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Catastrophic Risk, Rare Events, and Black Swans: Could There Be a Countably Additive Synthesis?

In: The Economics of the Global Environment

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  • Peter J. Hammond

    (University of Warwick)

Abstract

Catastrophic risk, rare events, and black swans are phenomena that require special attention in normative decision theory. Several papers by Chichilnisky integrate them into a single framework with finitely additive subjective probabilities. Some precursors include: (i) following Jones-Lee (1974), undefined willingness to pay to avoid catastrophic risk; (ii) following Rényi (1955, 1956) and many successors, rare events whose probability is infinitesimal. Also, when rationality is bounded, enlivened decision trees can represent a dynamic process involving successively unforeseen “true black swan” events. One conjectures that a different integrated framework could be developed to include these three phenomena while preserving countably additive probabilities.

Suggested Citation

  • Peter J. Hammond, 2016. "Catastrophic Risk, Rare Events, and Black Swans: Could There Be a Countably Additive Synthesis?," Studies in Economic Theory, in: Graciela Chichilnisky & Armon Rezai (ed.), The Economics of the Global Environment, pages 17-38, Springer.
    • Handle: RePEc:spr:steccp:978-3-319-31943-8_2
    DOI: 10.1007/978-3-319-31943-8_2
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    References listed on IDEAS

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    1. Joseph Halpern, 2009. "A nonstandard characterization of sequential equilibrium, perfect equilibrium, and proper equilibrium," International Journal of Game Theory, Springer;Game Theory Society, vol. 38(1), pages 37-49, March.
    2. Chichilnisky, Graciela, 2000. "An axiomatic approach to choice under uncertainty with catastrophic risks," Resource and Energy Economics, Elsevier, vol. 22(3), pages 221-231, July.
    3. Halpern, Joseph Y., 2010. "Lexicographic probability, conditional probability, and nonstandard probability," Games and Economic Behavior, Elsevier, vol. 68(1), pages 155-179, January.
    4. Partha Dasgupta & Douglas Gale & Oliver Hart & Eric Maskin (ed.), 1992. "Economic Analysis of Markets and Games: Essays in Honor of Frank Hahn," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262541599, April.
    5. Dekel, Eddie & Lipman, Barton L & Rustichini, Aldo, 2001. "Representing Preferences with a Unique Subjective State Space," Econometrica, Econometric Society, vol. 69(4), pages 891-934, July.
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    Cited by:

    1. Arbrie Jashari & Victor Tiberius & Marina Dabić, 2022. "Tracing the progress of scenario research in business and management," Futures & Foresight Science, John Wiley & Sons, vol. 4(2), June.

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