Large Variance and Fat Tail of Damage by Natural Disaster

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.