The shape of uncertainty : insurance underwriting in the face of catastrophe
In this thesis I study the nature of decision making under uncertainty in the case of natural catastrophes and reinsurance underwriting at Lloyd's of London. I begin by describing the broad context of natural catastrophes and society, which forms the basis for a market in catastrophe reinsurance. I then proceed to a review of literatures in risk, uncertainty, philosophy, and probability as a prelude to an analysis of decision making under catastrophic risk. According to the early 20th century philosopher-economist Frank Knight, risk specified those cases in which a frequency probability could be assigned, while situations of uncertainty do not allow a frequency probability since they are unique instances. In the thesis, I make the additional argument that risk and uncertainty are not solely categories of probability, but rather categories of probability and causality. The second main strand of the thesis refers to J.M. Keynes' work on probability which while related to frequency probability, is different in its emphasis on judgment and the assessment of information. I propose a causal framework to Keynes' weight of argument approach in terms of J.L. Mackie's causal field. With these two main ideas on probability and the addition of the causal field, the thesis presents the theoretical basis of its model of decision making. The last component of the model is developed through a review and critique of the economic literature on decision making under uncertainty. As the literature is founded upon frequency probability definitions of risk, the thesis argues through its theoretical investigations that this approach neglects the causal element of decision making, and that uncertainty requires a broader conceptualization than simply lack of probability. This final component, decision making routines, combines both individual and organizational elements. The empirical investigation of catastrophe risk underwriting at Lloyd's is organized into categories of decision making within a situated market context. I investigate the dominant categories and find that capital capacity and relationships drive reinsurance praxis. As an integration of its theoretical and empirical components, the thesis applies its risk decision making model. This model has implications for economic geography studies of the firm, in that it provides an epistemic and organizational basis for the formalization of tacit knowledge. The model also holds consequences for economic decision making theory, in that it integrates causal assessment in the purely probability based economic paradigm.