How prepared is prepared enough?

Decisions about disaster preparedness are rarely informed by cost-benefit analyses. This paper presents an economic model to address the thorny question, 'how prepared is prepared enough?' Difficulties related to the use of cost-benefit analysis in the field of disaster management concern the tension between the large number of high-probability events that can be handled by a single emergency response unit and the small number of low-probability events that must be handled by a large number of them. A further special feature of disaster management concerns the opportunity for cooperation between different emergency response units. To account for these issues, we introduce a portfolio approach. Our analysis shows that it would be useful to define disaster preparedness not in terms of capacities, but in terms of the frequency with which response capacity is expected to fall short.