Managing risks  Managing risks is about sharing risks with others. By finding ways of pooling risks we share both the upside and downside with others. This is beneficial because typically we dislike extremes. In the language of economics, we are ‘risk averse’. A key part of managing risk is the design of institutions that determine the ultimate incidence of risk. The Pensions Commission performed a valuable service in making us aware of the size of the shortfall in our current savings to finance future pension provision. It will report next year on various ways of closing this funding gap. But there is an additional and fundamental question of how to design a pension system which shares risk optimally among individuals and generations. Longevity risks are both individual and collective in nature. Collective risks raise difficult issues of fairness between generations. Individual risks are easier to handle. 15  On the use and misuse of statistics see Best (2001) and Briscoe (2000). An outstanding analysis of common mistakes in visual representations of statistical data can be found in Tufte (1983, 1990). 16  Robert Rubin, former US Treasury Secretary in the Clinton Administration, has stressed the importance of probabilistic thinking in policy-making (Rubin and Weisberg, 2003). 17  Letter to Frederick the Great, April 16, 1767. BIS Review 73/2004  7  In theory, individual longevity risks can be pooled through private annuity markets.
BIS Review 73/2004  1  coincidences are not evidence of guilt. Bookshops do not stock such titles as “I would have been a billionaire if only Lady Luck had been faithful”.3 In my lecture tonight I want to illustrate two propositions. First, in a wide range of collective decisions it is vital to think in terms of probabilities. We cannot avoid taking decisions, so we must accept the need to analyse the uncertainty that inevitably surrounds them. H.G. Wells is often reported as saying that, “Statistical thinking will one day be as necessary for efficient citizenship as the ability to read and write”. And that is even more true today when we are inundated with statistics from every quarter. Second, in order that public discussion can be framed in terms of risks, the public needs to receive accurate and objective information about the risks. Transparency and honesty about risks should be an essential part of both the decision-making process and the explanation of decisions. I want to illustrate those two propositions by considering as an example public policy about pensions an issue, you might think, of particular interest to many of us in the Academy. When the Pensions Commission reported in October, it highlighted the financing gap in our present system. But we must not lose sight of the equally important question of what are the risks incurred in pension provision and how should they be shared among us? It is not my intention to make any recommendations.