(Title is paraphrased from a remark by Mark Eisner, Cornell University)
Operations Research (aka management science or decision science) is a field of business mathematics, believed to have been created during World War II to help the British military strategise and win the war.
Why am I writing about Operations Research today? Well, I would like to elaborate the two following thoughts:
1. Operations Research's practical applications make it an essential field to society, and we need more students and professionals to study and apply it.
2. The Actuarial profession should embrace & incorporate Operations Research in its education and practice.
Practical Applications of Operations Research
Examples include:
- Project scheduling (PERT & CPM): An algorithm to schedule projects efficiently, identifying the earliest possible finish time, critical activities, and the probability of finishing the project earlier or later.
- Simulation: Modelling of a process or phenomena or system, to understand it better, and quantitatively analyse the potential impact of solutions. The study of waiting lines is a common application, that is relevant to call centres, customer service departments and many other areas with a waiting line. Beyond that, simulation has very wide applications in business, healthcare, resource management, etc.
- Linear & Non-linear programming: A mathematical approach to maximize or minimize a function (eg profits, costs etc), given a set of constraints. This approach will help us run organisations more efficiently, minimising costs and maximising profits in various areas. The CAPM (Capital Asset Pricing Model) used by investment analysts is one application of non-linear programming.
- Distribution & Network models: Enables us to solve problems in the fields of supply chain design, information system design etc.
- Inventory Models: Enables inventory managers to solve the dual problems of maintaining sufficient inventories to meet the demand for goods, while at the same time incurring the lowest possible inventory holding costs.
- Decision analysis: Determine optimal strategies in situations involving several decision alternatives and an uncertain or risk-filled pattern of events.
Evidently, these tools have very wide applications in business and society. It is time for us to take this field of mathematics more seriously.
The Actuarial Profession & Operations Research
In my view, the key elements that make an actuary are professionalism, a rigorous problem solving approach (the actuarial control cycle), and insights and judgement built on a foundation of mathematical and analytical training.
When viewed in this lens, it is quite clear that the actuarial profession can and should embrace mathematical disciplines that enhance the actuary's toolbox. This will allow for wider applications and benefits to businesses and society from the professionalism, problem solving approach, insight and judgment of actuaries.
Further, the actuarial profession itself is at what I think as an inflection point. Data analysis is now seen as an essential field of study, and has been included in our education and continuing professional development.
Banking has already been included as a fellowship track with the Actuarial Society of South Africa, and the IFoA is following in that path soon.
Operations research also merits serious consideration in this light, as this would enhance the relevance of the actuarial profession, and increase the employment opportunities of our growing ranks of actuarial graduates.
Reference: An Introduction to Management Science, Anderson et al.
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