The Hidden Cost of False Alarms: A New Marketplace Podcast

(Photo: Scott Davidson)

Our latest Freakonomics Radio on Marketplace podcast is called “The Hidden Cost of False Alarms.” (You can download/subscribe at iTunes, get the RSS feed, listen via the media player above, or read the transcript below.)  

The central facts: between 94 and 99 percent of burglar-alarm calls turn out to be false alarms, and false alarms make up between 10 and 20 percent of all calls to police.

There are at least three things to consider upon learning these facts:

1. If a particular medical screening had such a high false-positive rate, it would likely be considered worse than worthless; but:

2. With more than 2 million annual burglaries in the U.S., perhaps it’s worth putting up with so many false positives in service of the greater deterrent; as long as:

3. The cost of all those false positives are borne by the right people.

Can you already figure out whether No. 3 is in fact the case?

You’ll hear from Temple economist Simon Hakim, who has been studying this topic for years. Here’s one paper on the economics of false alarms, coauthored with Erwin A. Blackstone and Andrew J. Buck:

Ninety-four to ninety-nine percent of all police physical responses to burglar alarm activations are false. In 2000 police responded to 36 million false calls at an estimated cost of $1.8 billion. This paper presents and evaluates ten police policies for dealing with this waste of police resources.

Hakim proposes a public-private market response to fight this problem, including higher fines, education, and registration fees.

You’ll also hear from the police chief of Fremont, Calif., Craig Steckler. He says his department gets about 4,000 alarm calls each year: 

You wouldn’t stay in business if 95 percent of the product you put out was a bad product, right? You wouldn’t have customers. … If you buy a washing machine from Sears and it malfunctions, you don’t call the city maintenance department to come out and fix it. So if you buy an alarm, why do you call us to come out when it’s broken or it’s not working?

Some cities have begun to fine homeowners who rack up multiple false alarms, which is one way of introducing accountability. As for the alarm industry? The Security Industry Alarm Coalition says it’s dancing as fast as it can to bring down the number of false positives. Here’s what the SIAC’s Ron Walter told us:

“It’s our number-one priority.  This is the one issue that we have decided has to be addressed.”

But as our podcast makes clear, the incentives are misaligned here. The alarm companies are doing quite well by passing along some of their costs to police departments (and, of course, taxpayers). Industry analysts say that industry leader ADT, for instance, has an operating margin of about 25 percent on roughly $3 billion in revenues.

If you were running an alarm company, how much effort would you put into voluntarily lowering the false-positive rate?

Audio Transcript

Kai Ryssdal: Time now for a little Freakonomics Radio. It's that moment every couple of weeks where we talk to Stephen Dubner, the co-author of the books and the blog...

Alarm noise

Stephen Dubner: Oh geez, Kai. I'm sorry. I'm sorry. Fight through it.

Ryssdal: Books and the blog of the same name. It is of course the hidden side of everything.

Alarm noise

Dubner: Let me find the button, Kai. I got it. I got it. Apologies.

Ryssdal: All right. So what are you doing?

Dubner: I'm sorry. We just put a burglar alarm in the studio here. It goes off like every five minutes. I'm so sorry.

Ryssdal: One would think you'd be able to turn it off when you're on the radio, dude.

Dubner: You would, but it's not just me, Kai. Do you have any idea what the false alarm rate is for burglary alarms in this country?

Ryssdal: Well I'm just going to guess that you're trying to make a point here, so I would say high. Yes?

Dubner: The data show that false alarms account for 94-99 percent of all alarm calls.

Ryssdal: God. Wow. I mean, that's great that they're false alarms, but it's bad that they're false alarms. Right?

Dubner: You know who hates it even more than the homeowners are the police. Listen to Craig Steckler. He's the police chief of Fremont, Calif. When he realized that 98 percent of these alarm calls to his department were false alarms, he started to figure out what this was actually costing.

Craig Steckler: The officer's time, we figured that 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-something. Pretty outrageous.

Ryssdal: Geez. Wow. That's just a lot of false alarms.

Dubner: 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.

Simon Hakim: Most of the time, it's not a burglar that came to your house, but it's false activation. So the 94-99 percent, you get a personal service. It's not enhancing in any way or form the security of the community.

Ryssdal: So that phrase he used, "false activation," what does that name?

Dubner: Well 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. And then there's the weather and power surges, and also let's not forget there are actual burglars out there, about 2 million burglaries a year in the U.S.

Ryssdal: So do these alarm systems deter 'em? Would it be 5 million without 'em?

Dubner: Hakim says that yes, that alarm systems to deter burglars to some degree. The sign in the yard and the threat of the alarm and the police. So we've got a deterrent effect, which just happens to have an extraordinarily high false-positive rate.

Ryssdal: What does the alarm industry say? I mean, they're obviously making a lot of money selling these things that don't work 95 percent of the time.

Dubner: 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.

Ron Walters: It's our No. 1 priority. This is the one issue that we have decided has to be addressed.

Dubner: So they're proposing better design for alarm keypads. More video monitoring to verify whether an alarm call's legit. But 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.

Steckler: 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. So it's money in their pocket. Why should they change?

Ryssdal: Yeah, that's the total skeptical/realist view. But he's got a point, right?

Dubner: He does have a point. Financial analysts say that industry leader ADT, for instance, has an operating margin of about 25 percent on roughly $3 billion on 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.

Ryssdal: Right. So what are we supposed to do about it? What are the solutions?

Dubner: Well it's probably a good idea to make the alarm companies more accountable in some fashion, including having them make alarms that don't fail so often. In the meantime, 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, so if this new alarm of mine would actually keep you out of my studio.

Dog growling

Dubner: Go ahead. Make my dog's day, Kai.

Ryssdal: I've been to your house. I know you don't have a dog, get out of here Mr. Upper West Side. Stephen Dubner, is the website. See you in a couple of weeks.

Dubner: Talk to you soon, Kai. Thanks.

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  1. DanSanto says:

    Off the top of my head, I think that a fee could be charged to alarm companies by the police department for every false alarm. $100 per call, or something like that.

    I imagine the companies would pass at least some of the cost on to the customers, but the smart companies would figure out a way to cut down on their false alarms, and thus manage to have fewer expenses than their competitors, giving them some combination of fatter profits and lower charges to their customers compared to their competitors.

    If an alarm company is generating 2 false alarms per year per household, that will be roughly an extra $200/year per customer that the company would need to either swallow or pass along. That’s a pretty strong incentive for the company to lower their false alarms and for the customer to find a company with fewer false alarms.

    It might also make an incentive for police departments to check up on every alarm if they can pad their budget a bit. At the very least it will reduce the incentive they have to assume an alarm is a false alarm (and thus possibly miss out on the real alarm).

    The costs would be born by the proper people as far as I can tell – the companies and the people who are using the alarm systems.

    I don’t know if $100 per false alarm would be too much or too little, but I’m sure someone with more access to relevant data could make a better estimate of an appropriate amount.

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    • J says:

      A better approach would be to fine the homeowner for false alarms; my observation has been that nearly all false alarms are due to negligence/carelessness on the part of the homeowner, not the alarm company. If we fine the alarm company, they’re likely, as you note, to spread the cost of those fines over all customers, rather than the customers who deserve it.

      Like other commenters, I’d also disagree with the idea that opportunity cost is all that high here. If a police department is adequately staffed, false alarms drawing them away from real police work suggests poor triage on their part. I have no doubt that false alarms draw police away from revenue generating activities such as traffic enforcement, but the idea police are going to respond to a burglar alarm before they respond to an armed robbery or a 911 call from a human is preposterous. At least I hope it is.

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    • FARGO says:

      We have been in the security industry for 25 years, we do our best to reduce false alarms by introducing false alarm verification at the keypad and through video feeds to the monitoring station operator. Most false alarms are caused by end-user error, there’s only so much we can do to help reduce false alarms. Fining the company will only put small shops our of business.

      A better solution would be to mandate by law video verification and/or keypad alarm verification.

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  2. Kirk says:

    Here are some factors to consider (I didn’t listen to the podcast yet).

    1) Insurance companies have some bearing on the incentives. I got an alarm for two reasons, and neither of them are because I think the alarm will deter burglaries. First is because the amount I pay for the alarm is offset by reductions in my home insurance premiums (likely more to do with the integrated fire alarm). Second, because the sign outside my house announcing the presence of the alarm will hopefully make a burglar choose an easier target.

    2) In my jurisdiction, police do not respond to alarm calls. If there is an alarm tripped, somebody (home owner, etc) has to go check, and if nobody can be found, then the alarm company will send somebody. The police won’t do anything until a human has confirmed a break-in. I heard that the best way to get somebody to show up at your house if you’re in danger is to trip the fire alarm. Then I believe at least the fire department may show up with sirens blaring.

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    • James says:

      “Second, because the sign outside my house announcing the presence of the alarm will hopefully make a burglar choose an easier target.”

      Which suggests that there should be a ready market for alarm company signs, and perhaps faux alarm boxes.

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  3. RGJ says:

    My town instituted a three strike rule — after three strikes you get paid a fine.

    In my town, the policy is every alarm, burglar or fire, must be responded to. Since we are volunteer fire and first aid, this is an enormous hassle.

    The other question is, what are the false alarms from? I know one friend whose problem was simply the system — the alarm company had some glitch or something in the installation was calling in false alarms. Other people walk through the door and forget to key the code or do it wrong or whatever.

    Another major issue was with the school system, which were getting either pulled fire alarms or false positives. Since everyone rolls for a school fire, all hands on deck, it was an enormous hassle. The town started fining the schools, figuring it was their problem, and it was a big political brouhaha.

    Another factor is, in many small communities, emergency vehicles, especially fire rigs, last a long time, a decade or more. due to the ability to keep mileage remarkably low. a perhaps a half a mil a clip, that factors in, too.

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  4. Mike B says:

    I’d like to know the opportunity cost of a police response. Yes it takes officers’ time to respond to a call, but what would they have been doing if that call never came in? Randomly paroling? Writing traffic tickets? Filling out paperwork back at the station? If the level of calls is such that police can respond to alarms without sacrificing other duties there there really isn’t much of a need to crack down on them. Towns don’t pay police officers by the call…they are paid for the entire shift.

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    • Jesse says:

      This is a very important point, imo. The numbers being quoted as a “cost” to the police seem to be just the time it takes to respond X pay rate. The officers are getting paid the same whether they are responding to an alarm, patrolling randomly, or whatever else officers do. 😉

      It isn’t like they are working overtime to respond to alarms or calling in off-duty officers when an alarm goes off. The cost to the municipality remains the same. Maybe more gas consumed or more wear and tear on police vehicles?

      If responding to false alarms is causing crime to go up elsewhere, that is a big opportunity cost. I doubt that is happening, though.

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      • Enter your name... says:

        In a small or rural area, this is probably true, because you can’t have less than one person on duty. However, in a city of any size, you could employ fewer police officers if you never had to respond to alarms. A small town might deal with one burglar alarm a week. A large city might get one call an hour.

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    • Kazzy says:

      This. So many of these “opportunity cost” studies are based on this sort of silly logic. If I have a false alarm, it costs the town very little to have a squad car drive a few blocks to check out what happened. The quoted math (36 million false alarms resulting in $1.8 billion in costs) indicates a cost of $50 per call. Where does this money go? Even a car with terrible gas mileage (10MPG) in an area with high gas prices ($5/gallon) would need to cover 100 miles round trip to justify that expense. If a cop is coming from 50 miles away, we have bigger problems.

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      • Enter your name... says:

        The biggest cost is staff time. You don’t just “drive a few blocks”: You hire, train, and pay a dispatcher to receive the call. You hire, train, equip and pay an officer to drive a few blocks (or a few miles, depending on the territory), walk around the building, knock on the door, talk to anyone who is home (or the neighbors), look in the windows, look for signs that someone had been there but has already left, determine that nothing’s (visibly) wrong, phone headquarters to request that another paid employee tell the alarm company that it’s apparently a false alarm, leave a note for the tenants, drive a few blocks back, and fill out a bunch of paperwork, which you then submit for review to a fourth paid employee.

        When you consider what’s involved here, the astonishing thing is that it *only* costs $50 a call.

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    • Kristoffer says:

      So you would rather officers be reactive than proactive? I would much rather have the officers have time to patrol my neighborhood with the possibility they are going to stop something before it starts as opposed to jumping from one false alarm to another with no time to do anything else.

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  5. Joe J says:

    Wondering what the false positive rate is on car alarms. I hear a car alarm go off probably every other day. So often noone even thinks it is an actual car theft taking place.

    As to police fining for false alarms, we don’t want to over incentivise police, they may begin causing false alarms to gain fine revenue.

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  6. AaronS says:

    What an incredible scam–I get paid for dialing 911 for you…and I get the credit if an actual crime is stopped! I think the next step is to link smoke detectors to a central office. Then, when your smoke alarm goes off, I simply call 911 for you–AND GET PAID FOR IT!

    Maybe what the police/fire department ought to do is create their OWN alarm service. If a person has the official police service, there is no charge for answering a false alarm. Otherwise, there would be a $100 charge. To compete, the other alarm services would have to guarantee to pay the fine if their alarm gave a false positive.

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  7. Enter your name... says:

    It’s a little difficult to reliably identify false alarms. Consider this situation: The last person out of the building sets the alarm before leaving. Several times, we’ve had people leave without realizing that someone else was still in the building (usually behind a closed office door). At least twice it’s been someone who was not authorized to be in the building by himself/herself and therefore had no way to turn off the burglar alarm.

    The system worked perfectly: it correctly identified that an unauthorized human was in the building after the system was told that everyone had left for the day. Is that a “false positive”? If that person had simply left the building when the alarm went off, it would certainly look like it.

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    • Kitty_T says:

      Did they study only residential alarms? I’ve got both a business and a home alarm system. The cops here don’t respond to either (though in some municipalities, they tell you they are dispatching, which apparently means “we’ll put it on the bottom of the list after donut breaks and will respond 5 1/2 hours later only when a live person has called 911 to report the front of your store is smashed in”).

      My house alarm has never gone off (though I’ve gotten calls from the company that one of my smoke alarms is malfunctioning). My business alarms (6 locations) go off less than 6x per year; there is only about one per year that I want someone to check it out.

      Last year when it went off, we’d recently fired a somewhat … unbalanced employee so I wanted to be cautious. The PD at least admitted that they would not send someone unless a live person on site confirmed it was necessary. So I told them I was going to see if the disgruntled employee was firebombing the place, and got in my car and drove to a deserted commercial district at 1 am. To their credit, as soon as I got on site and started looking in windows and shining my headlights down the alley to check the back doors, the cops showed up. Not to respond to the alarm, or to back up the business owner going to confront possible armed burglars in the middle of the night alone in her PJs, mind you – just because they’d seen me acting suspiciously from the street. I explained that I was lurking around because their dispatcher told I needed to check it out before they would, and they had the good grace to look sheepish.

      This year it turned out to be an actual break-in (see bitter comments above). It was one of a series of break-ins at the building that had been going on for a month. 3 other places there have been broken into since.

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  8. Shane L says:

    Another kind of cost is also borne by neighbours who live in a community with lots of false alarms. I live in the suburbs at the moment, a relatively safe area, yet I cannot sleep long into the morning at weekends before inevitably being woken by some alarm. Of course it could be that people really are being burgled. But nearly every day? There must be many false alarms and they become very irritating.

    They also mean that as neighbours we do not bother to investigate such alarms since we assume they are false.

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