-Graciela Chichilnisky is the Architect of the Carbon Market of the Kyoto Protocol and the author of 'Saving Kyoto', New Holland Publishers, UK, 2009. Chichilnisky is a Professor of Mathematics and Economics at Columbia University in New York, Director of Columbia Consortium for Risk Management and Managing Director of Global Thermostat Inc. The opinions expressed are her own.-
We live surrounded by uncertainty. Tsunamis, the eruption of super- volcanoes, violent floods and storms, asteroid impacts that eliminate entire species as the dinosaurs that went extinct 60 millions years ago, the recent 8.8 earthquake in Chile, not to mention the global financial crisis. Some disasters are worse than others, but they all have one thing in common. They are catastrophic risks. This means risks that occur very rarely – but when they happen they have truly major consequences.
How should we prepare for the unknown catastrophe - how should we manage catastrophic risks?
In our daily lives we tend to weigh risks by their probability of occurrence. In this view, a 10 percent risk of losing your home is half as important as a 20 percent risk. This approach is reasonable and prudent and it is how bankers evaluate financial risk of a non-performing mortgage and how the U.S. Congress evaluates budget risks. It is a simple and reasonable approach that was first conceptualized by John Von Neumann as he developed the foundations of risk management that rules our lives today.
But it is the wrong way to evaluate and manage catastrophic risk.
A catastrophic risk is so rare that it can be badly underestimated when we weight the losses by its probability. The global financial crisis of 2009 was one in a 100-year event, and we ignored it because it is so infrequent. This is a bad mistake, since preparing for a catastrophe can prevent the worst from happening.