Looking back over history, successful counter-terrorism campaigns have ‘outthought’ rather than ‘out-fought’ the terrorists. As Dr. George Habash, co-founder of the Popular Front for the Liberation of Palestine, once remarked, “Terrorism is a thinking man’s game.” The global war on terrorism is waged not only by land, sea and air, but also across one of the most complex of terrains: the human brain. Given the overwhelming superiority of the military assets of nation states, the brain is the most potent weapon in the terrorist arsenal.
The thinking man’s handbook of terrorist strategy is Sun Tzu’s military masterpiece, ‘the Art of War’, which emphasizes the utility of a fundamental law of Nature: following the path of least resistance.
According to this principle, terrorists will choose softer targets, if the harder targets offer too little prospect of success: suicide alone does not make a militant a martyr. Civilians would be safe if terrorists strove for a tough macho image, and struck only at hard military targets, even if the chances of success were slim. Alas for insurers, the rules of asymmetric warfare are different.
In applying game theory to terrorism, it is important to leave behind popular notions of rationality, and to return to the formal mathematical definition of rational behavior, namely that actions are taken in accordance with a specific preference relation. There is no requirement that a terrorist’s preference relation should involve economic advantage or financial gain. Much of the purpose of terrorism is psychological: inspiring the global Jihad; whipping up malicious joy at seeing the U.S. suffering loss; and terrorising the general public. Nor is it necessary that a terrorist’s preference relation conform with those of society at large. Game theory is not restricted to any one cultural or religious perspective. For the devout, martyrdom is a rational choice: everyone has to die sooner or later, and bounteous eternal benefits are promised to the faithful who choose to die on the Path of God.
As time passes, the empirical terrorism database of successful, failed, aborted and foiled attacks becomes statistically ever more substantial and robust. Progressively, the underlying causes and manifestations of terrorism are being understood better, and the complex web of Islamist terrorist networks is being tracked more closely. Furthermore, the paramount importance of security in risk control is becoming ever more evident. But even if an insurer has been meticulous over property security, and is satisfied that it can quantify its portfolio terrorism risk with a reasonable degree of confidence, the risk of extreme loss from spectacular multi-target attacks, even if very slight, may still be deemed commercially unacceptable, unless there is some explicit external government safety net. The risk-reward curve may otherwise be unattractive, especially allowing for adverse selection. The continued vigor of the U.S. terrorism insurance market may thus depend on cautious risk-averse insurers having this external support. As in Robert Kagan’s metaphor of the camper in a forest with a prowling bear, sleeping at night is so much easier if someone else has already taken care of the most worrying risk.
http://www.rms.com/Publications/RiskAnalystPersectiveTRIA_WooForCongress.pdf
