asked the actuary how on earth he was able to get a precise answer so quickly. To which the actuary answered: “It was quite simple, you must have around 1,000 in that field in the distance, and you have seven sheep in the field next to us, so adding them together gives a thousand and seven.”
That type of thinking perhaps underlies many of the issues relating to liability-driven investment (LDI) and the concept of matching estimated long-term liabilities with expensive risk-free bonds.
See Discount rates and error margins