When an actuary saved Elon Musk...

Multi-disciplinary, visionary entrepreneur Elon Musk co-founded Paypal which is now globally leading and the most popular payment gateways in the world. Recent reports suggest it processed about 4.4 billion dollar payment transactions which sounds amazingly a huge deal.Lets learn about an untold story of how an actuary sustained the existence of Paypal when Musk was the then CEO of the company.

Long ago an actuary from Cape Town joined Paypal.He was Roelof Botha, present day multi-millionaire venture capitalist.In the year 1996 he was  running out of cash due to currency crisis.He didn't have enough money even to clear the rent bills which compelled him to borrow cash from his fellows and was embarassing for him.Finally, he accepted the third offer from Paypal as a part time employee three months before graduating.

As he joined, he developed a bottom up financial model to ease the understanding upon the driver of the business.Of course! the model excelled to be perfect one and gave crystal clear insights in forecasting.On course of fabricating the model he was trying to reconcile actual results compared to expectations.Soon he discovered that one of the model working on fraud losses was malfunctioning.Finally he came to know that the company was loosing millions of dollars a month due to the faulty model.

His team applied chain ladder technique to acknowledge the cumulative frequency distribution and they were shocked to learn that the fraud rates were about four times greater than estimated and growing exponentially.Then his team designed scoring algorithms for every transaction and modeled data using logistics regression and neutral network models to prevent such fraudulent transactions.After applying varieties of actuarial techniques the problem was resolved early which saved Paypal from forthcoming bankruptcy.

Musk was wholeheartedly grateful  for the life-sustaining contribution of actuaries for Paypal. Hadn't Botha's team made such efforts, the existence of Paypal would have tarnished!"I would love to have some high-energy actuaries… I have great respect for the actuarial profession. You guys are great at math. We want revolutionary actuaries." says Musk. Even today he pictures actuarial profession as a revolutionary and life-sustaining profession.And indeed actuary is a responsible and honourable profession.In todays modern world, their role in flourishing economic development, mitigating risk and coushioning businesses and organizations from possible threats is extraordinarily incredible!                              

Source:

https://www.theactuary.com/

MJ the fellow actuary(Youtube)