Natural hazard risk in the case of an emergency: the real options’ approach

In the case of an emergency provoked by a natural event, decision makers should (1) acquire a comprehensive understanding of the current dynamics and (2) take the optimal decision based on the information available at that moment. Scientists should provide the key inputs to decision makers, as well as clearly highlight the current dynamics. While much progress has been made in this field, the theory of options, which was developed to assess financial and real investments in an uncertain world, has as yet never been applied in emergency management related to natural hazards. This article highlights, through some simple examples, the contribution that this approach may provide in this field. First, it allows the comparison of different strategies and to value their degrees of flexibility. Second, it allows the determination of the optimal timing of different types of intervention. Finally, thanks to decision trees, this approach provides a clear and concise presentation of the current dynamics. Options theory possesses an interesting potential to improve emergency management