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Floods, Fires, Earthquakes and Pine Beetles: JARring Actions and Fat Tails. Berkeley Symposium on Real Estate, Catastrophic Risk, and Public Policy UC Berkeley, March 22-23, 2006. Thanks to Alan Berger, Carolyn Kousky, Erzo Luttmer.
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Berkeley Symposium on
Real Estate, Catastrophic Risk, and Public Policy
UC Berkeley, March 22-23, 2006
Thanks to Alan Berger, Carolyn Kousky, Erzo Luttmer
Work with Carolyn Kousky
Normal mechanisms to control externalities (e.g., liability, contracting, political regulations for those in jurisdiction) do not work well for JARring actions.
(PHOTO BY ELLIS LUCIA / The Times-Picayune)
Each year an area of marsh close to the size of Manhattan is lost.
The sediment is “shot over the shelf like peas through a peashooter, and lost to the abyssal plain.” - John McPhee
Other causes of loss: subsidence due to lack of sediment and exacerbated by withdrawals of oil and natural gas
FATTAILS: Observe massive multiple of largest to next in three categories:
Largest fire of year, people evacuated, and structures destroyed.
FAT TAILS: Observe massive multiple of largest to next in fatalities.
Source: Wikipedia, USGS
These distributions are the norm we carry around in our head. They are fundamentally misleading when we think about low probability catastrophes.
Real-Time Estimation Exercise
Your job is to assess:
First, your median estimate (50th percentile). This means the outcome is as likely to be above it as below it.
Second, your 25th and 75th percentiles. The 25th percentile means the outcome has one chance in four of being below it. In other words, if it is below your median, it is as likely as not to be below your 25th percentile.
Third, your 1st and 99th percentiles, what are sometimes called surprise points. There should only be a 1% chance that the true value lies below your 1st percentile. There should only be a 1% chance that the true value lies above your 99th percentile.
Only 7% of land in California is in the wild-urban interface where the risk of fire damage is highest. How many homes are located in that 7% of California land?
(Roger Kennedy, Wildfire and Americans: How to Save Lives, Property, and Your Tax Dollars, 2006.)
99th percentile __________
75th percentile __________
50th percentile __________
25th percentile __________
1st percentile __________
While we can never contract with the future or accurately predict all of the consequences of our actions and policies, policymakers must extend their thinking about their impacts and the impacts of private entities beyond the local, the near term, the likely, and the recently newsworthy.