According to the wise amongst us the only way to solve complex problems is by breaking them into smaller, more manageable chunks. Investing. The World Economy. Financial Markets. All of these are extremely complex environments wherein individuals have their own processes and magic formulae they use in order to derive the best possible outcome.
Some are successful, and some are not. While popular culture often focusses on extreme successes, there is a lot of merit in looking at the less successful stories and learning from them. One such tale involves a French lawyer named Andre-Francois Raffray, and an elderly lady by the name of Jeanne Calment.
In 1975, Raffray saw the investment opportunity of a lifetime. He approached Calment (90 years old at the time without any heirs) with a proposition. He would make a monthly payment of 2,500 Francs to her until her death, in return for the keys to her apartment when she passes away.
Raffray (47 years old at the time), used actuarial tables and took a calculated risk that the old lady would pass away within the next couple of years, and he would be the proud new owner of a luxurious apartment bought at a massive discount. His investment based on the assumptions of life expectancy would come back to bite him. Badly.
Jeanne Calment would later hold a record Raffray would not have foreseen. She became the proud title owner of “Longest confirmed human lifespan” on planet earth and passed away when she was 122 years and 164 days old, outliving Raffray whose widow had to keep paying Calment the 2500 Francs per month after his death!
The lesson? When breaking complex problems down to simpler chunks, statistical assumptions (such as the one Raffray made a bet on) need to be made with caution. The old and boring and investment advice of diversifying risk is old and boring for a reason. It works. It protects you from uncharacteristically unexpected negative movements that you would not have expected in 122 years and 164 days.
