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Insights on Fat-Tail Distributions and Climate Change Implications

Delve into the nuances of fat-tail distributions, their relevance in understanding natural disasters like hurricanes, stock market dynamics, and insurance claims. Explore the concept of mean excess and its application in predicting catastrophic events, such as the likelihood of another disaster akin to Hurricane Katrina. Gain insights on managing tail risks and the impact of fat-tail heuristics on historical data trends.

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Insights on Fat-Tail Distributions and Climate Change Implications

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  1. Fat Tails Fat Tails Cooke and Kousky nsf# 0960865 Micro Correlations Tail Dependence http://www.rff.org/Events/Pages/Introductio n-Climate-Change-Extreme-Events.aspx

  2. “Nice” distributions don’t surprise Someday, you’ll meet a taller person Tallest so far Next record Next record

  3. But Not:

  4. Catastrophes are Different! Stock market Hurricanes Insurance

  5. Nice distribution Women’s height [cm] Bigger is less bigger Mean excess Average height above heloise Mean excess curve decreasing

  6. Fat Tails: Natural disasters Mean Excess Worse is more worse Average above Heat1 Mean excess curve increasing

  7. Fat Tail heuristics Historical averages ‘average out’ US crop insurance claims mean excess US crop insurance claims running average Variance is Infinite Variance is finite

  8. Fat Tail Heuristics Historical averages just keep growing US Flood Claims per $ Income by County and Year

  9. Katrina cost 100$B What’s the chance that the Next Katrina will cost >200$B? Probability that next extreme > 2 x current extreme 100 samples 2500 samples Thin tail (exponential) 0.02 0.0008 Super Fat 0.5 0.5

  10. Ask someone from St. Tammany County, LA: ‘After Katrina, flood loss claims in your county totaled $240 per dollar income (2000 dollars); in the next flood at least as bad as Katrina, what do you expect your (2000) dollar loss per dollar income to be?”

  11. Answer: $4,000 US Flood Claims per $ Income by County and Year

  12. Sobering Data • Tail Risk Show Background on Fat Tail Distributions http://www.rff.org/News/Features/Pages/Und erstanding-Fat-Tailed-Distributions-and-What- They-Mean-for-Policy.aspx

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