A Heuristic Approach to Longevity & Health Planning
Models are used to help us understand the world. Just as a map is not the actual physical territory it represents, a model is also just a method of understanding a complex environment. In our case, that environment is how a person’s family health history and lifestyle choices affect longevity and quality of life, which ultimately impacts their future wealth. Here we show you how a heuristic model approach works and why it is an accurate and appropriate approach for financial planning.
The Lumiant approach to estimating longevity, health, and health costs for financial planning is based on a heuristic decision-making model. This article explains the reasons for this approach and the benefits it provides.
DEFINITION OF A HEURISTIC MODEL
A heuristic is a term used to describe a method of discovery in problem-solving. It is an effective and efficient way of using simple rules to make decisions about complex problems, especially when all the information necessary for deciding is unknown, and the goal of the decision-making process is to be quick yet effective.
Heuristic models refer to techniques based on experience for various tasks such as research, problem-solving, discovery, and learning. Heuristic methods enhance the pace of finding a desirable solution under conditions where a comprehensive search isn’t feasible. Heuristics are strategies that use readily accessible information for problem-solving.
WHY HEURISTIC MODELS ARE USED
Through the formalization of heuristic models in the 1990’s a powerful yet simple discovery was made; the less-is-more effect. Researchers were studying the comparative results of standard statistical methods to formalized heuristics. What they found was an inverse, U-shaped relationship between level of accuracy and amount of information and computation time. This evidence supported the notion that employing one good reason (and ignoring the rest) can lead to higher predictive accuracy than using a linear multiple regression1.
This less-is-more effect is of value when decision-making is happening in a complex environment in which some relevant information is unknown or can only be estimated from samples and the future is uncertain (all alternatives are known as well as all the probabilities of those alternatives are known).
EXAMPLE OF A HEURISTIC MODEL APPROACH IN FINANCIAL PLANNING
A commonly used heuristic for financial planning is the decision-tree model. An investor buys stocks based only on the stock soliciting buy recommendations and upward revisions in their forecasted earnings.
This decision tree heuristic ignores other important stock qualities, such as the difference between hold and sell recommendations and the difference between stocks with large and small upward revisions, to provide a simple decision-making tool.
This decision tree heuristic ignores other important stock qualities such as the difference between hold and sell recommendations and the difference between stocks with large and small upward revisions to provide a simple decision-making tool. 2
LUMIANT'S HEURISTIC MODEL FOR LONGEVITY
Lumiant calculates a genetic age, based on the probability of living to 110, taking family health history into account, which is then used to determine the raw, pre-lifestyle adjusted, life expectancy from projected lifespan actuarial data. Lumiant then adds modifiable health risk factors of maintaining a normal weight, routine exercise, and nonsmoking during middle age effects on disability and mortality in later life. Most importantly, family health history is factored into one’s longevity.
Lumiant considers the most important diseases and conditions of one’s family health history: Alzheimer’s disease, cancer (9 of the most common), heart disease, stroke, and type 2 diabetes. HALO’s questions are targeted to drive engagement and are quite manageable for the person to complete in approximately five minutes or less.
The feel of the HALO Planner is informative and motivating. Instead of being overwhelmed with pages of questions, the client focuses on the most essential areas and is rewarded throughout the assessment process with interesting facts and graphs to drive engagement. The interactive results page provides a high-level overview that is clean, easy-to-understand, and engaging for clients. Meanwhile, the full analysis report with expense projections is sent directly to their advisor for follow-up planning discussions.
In a complex environment where there is a lot of information and uncertainty about the future, a heuristic model for decision-making is superior to a regression or probabilistic model because of the demonstrated less-is-more effect. The reliance on rules based on previous knowledge (a heuristic) to guide the result is more accurate than a complex series of statistical tests incorporating all the data points to cover all the bases across all possible outcomes.
People’s health, wealth and family are inseparable and complex. Employing a heuristic model to the relationship between family health history, personal lifestyle and financial planning is the most effective tool for empowering people to make good decisions about their health, wealth and financial goals.
1. From “Heuristic Decision Making,” by Gerd Gigerenzer and Wolfgang Gaissmaier, 2011, The Annual Review of Psychology, p 451-482.
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