Freakonomics Radio - 69. The Hidden Cost of False Alarms

Episode Date: April 3, 2012

If any other product failed 94 percent of the time, you’d probably stop using it. So why do we put up with burglar alarms?

From APM, American Public Media, and WNYC, this is Freakonomics Radio on Marketplace. Here's the host of Marketplace, Kai Risdahl. Time now for a little bit of Freakonomics Radio, that moment in the broadcast every couple of weeks where we talk to Stephen Dubner, the co-author of the books and the blog. Hi, I'm sorry, I'm sorry. Fight through it. Books and the blog have the same name. It is, of course, the hidden side of everything. Ah, let me find the button, Kai. I got it. I got it.

Apologies. So, what are you doing? I'm sorry. We just put a burglar alarm in the studio here. It goes off like every five minutes. I'm so sorry. One would think you'd be able to turn it off when you're on the radio, dude. You would, but you know, it's not just me, Kai. Do you have any idea what the false alarm rate is for burglar alarms in this country? Well, I'm just going to guess you're trying to make a point here. So I would say high, yes.

The data show that false alarms account for 94 to 99% of all alarm calls. Wow. I mean, that's great that they're false alarms, but it's bad that they're false alarms, right? Well, you know who hates it even more than the homeowners are the police. Listen to Craig Steckler. He's the police chief of Fremont, California. When he realized that 98% of the alarm calls to his department were false alarms, he started to figure out what this was actually costing him. The officer's time, we figured it was around $67 for each officer to respond, two officers per call.

Then the dispatch time was around $12 for every dispatch call. So we took those figures and multiplied it by our number of alarms and came up with this figure of $664,000. Wow, that's just a lot of false alarms. We talked to Simon Hakim, an economist at Temple who's been studying this issue for a long time. He says that in a given year, U.S. police respond to more than 35 million alarm activations. Now, again, Kai, something like 95 percent of them are false alarms. And the cost is about $2 billion. Most of the time, it's not a burglar that came to your house, but it's false activation. So the 94 to 99%, you get a personal service. It's not enhancing

in any way and form the security of the community. So that phrase you used, false activation, what does that mean? Well, you know, one industry expert we talked to puts about 75 percent of the blame on user error. So, of course, the industry would blame us stupid users, right? And then there's the weather and power surges. And also, you know, let's not forget, there are actual burglars out there, about two million burglaries a year in the U.S. So do these alarm systems, though, deter? I mean, would it be five million without them? Well, you know, Hakeem says that, yes, the alarm systems do deter burglars to some degree. The sign in the yard and, you know, the threat of the alarm and the police.

We've got a deterrent effect, which just happens to have an extraordinarily high false positive rate. What does the alarm industry say? I mean, they're obviously making a lot of money selling these things that don't work 95% of the time. Well, good point. We talked to Ron Walters with the Security Industry Alarm Coalition, which helps deal with the complaints about false alarms from the police departments. It's our number one priority. This is the one issue that we have decided has to be addressed. So, you know, they're proposing better design for alarm keypads, more video monitoring to verify whether an alarm call is legit. But, you know, if you think about how the incentives are laid out, Kai, you do have to wonder how hard the alarm companies really need to try. Here's Chief Steckler again. They have a business model that sells a product that gets serviced by a public entity that they don't even

pay to do the service. And so it's money in their pocket. Why should they change? Yeah, that's the total skeptical realist view, but he's got a point, right? He does have a point. You know, financial analysts say that industry leader ADT, for instance, has an operating margin of about 25 percent on roughly $3 billion in annual revenues. So these false alarms pose what economists call a negative externality. That is, the provider charges you for the service, but then they pass along a big part of their costs to someone else, in this case, the police departments and the taxpayers who support them.

Right. So what are we supposed to do about it? What are the solutions? Well, you know, it's probably a good idea to make the alarm companies more accountable in some fashion, including, you know, having them make alarms that don't fail so often. In the meantime, you know, some cities have started to penalize homeowners for repeated false alarms, cash fines, even misdemeanor charges. As for me, I think I'm just going to ditch my new alarm that seems to go off every five minutes.

I'm going old school here. Kai, see if this new alarm of mine would actually keep you out of my studio. Go ahead. Make my dog's day, Kai. I've been to your house. I know you don't have a dog. Get out of here, Mr. Upper West Side. Stephen Dubner, Freakonomics.com is the website. See you in a couple of weeks. Talk to you soon, Kai.

Bye. Hey, thanks for downloading this Freakonomics Radio podcast. Our episode next week will be a full one-hour program called Eating and Tweeting. You'll hear from Alice Waters, Nathan Myhrvold, Justin Halpern, Duncan Watts, and Steve Levitt, who would much rather eat than tweet. Unless, of course, someone else is doing the tweeting for him. That'll be next Thursday on iTunes and at Freakonomics.com.