Difference between revisions of "AAA.Materiality"
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Revision as of 17:28, 12 March 2019
Question: When can a discrepancy be ignored? Answer: When it is 'small enough' not to matter. (In other words, when it's not material.)
Study Tips
This is an important topic, but it's already discussed thoroughly in the SAO (Statement of Actuarial Opinion) reading. You probably don't need to spend much time here.
BattleTable
Based on past exams, the main things you need to know (in rough order of importance) are:
- this reading has not been tested on any exam from the year 2012 and subsequent
reference part (a) part (b) part (c) part (d) no prior questions
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In Plain English!
Alice the Actuary just accepted an actuarial job offer at a salary of $120,000. Woo-hoo!
- But the next day, HR called and said they'd made a mistake. The salary is only $119,500. Do you think she would accept the revised offer?
- What if the revised offer were $115,000, or $110,000, or even lower.
Question: How low do you think HR could go before Alice would reject the revised offer?
Obviously this question doesn't have a single correct answer. (For Alice, it depends on this month's credit card bill)
- Let's suppose Alice would be willing to accept $115,000, but nothing less.
- Then the level of materiality in this situation would be $5,000. That's because any reduction less than $5,000 would not affect her decision. But any reduction more than $5,000 would affect her decision.
That's the idea behind materiality:
- ==> What is the smallest amount that would changeaffect your decision?
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