Quantifying fear

There much comment here and here about the government stoking up a fear of terrorism. Here’s a crass economist’s take on the question.

There are two rules of economics.

Rule one – talk is cheap. It's actions that matter.

Rule two – count the money.

So here goes.

First, we need to know how much a big terrorist attack would cost. This standard textbook on cost-benefit analysis puts the value of a statistical life at £2.7 million in today’s money, though there’s a wide margin of disagreement. This means a 9/11-type attack, killing 3000 people, would cost £8.2bn in human life.

To this we must add the cost of disrupted business. This study estimates that 9/11 cost Manhattanites $2.1bn in lost wages. Take this as our guide, and we’re adding another £1.1bn in costs.

And then there’s the cost of rebuilding. What matters here is not the gross cost, but the social cost. Builders employed in reconstruction would have gotten work elsewhere. The cost to society of reconstruction is that work forgone. This is much smaller than the gross cost.

Put it all together and a very rough estimate of the cost of a big terrorist attack is around £10 billion.

But the government is spending only £1.5bn a year to combat this.

This suggests it regards the odds of a major attack as roughly 15%. If it thought the odds were much higher, it would have to explain why it’s spending so little on anti-terrorism. And if it thought they were much lower, it would have to justify spending so much on so small a threat.

There are countless ways to argue around these numbers, but revealed preference suggests the government is putting the odds on a 9/11 attack at about 6 to 1 against.

Let’s extend this. Assume, for simplicity rather accuracy, that each of 8 million Londoners has an equal chance of being among the 3000. Given a terrorist attack, this gives a 0.0375% chance of being killed. As there’s a 15% chance of such an attack, we have a probability of being killed of 0.0375% x 15 = 0.0056%, or 1 in 18,000. Poker players will recognize this as roughly equal to the odds of getting a royal flush on the flop, having been dealt a suited king and ace.

Is the government stoking up a fear of terrorism? Its actions suggest not. And by their deeds shall ye judge them.

Do I want to carry an ID card in the vague hope that doing so will somehow reduce these odds? No.

Comments

[Wally]

Why should the numbers be commensurate? We're not talking about insurance premiums here. If I spend £100 on door locks that have a significant effect on the likelihood of being burgled and loosing say £10000 of goods (based on the likely insurance claim), am I not spending enough? If the locks are good enough surely that's all that matters.

W.