Riley: Mr. Achorn Do You Still Want Door Number 1?
Tuesday, March 29, 2016
The answer to last week's “Monty Hall” quiz was, you should always switch doors.
The odds don’t change from the original one out-of-three because Monty knows and can always reveal a losing door. This is indisputable. However, even after being told that its proven that to switch human beings find it hard to do. The original fear of making a mistake by switching turns into something else. Before being shown the proof approximately 95% of participants said the odds were 50/50 yet 95% of those refused to switch. That in itself is amazing. Even when Monty would offer money to switch doors a vast majority stuck with their pick.
This very human behavior is why economists are often surprised by how incentives, or taxes or stimulus affect consumption. People aren't always rational. Here is a good explanation of the math.
GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLASTBut in my opinion the most interesting fact is that people refuse to accept the odds are against them, even when demonstrated and still stay with their pick. This phenomena is well described in the book “Blink” by Malcolm Gladwell.
This is a fatal flaw for traders and it’s the reason we posed this question to trader prospects in the early 1990’s. We wanted analytical people AND we also wanted people who when presented with the facts changed their tactics.
Fully Funded Pensions by 2040?
Last week, I referred to the question on A Lively Experiment of “whether the Rhode Island Pension plan would be fully funded by 2040."
I know that teachers and state workers are praying for it because they would get COLA’s reinstated. Don’t count on it. Just like the Monte Carlo Method finally proved the odds in the Monte Hall problem demanded that the contestant switch, the facts surrounding the chance of being fully funded in any pension plan are calculable and remote given the facts of that plan. In Rhode Island we are 57% funded and have $7.2 billion in assets to pay for $13 Billion in already earned but not yet paid benefits. The difference of $5.8 billion, is the PV (present value ) of the unfunded liabilities discounted at 7.5% (the rate we are supposedly going to compound for the next 30 years). Almost every serious economist finds this estimate of return laughable, especially given the current zero and negative interest rate environment.
But even further to the point, the odds of Rhode Island or any one else in the same circumstance fully funding by 2040 is calculable. Colorado, one of the 10 other states that have “hybrid” pension plans, had their actuary figure out those odds and crafted law designed to automatically adjust when more funding was necessary. The idea was to make it harder for politicians to short change retirees by predicting high returns and then spend the retirees pension money elsewhere. Colorado thought this was the responsible thing to do. Here is the Colorado Plan article:
Rhode Island's goal should be to adjust to reality and to get on track to fully fund our promises. It does not help when the Democratic Party Chair misleads taxpayers and retirees about returns and the condition of the pension plan. According to Mr. McNamara the last 5 years Rhode Island earned 9.3% in its pension plan. I was shocked to hear that and wondered where he got that “talking point” from. Never mind, lets just go to Seth Magaziner's RI Treasury website.
Just the facts please
The State released the return’s for the Pension plan trough February 29,2016 are summarized below. As can be seen on the transparency website, Rhode Island returns are nowhere near 9.3%. Here are the facts without the spin from our treasurer and Democratic State Chair.
Rhode Island State Pension Plan Returns
The question I have now goes to panelist and Projo Editor Ed Achorn , who originally endorsed Mr Magaziner for treasurer in 2014 and last week enthusiastically supported Mr. McNamara‘s prognostication that RI would easily be fully funded by 2040. …….
Mr. Achorn do you still want door number 1?
Michael G. Riley is vice chair at Rhode Island Center for Freedom and Prosperity, and is managing member and founder of Coastal Management Group, LLC. Riley has 35 years of experience in the financial industry, having managed divisions of PaineWebber, LETCO, and TD Securities (TD Bank). He has been quoted in Barron’s, Wall Street Transcript, NY Post, and various other print media and also appeared on NBC News, Yahoo TV, and CNBC.
Related Slideshow: Timeline - Rhode Island Pension Reform
GoLocalProv breaks down the sequence of events that have played out during Rhode Island's State Employee Pension Fund reform.
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