Risk and Economic Analysis of Terrorism Events

Detlof von WinterfeldtProfessor of Public Policy and ManagementDirector, Center for Risk and Economic Analysis of Terrorism EventsSchool of Policy, Planning, and DevelopmentUniversity of Southern California

Presentation at theCenter for Systems and Software EngineeringMarch 14, 2006

The Department of Homeland Security

• 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

• Need for a complete cost-benefit analysis of countermeasures

CREATE is a National Center

USC

U of Wisconsin, Madison

NYU

SDC/MIT

CREATE is an Interdisciplinary Center

• Social Science– Economics– Psychology– Political Science– Public Policy and Planning

• Engineering– Industrial and Systems Engineering– Electrical Engineering– Civil Engineering– Computer Science

CREATE Research Framework

Threat Assessment

ConsequenceAssessment

VulnerabilityAssessment

Risk Assessment

CREATE Research Framework

Threat Assessment

ConsequenceAssessment

VulnerabilityAssessment

Valuation of Direct

Consequences

Assessment ofIndirect Econ.Consequences

Cost-Benefit & Decision Analysis

Risk AnalysisEconomic

Assessment

CREATE Research Framework

Threat Assessment

ConsequenceAssessment

VulnerabilityAssessment

Assessment ofIndirect Econ.Consequences

ResponseRecovery

Prevention Protection

Cost-Benefit & Decision Analysis

Risk AssessmentEconomic

Assessment

Risk Management

Assessment ofDirect Econ.

Consequences

CREATE Case Studies – Year 1

Case Studies

Modeling and Analysis Areas MANPADS Dirty Bomb Electricity

Risk Assessment

Economic Assessment

Risk Management

CREATE Case Studies – Year 2

Case Studies

Modeling and Analysis Areas BioterrorismBorder

SecurityRisk-Based Allocation

Risk Assessment

Economic Assessment

Risk Management

MANPADS - Weapons

US REDEYE --- US REDEYE --- 19671967

USSR SA-7 --- USSR SA-7 --- 19681968

Close Call

MANPADS Decision Tree 2Fatal Crash

(1-g)*rx

Safe Landing1-(1-g)*r

x

Hit(1-e)*h

Miss1-(1-e)*h

x

No Interdiction(1-f)*(1-q)

Interdiction1-(1-f)*(1-q)

x

Attempt(1-d)*p

No Attempt1-(1-d)*p

x

Countermeasures

Fatal Crashr

x

Safe Landing1-r

x

Hith

Miss1-h

x

No Interdiction1-q

Interdictionq

x

Attemptp

No Attempt1-p

x

No Countermeasures

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 InterfaceProbabilities Base Case Min Max

Attempted Attack in 10 years 0.50 0.25 0.00 1.00

Interdiction|Attempt 0.00 0.00 0.00 0.10

Hit|Attack 0.80 0.80 0.00 1.00

Crash|Hit 0.25 0.25 0.00 1.00

Effectiveness of CountermeasuresDeterrence Effectiveness 0.50 0.50 0.00 1.00

Interdiction Effectiveness 0.00 0.00 0.00 1.00

Diversion/Destruction Effectiveness 0.80 0.80 0.00 1.00

Crash Reduction Effectiveness 0.00 0.00 0.00 1.00

ConsequencesFatalities|crash 200 200 0 400

Cost of the Plane (millions) 200 200 0 500

Loss to Economy|Fatal Crash (billions) 100 100 0 500

Percent of Loss|Hit and Safe Landing 25% 25% 0% 50%

Percent of Loss|Miss 10% 10% 0% 25%

Number of False Alarms/Year 10 10 0 20

Cost of Countermeasures (billions) 10 10 5 50

TradeoffsValue of Life (millions) 5 5 0 10

Cost of a False Alarm (millions) 10 20 0 100

Outputs of Manpads ModelTotal Crash Econ Loss CM Cost

Expected Costs w/ Countermeasures (millions) w/CM 13,932$ 7$ 1,925$ 12,000$

Expected Costs w/o Countermeasures (millions) w/o CM 9,318$ 68$ 9,250$ -$

EXPECTED COSTS OF MANPADS

$-

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

w/CM w/o CM

DECISION

Eq

uiv

ale

nt

Ex

pe

cte

d C

os

ts (

Mill

ion

s)

CM Cost

Econ Loss

Crash

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

0

10

20

30

40

50

60

70

Month

Passenger Number (m.) DOMESTIC (Actual)

INTERNATIONAL(Actual)

DOMESTIC (Forecast)

INTERNATIONAL(Forecast)

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– 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