Storm surge risk mitigation under ambiguity by coupled tropical cyclone and decision model

Abstract

Even as storm surge risks are increasing, the projections of such risks have an element of ambiguity. Consequently, policymakers find it extremely difficult to design policies to deal with storm surge risks. Therefore, in this study, we have linked the tropical cyclone models and stated preference experiments with decision models to provide a fresh perspective on households’ preferences for storm surge risk mitigation under ambiguity. We have validated households’ choices under the average and worst projections of storm surges and estimated the expected loss reduction, risk premium, and ambiguity premium for storm surge risk mitigation. Our study reveals that households pay disproportionately more attention to the worst case and that the ambiguity premium is not negligible. This leads to an important conclusion that policymakers should factor in the ambiguity premium to formulate risk mitigation policies.