Using Game Theory in Managing the Risks of Terrorism

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<ul><li><p>This article was downloaded by: [Colorado College]On: 27 October 2014, At: 16:43Publisher: RoutledgeInforma Ltd Registered in England and Wales Registered Number: 1072954Registered office: Mortimer House, 37-41 Mortimer Street, London W1T 3JH,UK</p><p>Journal of Security EducationPublication details, including instructions forauthors and subscription information:</p><p>Using Game Theory in Managingthe Risks of TerrorismBrian Seymour BA a ba Boston University , USAb John Jay College of Criminal Justice, MastersProgram in Protection Management , USAPublished online: 20 Oct 2008.</p><p>To cite this article: Brian Seymour BA (2004) Using Game Theory in Managingthe Risks of Terrorism, Journal of Security Education, 1:1, 95-105, DOI: 10.1300/J460v01n01_09</p><p>To link to this article:</p><p>PLEASE SCROLL DOWN FOR ARTICLE</p><p>Taylor &amp; Francis makes every effort to ensure the accuracy of all theinformation (the Content) contained in the publications on our platform.However, Taylor &amp; Francis, our agents, and our licensors make norepresentations or warranties whatsoever as to the accuracy, completeness,or suitability for any purpose of the Content. Any opinions and viewsexpressed in this publication are the opinions and views of the authors, andare not the views of or endorsed by Taylor &amp; Francis. The accuracy of theContent should not be relied upon and should be independently verified withprimary sources of information. Taylor and Francis shall not be liable for anylosses, actions, claims, proceedings, demands, costs, expenses, damages,and other liabilities whatsoever or howsoever caused arising directly orindirectly in connection with, in relation to or arising out of the use of theContent.</p><p>This article may be used for research, teaching, and private study purposes.Any substantial or systematic reproduction, redistribution, reselling, loan,</p><p></p></li><li><p>sub-licensing, systematic supply, or distribution in any form to anyone isexpressly forbidden. Terms &amp; Conditions of access and use can be found at</p><p>Dow</p><p>nloa</p><p>ded </p><p>by [</p><p>Col</p><p>orad</p><p>o C</p><p>olle</p><p>ge] </p><p>at 1</p><p>6:43</p><p> 27 </p><p>Oct</p><p>ober</p><p> 201</p><p>4 </p><p></p></li><li><p>STUDENT PAPERS</p><p>Using Game Theoryin Managing the Risks of Terrorism</p><p>Brian Seymour, BA</p><p>ABSTRACT. The purpose of this paper is to explore how innovativeideas based on game theory can be useful to security professionals andgovernments in managing the risks posed by a terrorist attack. [Articlecopies available for a fee from The Haworth Document Delivery Service: 1-800-HAWORTH. E-mail address: Website: 2005 by The Haworth Press, Inc. All rights reserved.]</p><p>KEYWORDS. Game theory, probability, Nash Equilibrium, terrorism,minimax criterion, substitution strategies</p><p>PROBABILITY AND SECURITY MANAGEMENT</p><p>One day in a class called Contemporary Issues in Security Manage-ment, the professor proposed a situation and asked a question. Studentswere told to imagine they were the Chief Security Officer of a large cor-</p><p>Brian Seymour, BA (Psychology, at Boston University), is a Graduate Student atthe John Jay College of Criminal Justice, Masters Program in Protection Management.</p><p>Journal of Security Education, Vol. 1(1) 2005</p><p> 2005 by The Haworth Press, Inc. All rights reserved.Digital Object Identifier: 10.1300/J460v01n01_09 95</p><p>Dow</p><p>nloa</p><p>ded </p><p>by [</p><p>Col</p><p>orad</p><p>o C</p><p>olle</p><p>ge] </p><p>at 1</p><p>6:43</p><p> 27 </p><p>Oct</p><p>ober</p><p> 201</p><p>4 </p><p>http://</p></li><li><p>poration and the Chief Executive Officer asked for an immediate an-swer to the questions of whether it was prudent to purchase terrorisminsurance. Everyone in the class that raised their hand said it was neces-sary. However, I disagreed. Terrorism insurance is very expensive andeven though the result of a terrorist attack is usually severe, the proba-bility of it happening is so low it does not warrant the expense. Re-sources could be better spent on managing other risks that are morelikely to occur.</p><p>Probability is a very important issue for a security professional. Fi-nite resources must be allocated to manage risks that have the great-est potential to harm as well as having a high probability ofoccurring. A security manager interacts with human resource depart-ments, upper management and financial officers in day-to-day opera-tions. These managers can have a tremendous input in how defensiveresources are allocated. However, a security manager must keep inmind that people in general are not good at judging risks especially onesassociated with dangers. In 2002, two men, Vernon Smith and DanielKahneman, won the Noble Prize in economics based on their workshowing how people are not wise at assessing probability.</p><p>Recently some people in the security and risk management fieldshave advocated using principles based on game theory to try and modelor predict the probability of a terrorist attack. These innovative ideascould be useful to a security manager defending targets against a possi-ble terrorist attack.</p><p>JOHN NASHS GAME THEORY</p><p>At age 21, John Nash wrote a 27-page dissertation later called theNash Equilibrium. His work was an extension of game theory that wasdeveloped by John von Neumann and Oskar Morgenstern in 1944.Game theory strives to predict human behavior in non-cooperativecompetitive interactions. It uses mathematical propositions to predictthe outcome when players have conflicting interest.</p><p>Game theory can provide a useful framework for analyzing bargain-ing, bidding and negotiation. Modern game theory has been adopted infinancial markets, environmental studies, public policy-making, con-flict resolution, and peace negotiations. Nashs theory has had an effecton fields of study that are centered around competitive behavior, includ-ing economics, political science, military science, missile defense, labormanagement negotiations, consumer price wars, currency speculations,</p><p>96 JOURNAL OF SECURITY EDUCATION</p><p>Dow</p><p>nloa</p><p>ded </p><p>by [</p><p>Col</p><p>orad</p><p>o C</p><p>olle</p><p>ge] </p><p>at 1</p><p>6:43</p><p> 27 </p><p>Oct</p><p>ober</p><p> 201</p><p>4 </p></li><li><p>sports, and auctions. Some companies in the insurance industry are us-ing game theory to analyze the risk of future terrorist attacks by model-ing possible responses of terrorist groups to increased security andcounter-intelligence efforts.</p><p>ADVANCED TECHNIQUESFOR MODELING TERRORISM RISK</p><p>What does game theory have to do with contemporary issues in secu-rity management? Imagine a security manager protecting multiple siteswith different strategic and monetary values. This manager could be thehead of security for a multi-national corporation that has manufacturingand distribution plants all over the world or a security manager oversee-ing several sites in New York City. The security manager has three as-sumptions about defending the multiple targets against the threat of apossible terrorist attack. First, all the targets have some risk of being at-tacked and need to be defended. Second, the more valuable a target is, themore likely it is to be attacked. Third, the risk of a successful attack in-creases the more valuable a target is. According John A. Major, author ofAdvanced Techniques for Modeling Terrorism Risk, these assump-tions are wrong. Major is a senior vice president for Guy Carpenter &amp;Company, Inc., an insurance brokerage firm. His paper elaborates on aspeech he gave at the National Bureau of Economic Research InsuranceGroup in February, 2002. The paper draws on several theories, includ-ing game theory, in an attempt to model the risk posed by terrorists. Thepaper contains formulas that he uses to draw conclusions. The follow-ing is a summary of some of Majors points.</p><p>The events of September 11th showed how a terrorist attack can nowbe classified as a catastrophic loss event. The monetary damages of over$40 billion and the death toll of more than 3,000 are more severe thanthe damage of some of the countrys worst natural disasters. (HurricaneAndrew$20 billion, 40-60 people killed. The Northridge earthquake$12.5 billion, approximately 25 people killed.) Modeling terrorism riskhas similarities with other forms of catastrophic risk; however, key dif-ferences make modeling terrorism more difficult. According to Major:</p><p>Terrorism risk shares features with other forms of catastrophicrisk, including a time series of historical events, yet goes beyondthem with an extra layer of impenetrability. Defensive studies ofterrorism risk resemble analysis of complex engineering systems</p><p>Student Papers 97</p><p>Dow</p><p>nloa</p><p>ded </p><p>by [</p><p>Col</p><p>orad</p><p>o C</p><p>olle</p><p>ge] </p><p>at 1</p><p>6:43</p><p> 27 </p><p>Oct</p><p>ober</p><p> 201</p><p>4 </p></li><li><p>(nuclear power plants, satellite launches, etc.). A particular sce-nario can be analyzed in terms of the probability of failure of criti-cal subsystems. However, unlike natural disasters, it featureshuman intelligence and unlike industrial disasters, it features hu-man intent.</p><p>Before September 11th, insurers did not consider the human elementin catastrophic risk modeling. In a statement on his paper Major said:Storms will not change course after you build a seawall to protect resi-dents on the coast. But terrorists will change strategies, techniques andtargets given the defenses put in place by a country. In order to have amodeling structure that is of any use to the insurance or security indus-try, simple probability is not sufficient.</p><p>Two theories that Major proposes could be useful to a security man-ager. First, the probability of a successful attack decreases with an in-crease in applied defensive resources. Therefore, the security managershould use all defense resources. No benefit accrues in holding back be-cause according to Major, [a] quantity of unused resources could beapplied to reduce the success probability and hence the expected loss ofat least one target. According to this idea, a security manager shouldnot save any defensive resources for the proverbial rainy day.</p><p>The second point of use is a defensive strategy that is a result of theminimax criterion. This criterion refers to the assumption in his for-mulas that the attacker wants to maximize the total expected loss and thedefender wants to minimize it. Assuming the defender does not knowwhich targets will be chosen by the attacker, the defensive strategyshould be to minimize the expected loss of the worst case scenario re-gardless of which site is selected for attack. To do this, resources shouldbe shifted from lower expected loss targets to higher expected loss tar-gets. Less valuable targets can be left undefended because, even if an at-tack is 100% successful, the loss would be less than the loss from a morevaluable target being hit.</p><p>A security manager should use all resources to defend the targets thathave the greatest possibility of producing a large loss. Spreading thewealth or covering all your bases is not desirable. In his paper Majorquotes C. J. Hitch [in Quade] who states that some of the conclusions oftheory concerning defending targets are counterintuitive:</p><p>Suppose you have your defenses deployed as well as you can.Now you get more defenses. How do you deploy them? Well, myintuition told me (and so did most peoples) that you deploy them</p><p>98 JOURNAL OF SECURITY EDUCATION</p><p>Dow</p><p>nloa</p><p>ded </p><p>by [</p><p>Col</p><p>orad</p><p>o C</p><p>olle</p><p>ge] </p><p>at 1</p><p>6:43</p><p> 27 </p><p>Oct</p><p>ober</p><p> 201</p><p>4 </p></li><li><p>mainly to protect additional targets . . . that you did not previouslyhave enough stuff to defend. Game theory says no. You use addi-tional defenses mainly to increase the defense of targets alreadydefended. In fact, over a wide range, the more you have the moreyou concentrate it. (Major, 2002)</p><p>These innovative ideas may contradict established beliefs such asyour defense is only as strong as your weakest link. Terrorists want tokill and destroy but also want to instill fear in those not directly affectedby the attack. According to Major, not all targets will be at risk. Terror-ists will look at some sites and determine that there is no value in attack-ing. These targets do not need any defense. In direct contradiction to thethree afore mentioned assumptions Major states:</p><p>The probability of an attack being successful also goes down withthe higher value of the target, not up . . . so the more valuable tar-gets are actually safer given that the defenses in place are ade-quate and both the would-be terrorists and the defenders give thesame measure of importance to the target. If the defenses arentarranged correctly, then the attacker will look for chinks in the ar-mor. That might be a better description of where we are today.(Best Wire, 2002)</p><p>HOMELAND DEFENSE RESOURCE ALLOCATION</p><p>If security analysts find Majors line of thinking reasonable, theywould be disappointed to see how the Department of Homeland Secu-rity and Congress are allocating resources for national protection. Todate, more than 3 billion dollars have been distributed. New York hasreceived the most with about $321 million and California comes in sec-ond with $304 million. This would seem to fit the game theory notionthat resources should go to targets highly valued by terrorists. However,the Associated Press (2003) analyzed allocations based on populationand determined that 12 states received more money than New York on aper capita basis. Wyoming received $17.7 million, which works out tonearly $36 per person. New York by comparison received $17 per per-son and California $9. According to Arnold of the Associated Press,Washington, D.C., has received $73.10 per person, more than anystate. But even the nations capital is not the per capita champion.American Samoa, a U.S. territory 2,300 miles south of Hawaii, received</p><p>Student Papers 99</p><p>Dow</p><p>nloa</p><p>ded </p><p>by [</p><p>Col</p><p>orad</p><p>o C</p><p>olle</p><p>ge] </p><p>at 1</p><p>6:43</p><p> 27 </p><p>Oct</p><p>ober</p><p> 201</p><p>4 </p></li><li><p>$5.4 million in homeland security funds, or $94.40 for each of its57,291 residents. According to Carolyn Maloney, Democratic Repre-sentative from New York, 70 percent of homeland security grants havebeen distributed under a formula that is entirely unrelated to where theterror threat is. The number could rise to 83 percent next year under leg-islation being considered in Congress. Our effort to protect the mostlikely targets of terrorism is moving backward (Arnold, 2003).</p><p>The current formula for distribution contradicts the suggestions pro-posed by Major that resources should be concentrated on high-risk tar-gets at the expense of spending resources on targets that have a lowexpected loss amount in the event of a successful attack.</p><p>COMMERCIAL APPLICATIONS</p><p>John A. Major is not alone in his use of game theory to model terror-ism risk. In 2002, Risk Management Solutions (RMS) introduced mod-els based on John Nashs theory. RMSs Understanding and ManagingTerrorism Risk is designed to assist property owners, insurers and re-insures, and other industries in quantifying the risk from catastrophicterrorist attacks. It was developed with the...</p></li></ul>


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