The risk-return tradeoff in optimizing regional earthquake mitigation investment

Abstract

Earthquakes are low probability-high consequence events, regional earthquake mitigation is therefore a risky investment. Despite its importance, the risk-return tradeoff is often not examined explicitly in regional earthquake risk management resource allocation decisions. This paper introduces a stochastic optimization model developed to help decision-makers understand the risk-return tradeoff in regional earthquake risk mitigation, and to help state and local governments comply with the Disaster Mitigation Act of 2000 requirement that they develop a mitigation plan. Taking advantage of the special structure of the optimization, Dantzig-Wolfe decomposition is used as the solution method. A case study for Central and Eastern Los Angeles illustrates an application of the model. Results include a graph of the tradeoff between risk and return, quantification of the relative contributions of each possible earthquake scenario, and discussion of the effect of risk aversion on the selection of mitigation alternatives.

Keywords:

• Earthquakes
• Optimization
• Risk management
• Resource allocation
• Cost-benefit analysis

Acknowledgements

The authors would like to thank the National Science Foundation (CMS-0196003 and CMS -00408577) for partial financial support of this research. This support is gratefully acknowledged, but the authors take sole responsibility for the content of the paper.