The sting of climate risk is in the tails

Here’s an excerpt from this note by Filippo Sebastio about this note from David Carlin (which analyzes this commentary by Mark Cliffe):

Climate Change – just like pandemics – is a multiplicative, fat tail risk with systemic effect. Because of these characteristics, climate change models might have underestimated future impacts. This means that adaptation policies need to be calibrated on potential risks that are considerably larger than what is predicted with time series models or normal distribution events. The problem is how much are we willing to invest now to adapt to future extreme events?

“There are two categories in which random events fall: Mediocristan and Extremistan. Mediocristan is thin-tailed and affects the individual without correlation to the collective. Extremistan, by definition, affects many people. Hence Extremistan has a systemic effect that Mediocristan doesn’t. Multiplicative risks—such as epidemics—are always from Extremistan.”