INTRODUCTION

Applications of probability in the realm of finance, business, and insurance are becoming
more appreciated as humans increasingly comprehend the essence of probabilistic concepts in
the management of risks. With these advantages, it is significant that we improve our
understanding of this body of knowledge by utilizing the advancement of computing technology
to ameliorate the way people could utilize these probabilistic concepts as applied in the different
sectors of the industry. Being one of the first programming languages created with its declining
popularity in the modern world, Formula Translator, popularly known as Fortran, has its
multifunctionality recognized and widely appreciated by physicists and scientists. With the use
of Fortran, programmed are the different probabilistics concepts considered paramount in
the insurance industry which are as follows: application of binomial distribution to
insurance, poisson distribution, markov processes, expected utility function, and basic
application of binomial distribution in calculating mortality problems.

BACKGROUND INFORMATION/STATEMENT OF THE PROBLEM

OBJECTIVES
1. Binomial Distribution
2. Poisson Distribution
3. Markov Processes
4. Expected Utility of Wealth
My main objective is to help individuals, especially individuals who has a company to
choose on, to choose a better decision on the pathway that they will take. This is a great
opportunity and criterion for every risk takers as we, in the long run, will be involved in risk
decisions.
5. Binomial Distribution in Insurance

SIGNIFICANCE
1. Binomial Distribution
2. Poisson Distribution
3. Markov Processes
4. Expected Utility of Wealth
The Expected Utility of Wealth is a huge financial decision that can give a better
financial option. However, Expected Utility Theory of Wealth does not replace the theories of
each individual as it still holds a risk. According to Evans (2016), the Expected Utility Theory of
Wealth is used by individuals who has an option to choose between a job with a steady salary or
a job with a larger salary potential but has a downside of you will be searching for another job in
the long run. Each of us has a Utility function depending on our financial status and if we are risk
averse or not.

5. Binomial Distribution in Insurance

REVIEW OF RELATED LITERATURE

1. Binomial Distribution

As one of the most promising fields of study in mathematics, the mathematical concept of
probability offers extensive and immense applications in areas like finance, insurance, business,
and economics. Probabilistic models are also used to make financial decisions, guiding business
professionals and investors in making wise choices for a more financially secure future.
Probability, as a tool used widely in mathematics, also paves the way for humans greater
comprehension and understanding of risks, engendering limitless solutions to alleviate future
contingencies. Probability proved to be a salient tool to aid the society by using probabilistic
models as guide to different decisions in the different sectors of society.
Simply put, probability is defined as the chance that an event will happen. For instance,
computations of the chance of survival of an adult after 10 years or the chance that a certain
company will be bankrupt after three years are computations related to probability. However, it
is not as easy as anyone may assume because real world problems concerning probabilities
involve a myriad of factors for a probability to be truly applicable.
In the program coded, one of the applications of probability is in insurance using a
probabilistic distribution called the binomial distribution. A binomial distribution has the
following properties: a success-failure experiment, also called Bernoulli experiment, is
performed n times where n is a constant and is an element of the set of natural numbers; the trials
are independent, that is, a trial does not affect the outcome of the other trials; the probabilities of
success and failure per trial are not changing and have a sum of one; and the random variable
equals the number of successes in the trial.

2. P
oisson Distribution

3. Markov Processes

4. Expected Utility Function

When offered with different risky financial options with uncertain outcomes, the decision
of an individual does not always depend on the outcome that gives the higher value. It will also
depend on the probability of risk it entails and how the person value each amount of his/her
money. As the common belief goes, a single peso may be less important to a millionaire
compared to a person with no savings. In this case, the expected utility function becomes an
important tool for predicting the which of the risky financial options with uncertain outcomes
will be taken by an individual. As an application of expected utility function, an individual who
doesnt have that much money may choose the option which is less risky and has lower return
instead of the other option which is more risky but has higher return.

In the program coded, the user will enter the value that he/she desires and also the
probability (in percent) that he/she will achieve the desired value.
As my basis, I have used the book Probability for Risk Management by Hassett
and Stewart. A chapter of the book summarize the overview of the Expected Theory of
Wealth. It gave a real life application that helped me to view my program and expand it
thoroughly. The book showed two methods which compares the two random variable
using two ways; one way is Expected Values and the other is Expected Utility Function
of Wealth.

Using Expected Values (Figure 1.0), Method 1 gave a result of 9,000 compared
to Method 2 which has a result of 8,844. On the other hand, Using Expected Utility
Function (Figure 1.1), Method 1 gave a result of 90 while the Method 2 gave a result of
93.10.

Note: Expected Values: E(w)=P1(W1)+ (P2)(W2) while the

Expected Utility Function: E[u(w)]=P1(W1)+ (P2)(W2); u(w)=W
As Stewart and Hassett (1999) states, Method 1 is a good decision using
Expected Values as it has a larger expected value on the other hand, using the
Expected Utility Function of Wealth, an individual with utility function u(w)=W would
select Method 2 because it has a higher value. David Autor which was the one who
published Lecture Note 14: Uncertainty, Expected Utility Theory and the Market for Risk
gave me information to the description of the theory. Another journal by Peter Cramton
was used for the Examples of most commonly used Utility Functions for individuals. It
was also used to gather additional information for the project

BY HELBERT PAKI INTEXT CITATION NALANG AT PARAPHRASE

In economics and nance, the most popular approach to the problem of choice under
uncertainty is the expected utility (EU) hypothesis. The reason for this to be the preferred
paradigm is that, as a general approach to decision making under risk, it has a sound theoretical
basis.
(https://www.empiwifo.uni-freiburg.de/lehre-teaching-1/winter-term-10-11/materialien-portfolio
-analysis/utility.pdf)

5. Binomial Distribution in Mortality

Binomial distribution is one of the most useful statistical tools in calculating mortality
rate. It adheres to the research objectives of the said program. Binomial distribution is applicable
to the research of finding the probability of death in a particular age group, given that it is used
by insurance companies. It also proved sufficient because the probability holds on age-specific
death rates.

METHODOLOGY/FORTRAN IMPLEMENTATION
1. Binomial Distribution
2. Poisson DIstribution
As a part of our program, an application of Poisson distribution is programmed to
heighten the difficulty of the project. Applying Poisson Distribution in finance and business
using the FORTRAN program, we used some applications we have learned from our AMAT 150
class including making do loops, subroutines, functions and even if statements to obtain an
efficient and effective program. This program was made to give some assumptions in
probabilities using definite formulas. Applying it in FORTRAN is quite easy but it is very hard
on finding some faults especially when the given inputs will give either an indeterminate or
undefined number. This subroutine is able to answer three questions about policyholders, this
gives the rate of claims per policy per year, the probability table for each year stated and the
mean claim amount for a policyholder. The subroutine was assumed to give accurate answers
given that the inputs are correct.

3. Markov Processes
4. Expected Utility of Wealth
In this project, I have used FORTRAN language to execute the Expected Utility Theory. I
have used different syntax to perform the project. I have used IF statements to show the user
which utility function did he/she chose and also if the user wants to try again the program. I also
used it on the conclusion wherein it helps on determining the higher output value. I used Iterated
DO statements to construct the table for the comparison of the two companies and its possible
outcomes. GO TO statements which are used to jump on the error input and if the user still
wishes to use the program again. I used FORMAT to configure the excess digits or spaces which
are not necessary and to present it neatly. I used SUBROUTINES instead of FUNCTIONS
because subroutines gives one or more value via its argument than what can function give as it
only gives one value. I have used a MODULE to divide the program into parts wherein they
were called to communicate to each other. It also made the main program shorter and made the
whole program organized. I used Call clear_screen@ which is a intrinsic procedure that clears
the screen for the contents of the program not to be stacked as it goes by.

5. Binomial Distribution in Mortality Problems

The use of this type of probability in making a Fortran code made use of the subroutine
function and the if statement, in which specific values of the probability of death is supplied to
the specific age, in which the user would conveniently run the program without having to
encounter problems. The subroutine function helped in implementation because of its advantages
in decomposing the program into different parts. The If statement was used because of the
conditions given by the programmer for easier implementations in the program.

RESULTS AND DISCUSSION

1. Binomial Distribution
2. Poisson Distribution
3. Markov Processes
4. Expected Utility of Wealth
5. Binomial Distribution in Mortality

CONCLUSION
1. Binomial Distribution
2. Poisson Distribution
3. Markov Processes
4. Expected Utility of Wealth
The Expected Utility Theory is a huge leap for those who want a better financial
decision. It is not advisable for everyone as it holds risk and every individual has
different theories that they are in to. This program was intended for individuals for their
analysis of important risk management such as this theory. This is a huge step for me to
enhance more of my skill not only in the theory itself but also on my programming skills.

5. Binomial Distribution in Mortality