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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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False Choices and Black Boxes

False Choices and Black Boxes

The Costs of Limited Data

(p.207) 13 False Choices and Black Boxes
Acts of God and Man

Michael R. Powers

Columbia University Press

In recent decades, governments, corporations, and ordinary citizens the world over have become more aware of the potential impact of extreme-event, or catastrophe, risks. Dramatic events such as the September 11 attacks (2001), the Indian Ocean tsunami (2004), and Hurricane Katrina (2005) continue to raise these issues in the public mind while sending researchers from various disciplines scrambling to explain and forecast the frequencies and severities of such events. However, the rarity of catastrophes means that relevant data for estimating expected loss frequencies and severities is sparse, leaving risk-assessment experts with a difficult statistical problem: how to make reasonable forecasts of insured catastrophe losses based upon few historical observations. This chapter considers two troublesome issues arising from the paucity of catastrophe data: (1) a tendency to oversimplify conclusions from scientific research; and (2) the use of “black-box” forecasts that are not subject to impartial scientific examination and validation.

Keywords:   insurance, risk modeling, catastrophic events, extreme events, risk forecasting, catastrophe losses, black-box forecasts

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