December 28th, 2017
Diagoras was a Greek Poet and Philosopher, living in the 5th Century before Christ. He is known as an Atheist.
The story goes as follows (summary taken from Taleb’s Black Swan, Chapter 8): “Diagoras was shown painted tablets bearing the portraits of some worshippers who prayed, then survived a subsequent shipwreck. The implication was that praying protects you from drawning. Diagoras asked, ‘Where were the pictures of those who prayed, then drawned?’ The drawned worshippers, being dead, would have a lot of trouble advertising their experiences from the bottom of the sea.”
The flaw is that the believers only consider part of the evidence. The other part (the silent evidence – those who died and can’t tell their story) is left out.
In his practice as an insurance professional, Patrick has observed all too frequently that conclusions and decisions are based on incorrect use of (statistical) evidence.
Underwriters and managers alike observe a favorable loss ratio in their property book and conclude that last years’ re-underwriting was successful. However they forget that the variability (inherent uncertainty) of the results is bigger than the change they observe. Underwriters select risks to cancel (or to keep) largely on the basis of the individual loss record of the account. With low frequency risks, this is an ineffective way of improving the performance of a portfolio. A more structural and fundamental approach is required.
With his previous employers Patrick has coached managers and underwriters to improve their statistical reasoning as a means to enhance the quality of their decision making.