Chen on Modern Disaster Theory

Jim Chen has posted Modern Disaster Theory: Evaluating Disaster Law as a Portfolio of Legal Rules, available on SSRN here.  The abstract is as follows:  

Disaster law consists of a portfolio of legal rules for dealing with catastrophic risks. This essay takes preliminary steps toward modeling that metaphor in quantitative terms made familiar through modern portfolio theory. Modern disaster theory, by analogy to the foundational model of corporate finance, treats disaster law as the best portfolio of legal rules. Optimal legal preparedness for disaster consists of identifying, adopting, and maintaining that portfolio of rules at the frontier of efficient governance.

Part I of this essay defines disaster and disaster law. In an effort to develop an analytically rigorous basis for modeling and evaluating disaster law, Part II expounds the principles of modern portfolio theory, a framework for assessing financial returns according to risk. Part III outlines the principles of modern disaster theory as the legal analogue of modern portfolio theory as a branch of finance. Part IV conducts an exercise in applied modern disaster theory. It evaluates legal tools for compensating disaster victims ex post and spreading catastrophic risk ex ante according to the terms of modern disaster theory’s catastrophic preparedness asset model. Part V concludes that modern disaster theory, through the use of sophisticated quantitative methods analogous to those used in financial analysis, promises to place disaster law and policy at the efficient frontier of legal preparedness.

This is an interesting read.  Dean Chen concedes that using modern portfolio theory has its flaws. He also notes that "behavioral biases in the perception of risk, by policymakers and by members of the public, severely distort legal responses to disasters."  There is no doubt that is true, and it's true with legal responses, and it's true in planning for disasters, as well. (For more on that, see, in a bit of shameless self-promotion, here.)  Still, he proceeds with his analysis, and concludes:

My survey of risk management techniques in disaster law — from private insurance to public subsidies, the involvement of government as ultimate reinsurer, and the promise of enhancing catastrophic preparedness through private capital markets — shows how disaster law represents a single, theoretically coherent exercise in societal risk management.

. . . . A diversified disaster law portfolio — namely the optimal mixture of policy instruments for reducing environmental hazard and human susceptibility and for enhancing social resilience and capacity — represents the efficient frontier of legal preparedness in times of disaster.

I'm working my way back through it more closely, but I found it a throught-provoking piece, and I recommend taking a look. 

--JPF