Flood-Damage-Reduction Project Evaluation with Explicit Consideration of Damage Cost Uncertainty

Abstract

Facing uncertain future conditions, flood-damage-reduction alternatives with large positive expected net benefits may be accompanied with high uncertainty. In decision-making under uncertainty, not only failure probability and failure consequences but also the cost of lost opportunity should be considered so as to enhance risk-informed decision-making for hydrosystem design, planning, and management. This paper proposes a risk measure, i.e., the expected opportunity loss (EOL), in a risk-based framework for flood-damage-reduction project design. The opportunity loss for a chosen alternative is the difference between the payoffs of this alternative and the best payoff of all alternatives. The risk measure of EOL can quantify the adverse consequences associated with making a wrong decision due to the uncertain state of nature and it can also capture the correlation effect of the net benefits of two competing design alternatives. Using EOL, alternatives can be ranked by the minimax regret principle. The acceptable risk of the decision maker is conceptually compatible with EOL and can be used to test the feasibility of the design alternatives under consideration. An example based on a case study for flood damage reduction is used to demonstrate the application of the proposed risk-based decision-making model. The example application shows that the uncertainty of the project net benefits is significant, and thus the explicit consideration of tradeoffs between the project risks and net benefits is essential. Furthermore, the example also shows that the uncertainty and correlation between the net benefit in different projects can have a significant influence on the ranking of alternatives.