Schuette–Nesbitt formula
In mathematics, the Schuette–Nesbitt formula is a generalization of the inclusion–exclusion principle. It is named after Donald R. Schuette and Cecil J. Nesbitt.
The probabilistic version of the Schuette–Nesbitt formula has practical applications in actuarial science, where it is used to calculate the net single premium for life annuities and life insurances based on the general symmetric status.
Combinatorial versions
Consider a
-
(1)
denote the number of subsets to which ω ∈ Ω belongs, where we use the indicator functions of the sets A1, ..., Am. Furthermore, for each k ∈ {0, 1, ..., m}, let
-
(2)
denote the number of
-
(3)
where 1{N=n} denotes the indicator function of the set of all ω ∈ Ω with N(ω) = n, and is a binomial coefficient. Equality (3) says that the two V-valued functions defined on Ω are the same.
Proof of (3)
We prove that (3) holds pointwise. Take ω ∈ Ω and define n = N(ω). Then the left-hand side of (3) equals cn. Let I denote the set of all those indices i ∈ {1, ..., m} such that ω ∈ Ai, hence I contains exactly n indices. Given J ⊂ {1, ..., m} with k elements, then ω belongs to the intersection ∩j∈JAj if and only if J is a subset of I. By the combinatorial interpretation of the binomial coefficient, there are Nk = such subsets (the binomial coefficient is zero for k > n). Therefore the right-hand side of (3) evaluated at ω equals
where we used that the first binomial coefficient is zero for k > n. Note that the sum (*) is empty and therefore defined as zero for n < l. Using the factorial formula for the binomial coefficients, it follows that
Rewriting (**) with the summation index j = k − l und using the
which is the Kronecker delta. Substituting this result into the above formula and noting that n choose l equals 1 for l = n, it follows that the right-hand side of (3) evaluated at ω also reduces to cn.
Representation in the polynomial ring
As a special case, take for V the polynomial ring R[x] with the indeterminate x. Then (3) can be rewritten in a more compact way as
-
(4)
This is an identity for two polynomials whose coefficients depend on ω, which is implicit in the notation.
Proof of (
which proves (4).
Representation with shift and difference operators
Consider the
and
Substituting x = E in (4) shows that
-
(5)
where we used that Δ = E – I with I denoting the
To prove (5), we first want to verify the equation
-
(✳)
involving indicator functions of the sets A1, ..., Am and their complements with respect to Ω. Suppose an ω from Ω belongs to exactly k sets out of A1, ..., Am, where k ∈ {0, ..., m}, for simplicity of notation say that ω only belongs to A1, ..., Ak. Then the left-hand side of (✳) is Ek. On the right-hand side of (✳), the first k factors equal E, the remaining ones equal I, their product is also Ek, hence the formula (✳) is true.
Note that
Inserting this result into equation (✳) and expanding the product gives
because the product of indicator functions is the indicator function of the intersection. Using the definition (2), the result (5) follows.
Let (Δkc)0 denote the 0th
-
(6)
Probabilistic versions
Consider arbitrary events A1, ..., Am in a probability space (Ω, F, ) and let E denote the expectation operator. Then N from (1) is the random number of these events which occur simultaneously. Using Nk from (2), define
-
(7)
where the intersection over the empty index set is again defined as Ω, hence S0 = 1. If the ring R is also an
-
(4')
in R[x]. If R is the field of real numbers, then this is the probability-generating function of the probability distribution of N.
-
(5')
and, for every sequence c = (c0, c1, c2, c3, ..., cm, ...),
-
(6')
The quantity on the left-hand side of (6') is the expected value of cN.
Remarks
- In actuarial science, the name Schuette–Nesbitt formula refers to equation (6'), where V denotes the set of real numbers.
- The left-hand side of equation (discrete probability distribution with finite support, hence expectations are just the well-defined finite sums.
- The probabilistic version of the inclusion–exclusion principle can be derived from equation (6') by choosing the sequence c = (0, 1, 1, ...): the left-hand side reduces to the probability of the event {N ≥ 1}, which is the union of A1, ..., Am, and the right-hand side is S1 – S2 + S3 – ... – (–1)mSm, because (Δ0c)0 = 0 and (Δkc)0 = –(–1)k for k ∈ {1, ..., m}.
- Equations (5), (5'), (6) and (6') are also true when the shift operator and the difference operator are considered on a subspace like the ℓ p spaces.
- If desired, the formulae (5), (5'), (6) and (6') can be considered in finite dimensions, because only the first m + 1 components of the sequences matter. Hence, represent the linear shift operator E and the linear difference operator Δ as mappings of the (m + 1)-dimensional Euclidean space into itself, given by the (m + 1) × (m + 1)-matrices
- and let I denote the (m + 1)-dimensional identity matrix. Then (6) and (6') hold for every vector c = (c0, c1, ..., cm)T in (m + 1)-dimensional Euclidean space, where the exponent T in the definition of c denotes the transpose.
- Equations (5) and (5') hold for an arbitrary linear operator E as long as Δ is the difference of E and the identity operator I.
- The probabilistic versions (4'), (5') and (6') can be generalized to every finite measure space.
For textbook presentations of the probabilistic Schuette–Nesbitt formula (6') and their applications to actuarial science, cf. Gerber (1997). Chapter 8, or Bowers et al. (1997), Chapter 18 and the Appendix, pp. 577–578.
History
For
Cecil J. Nesbitt,
Donald Richard Schuette was a PhD student of C. Nesbitt, he later became professor at the University of Wisconsin–Madison.
The probabilistic version of the Schuette–Nesbitt formula (6') generalizes much older formulae of Waring, which express the probability of the events {N = n} and {N ≥ n} in terms of S1, S2, ..., Sm. More precisely, with denoting the binomial coefficient,
-
(8)
and
-
(9)
see Feller (1968), Sections IV.3 and IV.5, respectively.
To see that these formulae are special cases of the probabilistic version of the Schuette–Nesbitt formula, note that by the binomial theorem
Applying this operator identity to the sequence c = (0, ..., 0, 1, 0, 0, ...) with n leading zeros and noting that (E jc)0 = 1 if j = n and (E jc)0 = 0 otherwise, the formula (8) for {N = n} follows from (6').
Applying the identity to c = (0, ..., 0, 1, 1, 1, ...) with n leading zeros and noting that (E jc)0 = 1 if j ≥ n and (E jc)0 = 0 otherwise, equation (6') implies that
Expanding (1 – 1)k using the binomial theorem and using equation (11) of the formulas involving binomial coefficients, we obtain
Hence, we have the formula (9) for {N ≥ n}.
Applications
In actuarial science
Problem: Suppose there are m persons aged x1, ..., xm with remaining random (but independent) lifetimes T1, ..., Tm. Suppose the group signs a life insurance contract which pays them after t years the amount cn if exactly n persons out of m are still alive after t years. How high is the expected payout of this insurance contract in t years?
Solution: Let Aj denote the event that person j survives t years, which means that Aj = {Tj > t}. In actuarial notation the probability of this event is denoted by t pxj and can be taken from a life table. Use independence to calculate the probability of intersections. Calculate S1, ..., Sm and use the probabilistic version of the Schuette–Nesbitt formula (6') to calculate the expected value of cN.
In probability theory
Let σ be a random permutation of the set {1, ..., m} and let Aj denote the event that j is a fixed point of σ, meaning that Aj = {σ(j) = j}. When the numbers in J, which is a subset of {1, ..., m}, are fixed points, then there are (m – |J|)! ways to permute the remaining m – |J| numbers, hence
By the combinatorical interpretation of the binomial coefficient, there are different choices of a subset J of {1, ..., m} with k elements, hence (7) simplifies to
Therefore, using (4'), the probability-generating function of the number N of fixed points is given by
This is the
See also
References
- Bowers, Newton L.; Gerber, Hans U.; Hickman, James C.; Jones, Donald A.; Nesbitt, Cecil J. (1997), Actuarial Mathematics (2nd ed.), The Society of Actuaries, Zbl 0634.62107
- Buchta, Christian (1994), "An elementary proof of the Schuette–Nesbitt formula", Mitteilungen der Schweiz. Vereinigung der Versicherungsmathematiker, 1994 (2): 219–220, Zbl 0825.62745
- Zbl 0155.23101
- Gerber, Hans U. (1979), "A proof of the Schuette–Nesbitt formula for dependent events" (PDF), Actuarial Research Clearing House, 1: 9–10
- Gerber, Hans U. (1997) [1986], Life Insurance Mathematics (3rd ed.), Berlin: Springer-Verlag, Zbl 0869.62072
- Schuette, Donald R.; Nesbitt, Cecil J. (1959), "Discussion of the preceding paper by Robert P. White and T.N.E. Greville" (PDF), Transactions of Society of Actuaries, 11 (29AB): 97–99