The Economics of Terrorism

Peter J. Phillips

• Publisher: Routledge
• Year: 2016
• ISBN:
  9781317267324
• Edition: 1
• Topic: Economia
• Subtopic: Macroeconomia

Brutality is the defining characteristic of terrorism. It is despairing to learn that this brutality is the outcome of purposeful, rational, human behaviour. In this purposefulness, however, there lies the key to the interpretation, explanation and understanding of terrorist behaviour. Ultimately, it is in this purposefulness that we shall also find the key to overcoming terrorism. Economic analysis highlights this purposefulness, this rationality, and in doing so provides a different perspective from which to approach the threat of terrorism and the task of pre-empting and pursuing its perpetrators. This book develops this economic perspective within a series of important contexts, each characterised by particular types of terrorist behaviour, choices and strategies.

The Economics of Terrorism brings new insights on how to deal with such challenges as the terrorist group's choice of attack method and target location, terrorist financing and 'copycat' behaviour.

1 Contemporary terrorism and brutality

This is one of those periods, which occur from time to time and place to place, in which terrorism is in the news on a daily basis. Each one of these periods is different in some way from the last. The difference this time is the global nature of the terrorist threat, emanating generally from a single religious ideology – some would say a single terrorist group called Islamic State – and characterised by singular brutality. The number of people that were killed in terrorism-related violence as recently as 2014 is an impossibly grotesque number for a human race a good part of the way into the twenty-first century. This wanton violence for which there is no justification has mired whole peoples. It is horrifying in its scope and its nature, and it is by this scope and nature that it evades capture by the standard textbook models of terrorism and the standard analytical treatments contained therein.

In the textbooks they usually say that terrorism “… is the premeditated use or threat of use of extra normal violence or brutality by subnational groups to obtain a political, religious, or ideological objective through intimidation of a huge audience, usually not directly involved with the policy making that the terrorists seek to influence” (Enders and Sandler 2002, pp. 145–146).¹ Violence, intimidation and brutality are all given a place in this definition, but when we seek to use or apply this definition to terrorists or terrorist groups in order to start to understand them we find our attention drifting not so much towards the brutality and violence perpetrated by the group but towards its political, religious or ideological objective. This is because we naturally wonder what the terrorists want and whether it might be possible to mitigate further outbursts of violence by engaging them within a policy-making process. It is perplexing to find that these political, religious or ideological objectives are usually, in a word, outrageous. So much so that it might almost be concluded that there is no rational basis for terrorist action and no rational basis for analysing that action.

But if we shift our focus from the overarching objectives that terrorists give themselves and their groups and focus instead on the operational objectives for each terrorist action we find very capable and very rational behaviour on display. Where the political, religious and ideological objectives are rarely achievable,² the operational objectives are by comparison very achievable. As such, attempts to understand terrorism and terrorist demands from the perspective of outrageous political, religious or ideological objectives become increasingly dissatisfying. In attempting to approach the problem of what terrorists want, attention has shifted towards the realistic and achievable operational objectives of terrorism. These operational objectives might include, among other things, generating media coverage, gathering grassroots supporters and developing linkages with other terrorists or terrorist groups.³ Any of these might be primary or secondary with reference to each other under different circumstances. Brutality, however, has often failed to make the list of relevant operational objectives, and the possibility that terrorist-inflicted brutality is the result of rational or purposeful choice has certainly not been given enough consideration.

By now, there has been more than enough evidence to indicate that on an operational level, when a terrorist attack is planned or carried out, the infliction of injuries and fatalities is both an expected and an intended outcome. Brutality is clearly an operational objective of contemporary terrorism. Furthermore, it is clearly the result of the purposeful allocation by terrorists of resources towards the achievement of that operational objective. This places this behaviour firmly within the grasp of economic analysis. From this economic perspective we see terrorists purposefully allocating their scarce resources such as time, money, equipment and personnel towards the achievement of their operational objective. By concentrating on the broad political, religious or ideological statements that terrorists make, one might be tempted to conclude that terrorist behaviour cannot be rational. Meanwhile, terrorists have purposefully undertaken campaigns of brutality across the world. Once this is recognised and terrorists are treated as purposeful actors trying to achieve a realistic operational objective it becomes possible to apply not only expected utility theory – the orthodox paradigm of rational choice under risk – but also the behavioural models, especially prospect theory, that have been developed within economics as alternatives to the orthodox theory.

2

Expected utility theory is a mathematical theory of decision making under risk. Developed by the mathematician John von Neumann and the economist Oskar Morgenstern,⁴ its purpose is to explain how people will choose from among two or more risky prospects. According to the theory, the decision maker orders the alternative risky prospects by their expected utility and chooses the best-ranked alternative. Expected utility is a numerical quantity, like an index number, which is arrived at by an assessment of the outcomes that risky prospects might produce, the utility that the decision maker attaches to them and the chances with which they may be expected to occur. Being a mathematical theory, it is built upon a set of axioms which provide the rules or structure for risky decision making.⁵ Within this structure, orderings of risky prospects based upon expected utility index numbers reflect the actual underlying preferences of the decision maker. Although the theory is usually applied to risky prospects that involve a monetary payoff, the theory applies to risky prospects that produce any type of outcome.

Applied to terrorist choice, attack methods can be treated as risky prospects. A bombing, for example, is a risky prospect that is expected to inflict some number of injuries and fatalities. Just how many injuries and fatalities may actually be inflicted is not known for sure. The expected utility that the terrorist attaches to bombing emerges from his consideration of the possible outcomes, the utility that he attaches to them and the chances with which those outcomes might be expected to occur. Different risky prospects are ranked according to their expected utility. In pursuing an operational objective like brutality, the terrorist may face a choice from among several risky prospects – bombing, hijacking, assassination or hostage taking – each associated with a range of possible injuries and fatalities. Expected utility theory allows a preference ordering over these risky prospects to be determined. This can be used to provide insight into which of the alternative attack methods may be chosen by a terrorist whose operational objective is to inflict injuries and fatalities.

This approach has one key contribution to make to law enforcement and national security. It clearly equates terrorist brutality with purposeful or rational decision making. If brutality is an operational objective of terrorism, the possibility that this objective may be approached purposefully with the intent to inflict injuries and fatalities must be considered. Economic analysis is particularly well suited to dealing with this sort of problem. This approach also avoids overlooking possible choices or outcomes because of their optimality. If we rule out even looking at terrorist opportunities and choices from a perspective of rationality or optimality because we think that terrorists are too irrational to identify such opportunities and choose optimally, we would rule out even considering the set of opportunities and choices that may inflict the most harm or generate the most media coverage or attract the most supporters or raise the most terrorist financing. Approaching terrorist choice from an economic perspective prevents us from making this mistake.

3

The expected utility approach can be complemented by ‘behavioural’ approaches to the determination of preference orderings for risky prospects. The most prominent behavioural model of choice under risk is prospect theory. Prospect theory was developed by Kahneman and Tversky (1979 and 1992). The model is designed to incorporate a number of things that appear to characterise human decision making. First, prospect theory depicts people as weighing up the outcomes against a reference point rather than in terms of their absolute magnitude. A terrorist considering one type of attack may judge its average outcome of two fatalities as a ‘loss’ if his reference point is a recent terrorist attack in which four fatalities were inflicted. Second, losses or outcomes below the reference point are weighted more heavily and loom larger in the decision-making process than gains or outcomes above the reference point. This can lead the decision maker to take risks – to be risk seeking – to avoid outcomes below the reference point. This can have important implications for terrorist behaviour. For example, if a recent attack has inflicted a relatively high number of fatalities and the terrorist who is planning a subsequent attack has formed a high reference point on this foundation, that terrorist may now be inclined to take considerable risks in order to increase the likelihood that the outcome of his planned attack will exceed that of his reference point.⁶ The preference orderings that emerge from prospect theory are those that embed these types of decision-making characteristics. Such preference orderings might be somewhat similar to those that emerge from an application of expected utility theory, but to the extent that they differ, they offer additional insights into the terrorist’s choices.

4

In this book, I want to explore about a dozen economic concepts, including expected utility theory and prospect theory, and apply them to problems that are important in the context of contemporary global terrorism, especially the brutality that so starkly characterises it. By taking this approach, I hope to highlight the relevance and utility of these theoretical frameworks for investigative decision making, law enforcement and counter-terrorism. The models and frameworks can be used by law enforcement and security agencies during the investigative process. Indeed, the combination of law enforcement experience and formal economic theory is likely to be more fruitful in this regard than theory applied in isolation. What follows is an overview of the main problems that are explored in the book and the general approaches that I have taken in developing insights into these problems from an economic perspective.

Terrorism perpetrated by individuals

Governments have become increasingly concerned about lone-wolf terrorism. There are some measurement statistics that have been developed within economics that can be used to provide some additional insights into the nature of terrorism perpetrated by individuals. Focusing on terrorism perpetrated by individuals in North America, I first show how the Herfindahl-Hirschman index can be used to examine just how concentrated (or dispersed) the responsibility for inflicted injuries and fatalities has been across the past four decades. Next I use ‘entropy’ to measure how diversified terrorists’ attack methods and weapons choices have been. Because the central theme of this book is terrorist brutality, I have developed a ratio called the fatalities-to-variability ratio to measure the capability with which terrorists have been able to inflict fatalities through acts of terrorism. Because there is a generally positive relationship between the average number of inflicted fatalities and the variability of the number of inflicted fatalities from attack to attack, a terrorist can inflict a higher average amount of harm per attack simply by choosing attack methods with more volatile outcomes. This, of course, requires no superior planning or capability. Some terrorists, however, demonstrate an ability to inflict a higher average number of fatalities with less variability (more certainty) than other terrorists. The fatalities-to-variability ratio reflects and measures this capability in a way that naïve averages cannot. The measurement statistics provide another perspective on terrorism perpetrated by individuals in North America.

Terrorist group brutality and the emergence of Islamic State

The Islamic State (IS) terrorist group has attracted a great deal of attention. The brutality with which this group asserts itself has been a particular feature highlighted by popular commentators and terrorism experts. The fatalities-to-variability ratio identifies the relatively superior capability that IS has demonstrated in undertaking its campaign. In fact, IS has been able to record higher fatalities-to-variability ratios than most of its competitors, especially Al-Qaida in Iraq and, perhaps more importantly, the activities of extremists operating in Iraq and Syria yet not affiliated with established groups such as Al-Qaida had been characterised by relatively high fatalities-to-variability ratios for several years prior to the formal emergence of Islamic State. The pattern in the aggregate fatalities- to-variability ratios over time and list of groups who demonstrate superior fatalities- to-variability ratios provide additional insights into the cycles of brutality that have characterised terrorism in general and specific groups in particular. The fatalities-to-variability ratio is an effective early identifier of emerging terrorist groups demonstrating relatively superior capability and brutality. Since the ratio is calculated using readily accessible data and because it has a straightforward interpretation, it can be easily put to use by law enforcement and security agencies.

Financing terrorist brutality

‘Terrorist financing’ is a research program within terrorism studies that gained a lot of momentum in the wake of the 9/11 attacks. More than a decade later, much progress has been made in identifying the methods by which terrorist groups raise and transfer finance. An overarching theoretical framework is still in development. Economics may contribute to this development in a number of ways. I devote two chapters to outlining some of the ways in which such a contribution may be framed. Following on from the second chapter, which deals with terrorism perpetrated by individuals, I explore the ways in which finance may be transferred from an established terrorist group to individuals who are not members of the group but may be willing to carry out attacks on its behalf. Both game theory and the well-known ‘rotten kid’ theorem are relevant to explaining the nature of this type of strategy and the conditions under which a terrorist group leader can be guaranteed that an individual non-group member will keep his promise and undertake the action that the terrorist group leader desires. The conditions under which the individuals being financed will certainly choose the actions that maximise the aggregate payoffs to the whole group are extremely strict. Individuals will be inclined to ‘cheat’ by taking the offered finance and using it to fund actions which they most desire even though this may be to the detriment of the group. These sorts of problems represent points of weakness that might be exploited by law enforcement.⁷

In the second of the two chapters that I devote to terrorist financing, I attempt to build more explicitly on the existing attempts at formulating a theoretical framework that can be used to analyse terrorist fundraising and transfer. The individual methods by which a terrorist group may raise or transfer finance represent only a sub-set of the complete set of fundraising and transfer opportunities. Terrorist groups do not restrict themselves to a single fundraising method or a single method of transferring finance from one place to another. They use combinations or portfolios of methods. A theory of terrorist financing may be developed, therefore, on the basis of the portfolio theory first developed by Markowitz (1952).⁸ This orthodox approach to portfolio choice under conditions of risk and uncertainty may be complemented by more recent theoretical developments in behavioural economics. In particular, the behavioural portfolio theory of Shefrin and Statman (2000) provides a different perspective that builds on the idea that decision makers partition their choices into mental accounts. A terrorist group might, for instance, partition its fundraising activities with particular goals in mind. One set of fundraising activities may be associated with raising finance for the terrorist group’s mundane operations. Another set of fundraising activities may be associated with raising finance for a planned ‘spectacular’ attack. In one mental account, the group may err on the side of caution. In the other, much more risk may be taken in order to reach the required financing threshold. The capability of orthodox portfolio theory and its behavioural counterpart to serve as building blocks for a theory of terrorist financing is assessed. The two approaches, as it happens, are far from mutually exclusive.

Attack methods: how the terrorist chooses

As we have glimpsed already, terrorist groups m...

Table of contents

• Cover
• Title
• Copyright
• Dedication
• Contents
• List of figures
• List of tables
• Preface
•  1 Contemporary terrorism and brutality
•  2 Terrorism perpetrated by individuals
•  3 Terrorist group brutality and the emergence of the Islamic State
•  4 Financing brutality: the ‘rotten kid’ theorem
•  5 Terrorist financing: portfolios of fundraising and transfer methods
•  6 Attack methods: how the terrorist chooses
•  7 Imitating the brutality of others
•  8 The path towards terrorism: prudence and time delay
•  9 Where will the terrorist attack?
• 10 Prospect theory and geographic profiling
• 11 Terrorism perpetrated by females
• 12 Brutality and survival
• 13 Terrorism defines the terrorist, brutality defines terrorism
• Index