Abstract
This article explores instinctive frames of human decision-making in environmental and resource economics. Higher-moment asset pricing combines rational, mathematically informed economic reasoning with psychological and biological insights. Leptokurtic blindness and skewness preference combine in particularly challenging ways for carbon mitigation. At their worst, human heuristics may generate perverse decisions. Information uncertainty and the innate preference for bonds-and-bullets portfolios may impair responses to catastrophic climate change.
Highlights
Climate change confronts humanity with the prospect of catastrophic harm
A four-moment variant of capital asset pricing model (CAPM)+ is expressed in terms of mean, variance, skewness, and kurtosis (Jurczenko and Maillet, 2012)
Once hope meets fear, even risk averse individuals will entertain upside gambles. Merging these insights expands the mathematical toolkit of finance and environmental economics
Summary
Climate change confronts humanity with the prospect of catastrophic harm. the threat is sufficiently grave that it should be regarded as existential. This article evaluates the greatest challenge in environmental economics according to the tools that traditional finance applies to valuation problems. This article applies higher-moment asset pricing and related financial principles to problems in environmental and resource economics. Environmental economics routinely requires the valuation of natural resources, including ecosystem services, explicit reliance on the CAPM and mathematically related models is less familiar. The resulting “bonds-and-bullets” approach, this article concludes, bodes ill for effective responses to climate change and other challenges of the Anthropocene. Human psychology predisposes this species against preemptive, preventive mitigation measures, in the hope that miraculous feats of geoengineering may eventually prevail
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