Catastrophe

"This is a book by a Chicago judge where he tries to explain what catastrophes are, why they are important to us and what are the outstanding issues that we need to resolve about them. It is about tsunamis and super-volcanoes, major tornadoes and floods – rare events that have momentous consequences. It is pretty accessible, not really technical but analytical. What interests me about the book is that it prompted me to develop a whole new way of looking at catastrophic risks. The book shows that in many ways we respond to catastrophic risks in what the author believes to be an irrational way. He is saying that for some reason we behave irrationally and we dismiss catastrophic risks because they are infrequent. But he doesn’t say why this is happening or what to do about it. This prompted me to explain why we dismiss them; why traditional ways of looking at risks do not work for catastrophic risks, and what to do about it. Having read it I developed a special way of explaining my new framework for understanding catastrophic risks and managing them – which I had developed mathematically before. And I focused on this question of irrationality. Essentially I showed that Richard Posner calls humans irrational because our decisions don’t tally with the received wisdom. Traditionally we use expected losses as a way to measure and track risks; we essentially ‘weigh’ a risk by the probability of its occurrence. For example, a ten per cent chance of your house burning is worth half as much as a risk involving a 20 per cent chance. We look at the probabilities and we say, ‘Aha, one is twice as likely as the other.’ We weigh losses by the probability of occurrence. Of course what happens with this approach is that when the event is very infrequent, and it happens once every 100 years, we dismiss it. He thinks that this is irrational. I believe that the old theory does not fit and that we need a new approach."