Large Variance and Fat Tail of Damage by Natural Disaster

TL;DR

This paper models the damage caused by natural disasters considering fat-tailed distributions and spatial correlations, revealing that damage tail behavior depends on the disaster or population distribution, impacting risk assessment.

Contribution

It introduces a simple model combining fat-tailed distributions and spatial correlations to analyze disaster damage variance and tail behavior, highlighting implications for risk management.

Findings

Damage damage exhibits fat tail properties in tornadoes in the US.

Tail behavior of damage depends on whether disaster or population distribution is fatter.

Spatial correlations can either amplify or diminish damage variance.

Abstract

In order to account for large variance and fat tail of damage by natural disaster, we study a simple model by combining distributions of disaster and population/property with their spatial correlation. We assume fat-tailed or power-law distributions for disaster and population/property exposed to the disaster, and a constant vulnerability for exposed population/property. Our model suggests that the fat tail property of damage can be determined either by that of disaster or by those of population/property depending on which tail is fatter. It is also found that the spatial correlations of population/property can enhance or reduce the variance of damage depending on how fat the tails of population/property are. In case of tornadoes in the United States, we show that the damage does have fat tail property. Our results support that the standard cost-benefit analysis would not be reliable for social investment in vulnerability reduction and disaster prevention.