Application of portfolio theory to asset-based biosecurity decision analysis

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.