Making Actuaries Less Human

Making Actuaries Less Human

Work by psychologists suggests
that, as human beings, actuaries are subject to a variety of mental biases and decision
making errors. The field of behavioural finance looks at how such biases affect
financial decisions.

This paper first looks at a selection of these biases including how:

• decisions are often made by adjusting from an existing position
  (anchoring)
  
• people are risk averse when facing gains but become risk seeking when
  facing losses (prospect theory)
  
• the framing of a problem can materially impact the decision that is made
  
• the frequency with which something is monitored can impact the decision
  (myopic loss aversion)
  
• people have a tendency to ignore underlying probability distributions
  
• almost everybody is overconfident
  
• when a number of different options are presented, the number, order and
  degree of difference between the options will affect which option is
  chosen.
  
• the use of separate mental accounts impacts financial decisions (mental
  accounting)