Design criteria for flood-defense structures based on probabilistic cost-benefit optimization with value at risk (VaR) methods. Application to the Choluteca River in Tegucigalpa (Honduras)

Abstract

A probabilistic CBA framework, combined with a Value at risk (VaR) methods, as applied in financial risk management, can be used to select the best mitigation scheme among several alternatives and reliability levels, based on a quantitative and objective procedure. The proposed method looks for the alternative that minimizes the accumulated maximum damage that can be produce by any particular sequence of events, over the life span of the structure, using numerical simulation and possibly including interactions among individual events (two large floods within a short time cannot damage twice the same assets). This is equivalent to a stochastic optimization problem, where the entity to be minimized are the maximum losses. The optimal alternative, based on a VaR criteria (including conditional VaR), differs largely from the one that maximizes the average NPV, and is more stable, compared with the average or a deterministic NPV. To demonstrate the proposed procedure, and show the differences among the three performance indicators (average NPV, VaR and CVaR), the case of the Choluteca River in Tegucigalpa, capital city of Honduras, are used, with real data of economic and human damages provided by a recent study by IDB.