Risk and Economic Analysis of
Terrorism Events
Detlof von Winterfeldt
Professor of Public Policy and Management
Director, Center for Risk and Economic Analysis of Terrorism Events
School of Policy, Planning, and Development
University of Southern California
Presentation at the
Center for Systems and Software Engineering
March 14, 2006
The Department of Homeland
Security
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22 agencies
180,000 employees
$40 billion budget
Major science and technology effort ($1 billion)
University Programs ($70 million)
Seven Centers
CREATE - Background
• USC was selected as the first DHS university
center in a competition of 72 universities
• Started operations in March of 2004
• Focus on risk and economic analysis
• $4 million per year for three years
• Five other centers have been awarded
• Integrated Network of Centers
CREATE Mission
To develop advanced models and tools
for the evaluation of the risks, costs
and consequences of terrorism and to
guide economically viable investments
in homeland security
Other Mission Elements
• To educate the next generation of homeland
security professionals in the areas of risk and
economic analysis
• To reach out to a broad constituency concerned
with risks and economic consequences of
terrorism
Why Risk Analysis?
• “Risk based” prioritization of investments
requested by the Secretary and Congress
• House Committee on HS, Subcommittee on
Intelligence Analysis, Information Sharing, and
Terrorism Risk Analysis
• Need to quantify risks and risk reduction due to
countermeasures and recovery measures
Why Economic Analysis?
• Osama Bin Laden (2002):
“(We need to) concentrate on striking the American economy
with every possible means.”
“The young men (of the jihad) need to seek out the nodes of the
American economy and strike the enemy’s nodes.”
•
Small local terrorism attacks can have large regional and
national economic impacts
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Need for a complete cost-benefit analysis of
countermeasures
CREATE is a National Center
U of Wisconsin, Madison
SDC/MIT
NYU
USC
CREATE is an Interdisciplinary Center
• Social Science
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Economics
Psychology
Political Science
Public Policy and Planning
• Engineering
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Industrial and Systems Engineering
Electrical Engineering
Civil Engineering
Computer Science
CREATE Research Framework
Risk Assessment
Threat
Assessment
Vulnerability
Assessment
Consequence
Assessment
CREATE Research Framework
Economic
Assessment
Risk Analysis
Threat
Assessment
Vulnerability
Assessment
Consequence
Assessment
Valuation
of Direct
Consequences
Assessment of
Indirect Econ.
Consequences
Cost-Benefit &
Decision
Analysis
CREATE Research Framework
Risk Assessment
Threat
Assessment
Prevention
Economic
Assessment
Vulnerability
Assessment
Consequence
Assessment
Assessment of
Direct Econ.
Consequences
Protection
Response
Recovery
Assessment of
Indirect Econ.
Consequences
Risk Management
Cost-Benefit &
Decision
Analysis
CREATE Case Studies – Year 1
Case Studies
Modeling and Analysis Areas
Risk Assessment
Economic Assessment
Risk Management
MANPADS
Dirty Bomb
Electricity
CREATE Case Studies – Year 2
Case Studies
Modeling and Analysis Areas
Risk Assessment
Economic Assessment
Risk Management
Bioterrorism
Border
Security
Risk-Based
Allocation
MANPADS - Weapons
US REDEYE --1967
USSR SA-7 --1968
Close Call
MANPADS Decision Tree 2
Fatal Crash
Hit
(1-g)*r
Safe Landing
(1-e)*h
No Interdiction
x
x
1-(1-g)*r
(1-f)*(1-q)
M iss
Attempt
x
1-(1-e)*h
(1-d)*p
Interdiction
Countermeasures
x
1-(1-f)*(1-q)
No Attempt
x
1-(1-d)*p
Fatal Crash
Hit
r
Safe Landing
h
No Interdiction
x
1-r
1-q
M iss
Attempt
x
1-h
p
Interdiction
No Countermeasures
q
No Attempt
x
1-p
x
x
MANPADS Consequences
• Impacts of an Attack
– Fatalities
– Loss of Airplane(s)
– Economic Impacts
• Impacts of Countermeasures
– False alarms
– Capital Costs
– Operation and Maintenance Cost
MANPADS – User Interface
Base
0.50
0.00
0.80
0.25
Case
0.25
0.00
0.80
0.25
0.50
0.00
0.80
0.00
0.50
0.00
0.80
0.00
200
200
100
25%
10%
10
10
200
200
100
25%
10%
10
10
5
10
5
20
Min
Max
0.00
1.00
0.00
0.10
0.00
1.00
0.00
1.00
0.00
1.00
0.00
1.00
0.00
1.00
0.00
1.00
0
400
0
500
0
500
0%
50%
0%
25%
0
20
5
50
0
10
0
100
$16,000
$14,000
$12,000
$10,000
CM Cost
$8,000
Econ Loss
Crash
$6,000
$4,000
$2,000
$w/CM
Outputs of Manpads Model
Total
Expected Costs w/ Countermeasures (millions)
Expected Costs w/o Countermeasures (millions)
EXPECTED COSTS OF MANPADS
Equivalent Expected Costs (Millions)
Probabilities
Attempted Attack in 10 years
Interdiction|Attempt
Hit|Attack
Crash|Hit
Effectiveness of Countermeasures
Deterrence Effectiveness
Interdiction Effectiveness
Diversion/Destruction Effectiveness
Crash Reduction Effectiveness
Consequences
Fatalities|crash
Cost of the Plane (millions)
Loss to Economy|Fatal Crash (billions)
Percent of Loss|Hit and Safe Landing
Percent of Loss|Miss
Number of False Alarms/Year
Cost of Countermeasures (billions)
Tradeoffs
Value of Life (millions)
Cost of a False Alarm (millions)
w/CM $ 13,932
w/o CM $
9,318
Crash Econ Loss
CM Cost
$
7
$
1,925
$
12,000
$
68
$
9,250
$
-
w/o CM
DECISION
Tornado Diagram
MANPADS - Economics
• Shutdown of all airports
– Lave: $1.5 billion/day
– USC model: $1 billion/day
• 9/11 economic impacts (2 years)
– Santos and Haimes: $28-80 billion
– USC model: $250-400 billion
Passenger Volume after 9/11
MANPADS - Conclusions
• MANPADS countermeasures can be cost-effective, if the
probability of a multiple attack is greater than 0.50 in ten
years and if economic costs are greater than $200 billion
• The economic consequences depend on policy and public
responses to an attack
• Terrorists may shift to other weapons, if MANPADS
countermeasures are installed
• Additional work
– Value of information to continue MANPADS research
– Dynamic decision model of shifting terrorist attack modes
Emerging Themes
• Adversarial risk is unlike natural risk
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Adversaries seek our weakest links
Difficult to estimate probabilities of attack
Probabilities shift with our action
Screening attack modes and targets is easier
• A terrorist attack is a multistage project
– Multiple intervention opportunities
– Upstream interventions are best
• From risk analysis to risk management
– Not all countermeasures are cost-effective
– Prioritization of investments across threat areas is needed
• Multi-hazard emergency preparedness & response
– Use DHS funds as leverage
– Make sure the investment pays for itself by reducing other risks
The Main Challenge:
How Secure is Secure Enough?
• We will never be completely secure
• The costs of increasing security
increase dramatically when we get
close to zero risk
• Increasing security may create other
risks, inconveniences, and restrict civil
liberties
Website: www.usc.edu/create