Integrating irrational behavior into flood risk models to test the outcomes of policy interventions

Abstract

Householders are increasingly responsible for managing residual flood risk at property level. Yet, consumers are observed to adopt irrational behaviors under scenarios of risk, often making suboptimal decisions. Therefore, the question is raised, if householders are required to manage flood risk at household level, how can this be made fair and efficient? Policy instruments often incorporate “fairness” by subsidizing the costs of mitigation options, assuming a linear relationship between available finances and the uptake of risk mitigation measures. To integrate behavior into the assessment of policy instruments, this article develops a method to compare the uptake of flood mitigation between agents following models of Expected Monetary Value (EMV) and Prospect Theory (PT). An agent‐based model is created, offering the option to apply either EMV or PT frameworks. EMV represents a rational gamble, determining whether an agent “should” invest in insurance or property‐level protection. On the other hand, the PT option incorporates behavioral aspects to examine how agents are likely to respond to investment decisions in flood risk environments. The models are applied to Flood Re, a policy aimed at ensuring affordable insurance access for all individuals in flood risk areas. The results demonstrate that PT models exhibit greater similarity to observed behavior compared to models based on EMV. These findings emphasize the importance of accommodating “irrational” behaviors within the design of policy instruments, promoting fairness and efficiency. Overall, this research provides insights into the integration of behavior in policy assessments and highlights the benefits of considering PT frameworks alongside traditional rational models. By understanding and accounting for human behavior in decision‐making processes, policymakers can design more effective and equitable policy instruments for managing flood risk.