Jim Chen, Modern Disaster Theory: Evaluating Disaster Law as a Portfolio of Legal Rules

• Citation: Vol. 25 No. 3
• Publication year: 2010

MODERN DISASTER THEORY: EVALUATING DISASTER LAW AS A PORTFOLIO OF LEGAL RULES

Jim Chen*

Disaster law consists of a portfolio of legal rules for dealing with catastrophic risks. This Article 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 Article 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 analog 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.

1. DEFINING DISASTER AND DISASTER LAW

   
   

   I begin by harmonizing the definitions of “disaster” and “disaster law.” The International Federation of Red Cross and Red Crescent Societies (“IFRC”) defines “disaster” as “a sudden, calamitous event that seriously disrupts the functioning of a community or society and causes human, material, and

   
   

   * Dean and Professor of Law, University of Louisville. Special thanks to Heather Elaine Worland Chen,

   who has taught me, among other things, to treat chaos, at least some of the time, as a beast to be tamed. I appreciate comments and suggestions from Daniel Farber, Christopher French, Gil Grantmore, Andrew Long, Elyse Mosquini, Elizabeth Porter, Jeffrey Sexton, Lisa Grow Sun, and Robert Verchick.

   economic or environmental losses that exceed the community’s or society’s ability to cope using its own resources.”1

   
   

   As for “disaster law,” I have joined my coauthors of Disaster Law and Policy in describing disaster law as a portfolio of rules:

   
   

   At first glance, disaster law seems to be nothing but a collection of legal rules of various kinds that happen to come into play when communities have suffered severe physical damage. But at a deeper level, disaster law is about assembling the best portfolio of legal rules to deal with catastrophic risks—a portfolio that includes mitigation, emergency response, compensation and insurance, and rebuilding

   strategies.2

   
   

   The IFRC synthesizes these definitions of calamity and response into a coherent definition of disaster. According to the IFRC, disaster arises from a “combination of hazards, vulnerability and inability to reduce the potential negative consequences of risk.”3 In apparent homage to the poetic admonition that “Euclid alone has looked on Beauty bare,”4 the IFRC has expressed the relationship between hazard, vulnerability, and capacity in mathematical terms:5

   
   

   (1)

   
   

   Although this formula treats mathematics as a metaphor rather than a concrete tool for computing actual, quantifiable results, that metaphor does carry great value. The fraction on the left side of equation (1) describes disaster as an inverse relationship between natural hazard plus social vulnerability and the responsive capacity of human institutions. The numerator expresses the risk of a “sudden, calamitous event” as a function of hazard (a natural or

   environmental factor) and vulnerability (a social or human factor).6 The IFRC’s insistence on defining risk as a combination of natural and social factors represents a sober reminder that there is no such thing as a natural

   
   

   1. Int’l Fed’n of Red Cross & Red Crescent Soc’ys, What Is a Disaster?, IFRC.ORG, http://www.ifrc.org/ en/what-we-do/disaster-management/about-disasters/what-is-a-disaster (last visited Nov. 6, 2011) [hereinafter IFRC].

   2. DISASTER LAW AND POLICY, at xxi (Daniel A. Farber, Jim Chen, Robert R.M. Verchick & Lisa Grow

      Sun eds., 2d ed. 2010).

   3. IFRC, supra note 1.

   4. EDNA ST. VINCENT MILLAY, To One Who Might Have Borne a Message, in EDNA ST. VINCENT MILLAY: SELECTED POEMS 47, 52 (J.D. McClatchy ed., 2003).

   5. IFRC, supra note 1.

   6. Id.

      
      

      disaster.7 As the social component of risk, vulnerability can be broken down further into two distinct subcomponents: the static, ex ante susceptibility of certain groups to harm at the moment disaster strikes, plus the dynamic, ex post resilience of those groups and their communities to recover after disaster.8

      
      

      Of the three variables identified in the IFRC’s definition of disaster, capacity offers governments and other social institutions what is by far the greatest degree of control. In the context of disaster law, meaningful capacity surely represents additional, marginal capacity over some baseline of institutional performance that society expects (and, one can only hope, delivers) in the absence of sudden, calamitous events. Law, of course, contributes to the management of all three variables: hazard, vulnerability, and capacity. Unthinking legal choices have undoubtedly contributed to anthropogenic climate change and other factors heightening the risk of

      environmental calamity.9 Comparable carelessness has institutionalized social

      injustices at the heart of every putatively “natural” disaster.10 As fervently as policymakers may hope to reduce these sources of environmental and social risk, disaster law may have an even greater role to play in guiding legal decisions on prevention, emergency response, mitigation, risk-spreading, compensation, and reconstruction in the face of disaster. Sharpening these tools enhances the portfolio of rules that comprise disaster law. There may be

      no greater way for government and private social agencies to enhance communal preparedness for sudden calamity.

      
      

      The mission of the IFRC and other relief agencies is to respond to disaster and to remedy its most tragic effects.11 By the same token, it is the mission of disaster law to increase the preparedness of all social institutions, including official and nongovernmental actors, to anticipate sudden, calamitous events, and to bring the optimal portfolio of legal rules to bear when such events

      
      

   7. See Jim Chen, Law Among the Ruins, in 2 LAW AND RECOVERY FROM DISASTER: HURRICANE KATRINA 1 (Robin Paul Malloy ed., 2009). See generally DISASTER LAW AND POLICY, supra note 2, at 203– 47.

   8. See B.E. Aguirre, Dialectics of Vulnerability and Resilience, 14 GEO. J. ON POVERTY L. & POL’Y 39,

      41–45 (2007); Susan L. Cutter, Bryan J. Boruff & W. Lynn Shirley, Social Vulnerability to Environmental Hazards, 84 SOC. SCI. Q. 242, 242–43 (2003).

   9. See RED CROSS/RED CRESCENT CLIMATE CTR., RED CROSS/RED CRESCENT CLIMATE GUIDE 10

      (2007), available at http://www.ifrc.org/Global/Publications/disasters/climate%20change/climate-guide.pdf.

   10. Chen, supra note 7, at 4.

   11. See Red Cross/Red Crescent Climate Ctr., Mission & Strategy, CLIMATE CENTRE, http://www. climatecentre.org/site/mission (last visited Sept. 30, 2011).

       occur. Though it may seem trivial, I define “preparedness” as the reciprocal of disaster:

       
       

       (2)

       
       

       I restate the relationship in a very slightly different fashion. I characterize preparedness as the performance of legal institutions and rules in times of disaster, adjusted for risks posed by environmental hazard and social vulnerability:

       
       

       (2a)

       
       

       This approach of defining disaster preparedness as institutional performance discounted by risk permits us to express the goals of disaster law in terms made familiar through theoretical analyses of financial markets. To infuse even a modest measure of mathematical rigor into my metaphor of disaster law as a portfolio of legal rules, I turn now to a very abbreviated survey of modern portfolio theory.

       
       

2. MODERN PORTFOLIO THEORY

   
   

   Modern portfolio theory offers a mathematically informed approach to financial risk management through diversified investing.12 By no means is it a panacea. Modern portfolio theory has drawn withering criticism, among many other reasons, for its failure to account for investor behavior,13 its reliance on historical measures of risk without accounting for the causes of risk,14 and its mathematically elegant but practically unrealistic construction of “beautifully Platonic models on a Gaussian base.”15 These limitations do constrain modern portfolio theory’s contributions to disaster law, not least because most disasters follow lopsidedly non-Gaussian distributions.16 Worse still, behavioral biases

   
   

   1. See Harry M. Markowitz, Portfolio Selection, 7 J. FIN. 77, 87–91 (1952). See generally HARRY M. MARKOWITZ, PORTFOLIO SELECTION: EFFICIENT DIVERSIFICATION OF INVESTMENTS 6 (2d ed. 1991)

      [hereinafter MARKOWITZ, PORTFOLIO SELECTION]; Edwin J. Elton & Martin J. Grumer, Modern Portfolio Theory, 1950 to Date, 21 J. BANKING & FIN. 1744 (1997).

   2. See Kent D. Daniel, David Hirshleifer & Avanidhar Subrahmanyam, Overconfidence, Arbitrage, and

      Equilibrium Asset Pricing, 56 J. FIN. 921, 921–22 (2001).

   3. See DOUGLAS W. HUBBARD, THE FAILURE OF RISK 67 (2009) (distinguishing the simple assignment of probabilities in modern portfolio theory from more comprehensive structural analyses of risk in probabilistic risk assessment).

   4. NASSIM NICHOLAS TALEB, THE BLACK SWAN: THE IMPACT OF THE HIGHLY IMPROBABLE 277 (2007).

   5. See Daniel A. Farber, Probabilities Behaving Badly: Complexity Theory and Environmental Uncertainty, 37 U.C. DAVIS L. REV. 145, 148–55 (2003).

      in the perception of risk, by policymakers and members of the public, severely distort legal responses to disasters.17 These reservations notwithstanding, I borrow the building blocks of modern portfolio theory as a basis for...