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January 24th, 2012 at 11:03 am

Michael R. Powers, author of Acts of God and Man, Takes the Page 99 Test

Michael Powers, Acts of God and ManMichael R. Powers, author of Acts of God and Man: Ruminations on Risk and Insurance, recently took The Page 99 Test.

Powers discussed how page 99 from his book reflects some of the ideas in his book Acts of God and Man. Here are some excerpts:

Reports abound that the realm of risk and insurance – with its chary underwriters, cynical claim adjustors, and calculating actuaries – is dry and forbidding. In Acts of God and Man, I challenge this notion by proposing a “science of risk” that entails:

* a fundamentalist Bayesian (i.e., subjective/judgmental) approach to modeling uncertainty and assessing probabilities;
* a formal distinction between the primarily natural “aloof” risks of insurance and the largely artificial “non-aloof” risks of other financial markets; and
* a personalized scientific method that casts off the shackles and inconsistencies of more orthodox methods too burdensome for the study of risk.

Page 99 marks the beginning of the formal discussion of aloof and non-aloof risks:

So what are the essential differences between insurance and other financial services? And will these differences persist into the future?

Traditionally, distinctions between insurance and other financial risks have relied on either: (1) regulatory definitions and institutional terminology/jargon; or (2) attempts to draw a theoretical difference between the categories of pure risks (characterized by the negative outcomes – i.e., losses – common to insurance) and speculative risks (characterized by both positive and negative outcomes). Although the latter approach may be intuitively attractive, it possesses little mathematical rigor. All that is needed to transform a pure risk into a speculative risk is to subtract its expected value; then, like a market price, it will have the potential of both increasing and decreasing….

Beyond page 99, Acts of God and Man will appeal to a broad assortment of readers. For those attracted by immoderate opinion, there is a categorical denunciation of observational studies (which happen to form the basis for most business-related empirical research). For those preferring wanton speculation, I adduce personal evidence of the paranormal. And for those contented by repeated attempts at feeble humor, a series of end-of-chapter dialogues divided into three “Acts” – featuring God, angels, saints, ordinary people, and even a lawyer and statistician – will likely suffice.

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