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A portfolio approach to evaluating natural hazard mitigation policies: An Application to lateral-spread ground failure in Coastal California

January 1, 2001

In the past, efforts to prevent catastrophic losses from natural hazards have largely been undertaken by individual property owners based on site-specific evaluations of risks to particular buildings. Public efforts to assess community vulnerability and encourage mitigation have focused on either aggregating site-specific estimates or adopting standards based upon broad assumptions about regional risks. This paper develops an alternative, intermediate-scale approach to regional risk assessment and the evaluation of community mitigation policies. Properties are grouped into types with similar land uses and levels of hazard, and hypothetical community mitigation strategies for protecting these properties are modeled like investment portfolios. The portfolios consist of investments in mitigation against the risk to a community posed by a specific natural hazard, and are defined by a community's mitigation budget and the proportion of the budget invested in locations of each type. The usefulness of this approach is demonstrated through an integrated assessment of earthquake-induced lateral-spread ground failure risk in the Watsonville, California area. Data from the magnitude 6.9 Loma Prieta earthquake of 1989 are used to model lateral-spread ground failure susceptibility. Earth science and economic data are combined and analyzed in a Geographic Information System (GIS). The portfolio model is then used to evaluate the benefits of mitigating the risk in different locations. Two mitigation policies, one that prioritizes mitigation by land use type and the other by hazard zone, are compared with a status quo policy of doing no further mitigation beyond that which already exists. The portfolio representing the hazard zone rule yields a higher expected return than the land use portfolio does: However, the hazard zone portfolio experiences a higher standard deviation. Therefore, neither portfolio is clearly preferred. The two mitigation policies both reduce expected losses and increase overall expected community wealth compared to the status quo policy.