I think the economic decision making eventually trickles down from banks and insurance companies who actually do the math themselves and charge building-owners/mortgage-owners competitively. It's sort of an continuous invisible hand.
At least for Bill he didn’t get a loan to build the addition or any insurance to cover flood damage.
So such trickle down just shifts who builds in such areas but it doesn’t prevent people from living or building in them.
Bill a friend of mine built a large addition on a house which had flooded twice while he had been living there, once actually reaching the second story. In his mind it’s picture perfect 99.9% of the time so what’s an inconvenience every few decades. In the end he died before the next flood, but now there is a nice house in a flood plain.
This isn’t reserved to individuals, companies didn’t abandon large areas of NYC after the last flood. https://www1.nyc.gov/site/planning/data-maps/flood-hazard-ma...