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Abstract

For years, the field of behavioural psychology has shaped the understanding of human behaviour. More and more findings of that discipline are also applied in economics. However, potential implications for the specific area of economics of security have been widely ignored. This paper transfers empirically proven phenomena of behavioural psychology, such as decision heuristics and fallacies, to the economics of security. In particular, we will focus on the subjective perception of risks and its implications on the evaluation of security solutions. Our paper provides an overview on aspects of behavioural psychology in economics of security. We argue that findings from behavioural psychology bear the potential to influence the assessment of security measures, and therefore need to be clearly identified for ensuring the efficient allocation of limited budgets for security solutions. In our view, sensitising decision-makers in the field of security for aspects of behavioural psychology is useful and conducive to enhance the management of risks for public security.

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Notes

  1. By 'economics of security' we also refer to 'economics of safety', i.e. the results of this analysis can be applied to intentional threats considered by security and unintentional threats considered by safety.

  2. The economic standard model is based on a rational utility-maximising individual (homo oeconomicus). However, behavioural economics, an established discipline in economics, shows that, in reality, human decisions are also affected by irrelevant information, the ability to process information, and the human’s feelings. Therefore, behavioural economics applies recognitions of behavioural psychology to economics. The discipline of behavioural economics was primarily established by the psychologists Daniel Kahneman und Amos Tversky, whose research was awarded the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel in 2002. With regard to the ability to process information and its boundaries, the term “Bounded Rationality” is worth to be mentioned, which was in particular shaped by Simon (1955).

  3. I would like to thank the anonymous reviewer for this aspect.

  4. “Rational” means that an agent behaves according to certain rules, or, colloquially, that he behaves in a consistent and logically coherent way. The concept of rationality was also formally defined in the past; i. a. compare for Muth (1961).

  5. In prospect theory, the value function is S-shaped, concave in the area of utility gains and convex in the area of utility losses (Kahneman and Tversky 1984). In case of a lottery with two positive outcomes, the certain payoff of the lottery’s expected value is preferred to participating in the lottery since the concave utility function implies a positive risk premium and risk aversion. The certainty equivalent, for which the agent is indifferent between the lottery and the certain payoff, is smaller than the lottery’s expected value. On the contrary, in case of a lottery with two negative outcomes, the certain payoff of the lottery’s expected value is appreciated less than participating in the lottery because the convex utility function implies a negative risk premium and risk-taking behaviour. Accordingly, the certainty equivalent is larger than the lottery’s expected value in that case.

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Acknowledgements

The author would like to thank Florian Schneider for excellent research assistance and the anonymous reviewer for very valuable and helpful comments.

Funding

This research was funded in the context of the support guidelines ’New Economic Aspects’ of the Federal Ministry of Education and Research within the framework of the program ’Research for Civil Security' of the German Federal Government.

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Correspondence to Alexander Schulan.

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Schulan, A. Behavioural Economics of Security. Eur J Secur Res 4, 273–286 (2019). https://doi.org/10.1007/s41125-019-00045-w

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