Keywords: terrorism, risk aversion, decision-making, homeland security, utility theory, cost-benefit analysis, decision theory, USA, United States, central government, regulatory agencies, government regulation, risk-neutral attitudes, low probability events, high consequence events, catastrophic events, hazards, risk averseness, utility functions, safety measures, federal budgets, terrorist attacks, threat probability, risk reduction, regulatory action, enhanced expenditure, security expenditure, policy options, risk assessment, risk management, catastrophic risks, catastrophes
Homeland security: a case study in risk aversion for public decision-making
Governments and their regulatory agencies normally exhibit risk-neutral attitudes in their decision-making. However, for low probability-high consequence events many decision-makers tend to be risk-averse because of the catastrophic or dire nature of the hazard or event. The degree of risk averseness can be described by utility theory. This paper will infer utility functions that reflect the level of risk averseness of regulatory agencies when adopting new safety measures ? such as investing $75 billion per year of the homeland security budget to avert terrorist attacks in the USA. The utility analysis considers threat probability, risk reduction caused by regulatory action, cost of regulatory action, and losses. The expected utilities using an identical risk-averse utility function for: 1) no enhanced security expenditure; 2) regulatory action associated with $75 billion of enhanced homeland security expenditure are compared and made equal to each other by modifying the risk-averse utility function. This means that both policy options are equally preferable so if the decision-maker is more risk-averse than suggested by the risk-averse utility function then regulatory action is preferable. It will be shown that the level of risk averseness needed to justify current expenditures for homeland security is considerable.