The Econophysics Blog

This blog is dedicated to exploring the application of quantiative tools from mathematics, physics, and other natural sciences to issues in finance, economics, and the social sciences. The focus of this blog will be on tools, methodology, and logic. This blog will also occasionally delve into philosophical issues surrounding quantitative finance and quantitative social science.

Sunday, November 04, 2007

Book Review: The Mathematics of Natural Catastrophes

I haven't written a pure book review blog post since coming to the UK, so I thought I would write one reviewing a book by a British author. Gordon Woo -- the author of The Mathematics of Natural Catastrophes -- was a senior wrangler in the Maths tripos as an undergraduate at Cambridge University. He went onto a PhD in theoretical physics at Cambridge as well (while taking a detour through MIT and Harvard). He is currently on the staff of RMS (a risk management consultancy) doing research on catastrophic risk and the risks of terrorism.

The title of Dr. Woo's book is slightly deceptive (but in a good way). Yes, it is literally about the mathematics of natural catastrophes, but it's a lot more than that. It is an insightful yet accessible guide to the philosophy of risk and chance.

Although the book has its share of mathematical formulae and equations, the book -- despite the title and the academic background of its author -- is less about maths (British English) in the colloquial sense (i.e., complicated symbolics) and more about maths in its true sense, a logical way of tackling problems. In that way, the book is highly readable and should be accessible to people with even rudimentary mathematical backgrounds, yet remaining sophisticated enough for people with more formal training in maths.

The types of natural disasters discussed in the book focuses on examples from geology and meteorology, but the discussion can easily be extended to other types of events (including terrorism). Not surprisingly, given Dr. Woo's background, the author applies the tools of mathematics, statistics, probability theory, physics, geology, meteorology, engineering, and actuarial methods, in order to get a grip on these thorny issues.

But he doesn't stop there; he also demonstrates -- in the framework of Isaiah Berlin's The Hedgehog and the Fox -- a certain intellectual 'foxiness.' Dr. Woo incorporates history, philosophy, and even literature into his analysis of catastrophic risk. For those interested in the increasingly important links between natural catastrophes and financial instruments, Dr. Woo devotes a chapter to financial issues (including Cat bonds) and other chapters to issues relevant to the insurance industry and the 'management' of extreme risk.

The most fascinating aspect of this book, beyond the purely practical (and there are definitely practical aspects to this book), are the philosophical aspects of the book. As a mathematician philosophizing about the nature of probability, Dr. Woo reminds me of another Cantabrigian mathematician (unfortunately, known more as an economist), John Maynard Keynes (especially in his magisterial, A Treatise on Probability). Dr. Woo's book has not received as much attention as Nassim Nicholas Taleb's Black Swan (my book review can be found here), but I strongly believe that fans of the Black Swan will enjoy reading The Mathematics of Natural Catastrophes.

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