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Acts of God and ManRuminations on Risk and Insurance$
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Michael Powers

Print publication date: 2014

Print ISBN-13: 9780231153676

Published to Columbia Scholarship Online: November 2015

DOI: 10.7312/columbia/9780231153676.001.0001

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Into the Unknown

Into the Unknown

Modeling Uncertainty

Chapter:
(p.20) 2 Into the Unknown
Source:
Acts of God and Man
Author(s):

Michael R. Powers

Publisher:
Columbia University Press
DOI:10.7312/columbia/9780231153676.003.0002

Every manifestation of risk is associated with one or more unknown quantities. For instance, in the case of the inevitable death of an individual, it is primarily the time of death that is unknown. In the case of damage to a building or other piece of property, it is a combination of the incidence of damage (i.e. whether or not it occurs), along with both the timing and the amount of damage. This chapter discusses the modeling of an unknown quantity using random variables and probability functions. It explains the two principal pairings of probability interpretations and estimation methods: (1) the frequency/classical approach, often called frequentism, which requires both the possibility of repeated trials and a large number of actual repeated trials; and (2) the subjective/judgmental approach, often called Bayesianism, which works for unique trials and any number of repeated trials. Of these two, the latter approach is more flexible.

Keywords:   risk, unknown quantities, uncertainty, unknown quantity, random variables, probability functions, frequentism, Bayesianism

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