From the January 2009 issue of Research Magazine • Subscribe!

Reassessing What Works

Civilization carries a grand illusion of stability. Yet, things change around us constantly. Our personalities change with aging, societies die around us, the Earth warms and cools in turn. However, we seem to need to plan our lives on the basis of stable relationships, only to be overtaken by continuous change. Unfortunately, change is not a kind and gentle thing. Change comes from conflict -- hot, hands-on conflict that is not limited to "what we've got here is a failure to communicate." Conflicts run deeper than most of us would think.

For instance, Isaiah Berlin (1909-1997), British philosopher, historian of ideas and political theorist, states that moral values (memories of what used to work) can and do conflict. Since values point to what used to work, times are always troubled from one point of view or another. Our times are troubled times indeed. Can we find out what used to work that does not work anymore? Better yet, can we find out what will work?

Reevaluating Worth

The fifth Managing Retirement Income conference will start on February 9, 2009 in Boston. RIIA continues to be the exclusive endorsing association and will continue to chair the conference. One of the responsibilities of the conference chair is to create the theme for the conference. Each year brings a new theme. This year's theme is "product and process development" -- and this focus comes at a time of a generalized reassessment of what things are worth in the economy in general and in the financial industry in particular.

Conference participants will present a comprehensive range of currently available retirement products and processes. They will also talk about their plans for the future. It is fitting that our keynote speaker will be Bruce Sterling, a prominent futurist and author of many books including a book with MIT Press, Shaping Things, that summarizes Bruce's foray into the world of product (and process) design. This book should be an important text for product designers in training, if it is not already the case. In it, Bruce summarizes the most salient aspects of the past and present of design. He also articulates a vision of the future.

In this book, Bruce starts with a description of "Artifacts" that are "made by hand, used by hand, powered by muscle ... created one at a time, locally, by rules of thumb ... People within an infrastructure of artifacts are 'Hunters and Farmers.'"

Next he moves to explaining "Machines" that are "complex, precisely proportioned artifacts with many integral moving parts that have tapped into non-human, non-animal power sources .... People within an infrastructure of Machines are 'Customers.'" He dates the transition from an "Artifact" techno-structure to a "Machine" techno-structure around 1,500 A.D.

He sees the next transition around WWI with the arrival of "Products" that he defines as "widely distributed, commercially available objects, anonymously and uniformly manufactured in massive quantities .... People within an infrastructure of 'Products' are 'Consumers.'"

His next transition took place in 1989, with the appearance of "Gizmos" that he establishes as "highly unstable, user-alterable ... multi-featured objects, commonly programmable, with a brief life-span .... People within an infrastructure of 'Gizmos' are 'End-Users.'"

The next transition that we will be looking at, but not the last transition in the book, took place in 2004 when "the United State Department of Defense suddenly demanded that its thousands of suppliers attach Radio Frequency ID tags, or "arphids" to military supplies." This created "Spimes" identified as "sustainable, enhanceable, uniquely identifiable, and made of substances that can and will be folded back into the production stream of future 'Spimes." Moreover, "people who live within an infrastructure of 'Spimes' are 'Wranglers.'"

So, how does this relate to financial products? Well, are we still designing products for the past or are we starting to design products for the future? In what ways are "Gizmos" related to financial products? Can you see that we have already been developing "Gizmos" rather than "Products" with advice calculators, embedded Monte-Carlo simulators, Web-enabled applets, etc.?

What about "Spimes"? What financial products do we have that would be able to give investors an online, real-time assessment of where they are with regards to what we expect from them and how far we may be from our goal? Would financial products built and marketed in units of outcomes (retirement income, college tuition, health-care procedures, etc.) be steps in that direction?

There is much to think about in Shaping Things, and I look forward to the discussion during the conference. What else should we look at and how should we prepare for it?

Rebuilding Trust

From our retirement management and retirement income perspective, we look to design products and processes that address customer needs (income) and risk factors.

Clearly, a specific product or process cannot address all risk factors at once. The importance of specific risk factors changes over time. Given the financial crisis that became most visible during the last few months, are there matching risk factors that have moved from the background to the forefront? The traditional priorities seem to have been inflation, market and longevity. Has this changed?

During a recent RIIA conference call, some members, including financial advisor Keith Diffenderffer, described the social, political, business and financial changes that we are living through as a betrayal of trust between the investor, the industry and the government. Taking a few steps back, one can see that a key value of thinking is the creation of representations that enable the holder to understand and to manipulate a situation faster and more predictably. There are mental models that work, and mental models that do not work. Our values (intangible as well as financial) reflect what used to work, what used to pay. Our values truly incorporate the winning cost/benefit calculations of the past. Once our mental models and values cease to work as expected, we feel a betrayal of trust. What has changed around us that would invalidate what used to work? What has changed around us that would reflect a world with different values from the past?

A lot of trust was lost because retirement income vehicles were built on the wrong chassis and those vehicles have lost a lot of financial value. Retirement income vehicles are more than accumulation vehicles with add-on guarantees and/or distribution mechanisms. The tools may be similar but the design, structure and implementation must be focused on risk/volatility control, not on outperformance. Retirement income investors do not make outperformance their primary goal. Their first goal should be to put a floor under their income risk. In 2008, we saw clearly that the values of accumulation (capital appreciation portfolios) did not serve the values of retirement income (consistent cash flow). In 2008, our retirement income products still looked like storm-chasers when we should have been building storm cellars.

We have lived through the growth and crash of the bubble, a rising age of innovation. We are living through the crash of the credit-fueled real-estate bubble. Where will the next storm come from? Where will the next bubble come from?

The Coming Entitlement Bubble

To answer those questions, let's look around us to see if we can recognize significant "elephants in the room" where retirement income policy and product development discussions take place. For instance, if you have children, you know that if you subsidize a behavior, you get more of it. Interestingly, the truly dependent cannot afford innovation because it increases the variability of their results. Innovation can really "rock the boat."

The lower the prospect of upward mobility through innovation, the more rational it is to adopt an unscientific view of the world. Wishful thinking replaces reason. Magic replaces technology. The market is replaced by kinship behavior. It is rational for the truly dependent to do so because it exonerates them from responsibility for their misfortune. Could it be that we have reached a point where more people see themselves threatened rather than empowered by innovation? Could it be that many -- and perhaps a majority -- have moved from dreams of rewarded efforts to a resentment of unclaimed entitlements?

As a rough proxy for the level of interest in government redistribution, rather than in private enterprise, consider that in 2006 about 32 percent of American taxpayers (43 million tax returns, covering 91 million individuals, out of a total of 136 million tax returns) are net beneficiaries from the Federal Government and do not pay taxes. What happens when too many of us expect a bailout?

During the past few years, we have seen a change in investors' focus because of the demographic transition driving a shift from accumulation and towards retirement income. The financial crisis of 2008 may have both accelerated this change and given it a new direction.

The possibility that the next bubble may be an entitlement bubble suggests that policy risks such as taxes may become one of the more urgent, and larger, risks for potential retirees. What is on the product development horizon that will either help increase the power of government, or provide a check against it?

Utopian Thinking

At the end of Shaping Things, Bruce Sterling addresses the problem of utopia in product design. The implications extend beyond product development. Utopias are a way to deal with change and conflict. However, they fail because they assume that all will share similar values across space and time, that all questions have a single right answer, that a method exists to find those answers and that the answers will not conflict. In his book, Bruce sees utopian thinking -- and product development -- as "mere verbal gasps of intellectual exhaustion [showing that] the futurist has exhausted his personal ability to confront the passage of time." He makes it clear that we should not expect to make everyone "happy and contented" because our needs express themselves in unexpected and disruptive ways, are time-dependent and are inherently conflicted.

Utopian thinking can be contrasted with practical efforts to deliver the tacit bargain that the investor accepts and that product developers seek to deliver. Using the RIIA risk matrix as a scorecard, you can describe the traditional accumulation bargain as accepting market risk in the hope of higher returns in order to offset inflation and longevity risks. This supported investors' willingness to take business risk (market) in order to offset a policy risk (inflation) and a personal risk (longevity).

Stressed-out investors may see their primary personal risk shift from a concern about excessive longevity to a concern about more immediate health-care risks. In addition to the basic shift from accumulation to retirement, fearful investors recoil from market risk and move towards protection and guarantees. Informed investors may see their fears of inflation replaced by evidence of deflation and greater fears of tax increases. As a result, the government, rather than the financial industry, might become increasingly perceived as the preferred purveyor of the new bargain.

If the financial industry was the primary purveyor of the old bargain (market risk vs. inflation and longevity risks), will the government become the primary purveyor of the new bargain (tax increases vs. guarantees and health care for all)? What will be the role of the financial industry if this is the new bargain? Will traditional "Product" development secure that role? Will a new emphasis on "Gizmo" and "Spime" development be more appropriate?

America tends to stay away from the radical extremes and instead favors moving around the practical middle-muddle. This practicality is the stuff of resilience (rather than brilliance) and repeated iterations (rather than a glorious crash-and-burn). Practicality, resilience and iterations: These are good values for creating retirement income solutions. We should all be looking forward to "Wrangling" the middle-muddle of financial "Product," "Gizmo" and "Spime" development during the conference and beyond.


Francois Gadenne is chairman and executive director of the Retirement Income Industry Association in Boston; see

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