Paper Number 11 Decision tools for earthquake risk management, including Net Present Value and Expected Utility

Conference ABSTRACT: The results of earthquake risk assessments should be presented in ways that will help facilitate risk management decisions. So the measures of risk that are chosen need to be those that will assist decision-makers. Annualised Loss may not be the best basis on which risk management decisions can be made. The Conditional Expected Value of the loss, defined for a suitable set of probability ranges, is a promising measure of the risk because it is similar to a scenario loss and can be readily comprehended by decision-makers. Utility Theory provides a further measure by taking account of individuals ’ perceptions of the severity of losses. It can be combined with the concept of Net Present Value to give an overall measure of the risk in terms of the value judgements of the individual decision-maker. The reduction in risk that would result from proposed mitigation works can be readily assessed, so that the decision-maker who is faced with the costs of mitigation is in a position to assess the benefits.