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Application of portfolio theory to asset-based biosecurity decision analysis

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  • Akter, Sonia
  • Kompas, Tom
  • Ward, Michael B.

Abstract

A key challenge for biosecurity decision-making is how best to allocate scarce resources across multiple environmental assets. The allocation of funds for the best return from investment requires a careful assessment of expected return and uncertainty. In this paper, we applied a portfolio theory-based decision support tool that helps determine resource allocation in a way that maximizes expected return and minimizes uncertainty. Our framework offers three advancements to the literature. First, it helps in making resource allocation decisions across multiple pests that affect multiple environmental assets. Second, it incorporates multiple sources of uncertainty in the decision analysis including economic value uncertainty. Finally, it demonstrates a generic approach to design a choice experiment study to estimate monetary values of a broad group of environmental assets. We find that a portfolio-based framework applied in conjunction with a choice experiment study can be a useful tool to guide biosecurity resource allocation decisions. Our results show that disregarding value uncertainty may cause bias by underestimating true uncertainty in the opportunity set. The choice experiment study revealed substantial positive non-market values generated by environmental biosecurity in Australia. However, significant preference heterogeneity across respondents with regards to different biosecurity outcomes was observed.

Suggested Citation

  • Akter, Sonia & Kompas, Tom & Ward, Michael B., 2015. "Application of portfolio theory to asset-based biosecurity decision analysis," Ecological Economics, Elsevier, vol. 117(C), pages 73-85.
    • Handle: RePEc:eee:ecolec:v:117:y:2015:i:c:p:73-85
    DOI: 10.1016/j.ecolecon.2015.06.020
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    2. Paul Mwebaze & Jeff Bennett & Nigel W. Beebe & Gregor J. Devine & Paul Barro, 2018. "Economic Valuation of the Threat Posed by the Establishment of the Asian Tiger Mosquito in Australia," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 71(2), pages 357-379, October.
    3. Ando, Amy W. & Shah, Payal, 2016. "The Economics of Conservation and Finance: A Review of the Literature," International Review of Environmental and Resource Economics, now publishers, vol. 8(3-4), pages 321-357, June.
    4. Carina Fagefors & Björn Lantz, 2021. "Application of Portfolio Theory to Healthcare Capacity Management," IJERPH, MDPI, vol. 18(2), pages 1-9, January.
    5. Haden Chomphosy, William & Manning, Dale T. & Shwiff, Stephanie & Weiler, Stephan, 2023. "Optimal R&D investment in the management of invasive species," Ecological Economics, Elsevier, vol. 211(C).
    6. Kompas, Tom & Chu, Long & Ha, Pham Van & Spring, Daniel, 2019. "Budgeting and portfolio allocation for biosecurity measures," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 63(3), July.
    7. Kompas, Tom & Chu, Long & Nguyen, Hoa Thi Minh, 2016. "A practical optimal surveillance policy for invasive weeds: An application to Hawkweed in Australia," Ecological Economics, Elsevier, vol. 130(C), pages 156-165.
    8. Stoeckl, Natalie & Dodd, Aaron & Kompas, Tom, 2023. "The monetary value of 16 services protected by the Australian National Biosecurity System: Spatially explicit estimates and vulnerability to incursions," Ecosystem Services, Elsevier, vol. 60(C).
    9. Lewis, David J. & Polasky, Stephen, 2018. "An auction mechanism for the optimal provision of ecosystem services under climate change," Journal of Environmental Economics and Management, Elsevier, vol. 92(C), pages 20-34.
    10. Pérez Odeh, Rodrigo & Watts, David & Flores, Yarela, 2018. "Planning in a changing environment: Applications of portfolio optimisation to deal with risk in the electricity sector," Renewable and Sustainable Energy Reviews, Elsevier, vol. 82(P3), pages 3808-3823.

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