Using Game Theory in Managing the Risks of Terrorism

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  • 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

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    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.

    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

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  • STUDENT PAPERS

    Using Game Theoryin Managing the Risks of Terrorism

    Brian Seymour, BA

    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.]

    KEYWORDS. Game theory, probability, Nash Equilibrium, terrorism,minimax criterion, substitution strategies

    PROBABILITY AND SECURITY MANAGEMENT

    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-

    Brian Seymour, BA (Psychology, at Boston University), is a Graduate Student atthe John Jay College of Criminal Justice, Masters Program in Protection Management.

    Journal of Security Education, Vol. 1(1) 2005http://www.haworthpress.com/web/JSE

    2005 by The Haworth Press, Inc. All rights reserved.Digital Object Identifier: 10.1300/J460v01n01_09 95

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  • 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.

    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.

    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.

    JOHN NASHS GAME THEORY

    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.

    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,

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  • 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.

    ADVANCED TECHNIQUESFOR MODELING TERRORISM RISK

    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 &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.

    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:

    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

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  • (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.

    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.

    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.

    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.

    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:

    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

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  • 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)

    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:

    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)

    HOMELAND DEFENSE RESOURCE ALLOCATION

    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

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  • $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).

    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.

    COMMERCIAL APPLICATIONS

    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 help of experts in terrorism,weapons systems and security from the United States and other coun-tries. Dr. Gordon Woo, a mathematician who was the architect of theRSM model, suggests that the probability of an attack and targets cho-sen by terrorists can be modeled by understanding the operational be-havioral characteristics of terrorist organizations. According to Woo,al-Qaeda operates in a similar way to the flow of water, which seeksthe path of least resistance, the flow of al-Qaeda activity is towardsweapons and targets that present the lowest technical, logistical, and se-curity barriers to mission success (Newswire, 2002). However, ac-cording to Dr. Rohan Gunaratna, a key adviser to Dr. Woo, One cansafely predict that al-Qaeda will continue to stage spectacular land, sea,and air attacks in the future, especially against symbolic or high-profiletargets (Newswire 2002). The enemy seems to have two strategies thatcontradict. According to Dr. Woo:

    Game theory helps us model the implications of the complex dy-namics between these conflicting factors. On one hand, we haveal-Qaedas desire to maximize the utility of their attacks, and onthe other hand, we have to consider their rational response tostepped-up security and counter-intelligence efforts, and the con-

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  • straints of their technological and logistical capacities. A tradi-tional probabilistic approach, such as used for modeling naturalcatastrophes, is simply not up to the challenge.

    According to Hemant Shah, president and CEO of RMS, clients are ad-vised to use this model as part of a comprehensive risk management strat-egy. First and foremost, we recommend that our clients build their riskmanagement infrastructure on a foundation of data, data, and more data. In-surers should track their exposures, across all lines of business, location-by-location, and understand and mitigate undue concentration of risk.

    Shahs point on the importance of data cannot be stressed enough. Inhis paper Major quotes Dr. Woo who is the chief architect for the RSMmodel. According to Woo, Any probabilistic framework for quantify-ing terrorism risk, however logically designed, will ultimately have toinvolve a measure of expert judgment (Major, 2002).

    A security manager who faces the threat of terrorism should be aware ofthe importance of collecting intelligence in the form of data on their sites.They should take advantage of expert judgment, especially in the area ofinnovative probability of modeling terrorism risk. If something can bemodeled, it can be measured. If it can be measured, it may be controlled.

    SUBSTITUTION STRATEGIES AND COOPERATION

    Using game theory to deal with the threat of terrorism is not only use-ful for the insurance industry but also for governments. Todd Sandler,professor of international relations at the University of Southern Cali-fornia, has been using game theory in the study of transnational terror-ism for more than 20 years. According to Sandler, terrorists have anadvantage over governments because, Terrorists take a long-term viewof their struggle and see interaction with other groups as continual,while most governments take a short-term view of the terrorist threatand do not necessarily see cooperation with other governments as con-tinual (Marano, 2003).

    According to Sandler, terrorists choose targets carefully, yet theymake it seem as if it is random. This is done to raise fear and cause ter-ror. As governments strengthen some targets, terrorists look for easier,softer targets. Sandler states:

    An important terrorist gambit, as analyzed by game theory, is find-ing substitution strategies. For example, when metal detectorswere placed in most airports, skyjackings declined but hostage

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  • taking in unprotected facilities increased. The fortification of U.S.embassies and missions reduced attacks against the structures, butmore diplomats and military personnel were assassinated outsidethe protected compounds. (Marano, 2003)

    A substitution strategy is an important concept for a security man-ager. If the front door is secure and this is known to the attackers theywill probably look for a softer target. The defender should try to antici-pate in a proactive fashion where the next move will be. Then resourcescan be applied accordingly.

    Cooperation is an important part of fighting terrorists. Terrorists co-operate because they face a stronger opponent and they see the struggleas continuing forever. According to Sandler, International cooperationis required in terms of deterrence, pre-emption, intelligence, and pun-ishment of terrorists. As long as governments place more weight ontheir autonomy than on the threat, terrorists will continue to probe theseams of sovereignty (Marano, 2003).

    Cooperation is also very important for private companies as well as thefederal government. Security managers should take advantage of organiza-tions such as the Oversees Security Advisory Committee (OSAC), theInternational Security Managers Association (ISMA), and ASIS Inter-national to build a network of cooperating interests. That can be usefulin the process of benchmarking by which leaders in different industriescompare and contrast policy, programs, and procedures. Benchmarkingis extremely important when companies are treading new ground suchas the fight against terrorism. Security managers must realize that evenrival companies can work together for a common good because theyshare the same risks and dangers.

    LIMITATIONS OF GAME THEORY

    There has been an ongoing debate on whether game theory and theNash Equilibrium have any usefulness that started before John Nashwon the Nobel Prize. Robert Matthews highlights this in his reference toSylvia Nasars biography of John Nash called A Beautiful Mind:

    As Nasar reveals in her book, the real worth of Nashs work was stillbeing disputed by the members of the Nobel Committee just hoursbefore the vote on whether Nash and two other game theorists shouldwin the 1994 Nobel Prize for Economics. According to Nasar, one

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  • committee member dared to ask if there was one shred of empiricalbacking for Nashs work. A bitter row ensued, followed by the bal-lot, in which Nash and the other game theorists allegedly just scrapedenough votes to take the prize. (Matthews, 2002)

    The debate continues to this day on whether game theory can be use-ful to predict real world situations. According to London (2002) thereare those that think game theory has little use in determining the proba-bility of real world events:

    The academic literature is strangely silent on this point, says ScottArmstrong, marketing professor at Wharton Business School at theUniversity of Pennsylvania. After conducting an exhaustive reviewof the literature, however, Professor Armstrong concluded that hewas unable to find any evidence to directly support the belief thatgame theory would aid predictive ability.

    Proponents of game theory disagree with the idea that game theory isnot useful in predicting real world outcomes. Robert Wilson, a profes-sor of economics at Stanford Business School believes that game theorypoints to a number of possible outcomes: Game theory does not offerany specific answers to any specific situation. It says something likethese are the things to take into account (London, 2002).

    Ideas in game theory can be helpful in analyzing a situation involvinga terrorist attack; however, they should not be seen as a definitive blue-print for how a security manager should act. Saul I. Gass, professoremeritus at the University of Marylands Robert H. Smith School ofBusiness explains, [for] many circumstances game theory does not re-ally solve the problem at hand. Instead it helps to illuminate the tasks byoffering a different way of interpreting the competitive interactions andpossible results (Gass, 2003).

    CONCLUSION

    Game theory does not offer definitive outcomes to competitive situa-tion involving terrorists and security managers. However, it is one ofmany tools that can be useful for a security manager when making deci-sions regarding defenses against terrorist attacks. Despite the lack ofempirical support game theory can be useful to a security manager be-cause it can help focus attention on the idea that terrorists will change

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  • strategies in response to improved security. Effective security needs toanticipate all possible scenarios and adapt to changing strategies.

    Insights into the fight against terrorism can come from many differentdisciplines and a security manager must keep an open mind. In the fightagainst terrorism, simple probability is not sufficient to model a cata-strophic risk that has malicious human intent. Security managers shouldseek out expert advice and cooperate with the government and other orga-nizations, even rivals, to protect against ever changing terrorist threats.

    REFERENCES

    Altman, D., (October 10, 2002). Nobel that bridges economics and psychology, NewYork Times, Business, page 1.

    Arnold, L. (June 28, 2003). Washington State among winners in race for federal secu-rity funds, The Associated Press State and Local Wire, Section: State and Regional.

    Black, B. (April 1, 2002). Applying John Nashs game theory to make terrorism insur-ance coverage more available to American business, Marketplace Morning Report,Copyright 2002 Minnesota Public Radio.

    Dubner, S. J. (August 3, 2003). The probability that a real-estate agent is cheating you,The New York Time Magazine, pg. 23-27.

    Ferguson, B. (February 24, 2002). Playing games with a beautiful mind, The Daily SunSection: Commentary (Copyright 2002 Knight Ridder/Tribune News Service).

    Gass, S.I. (December, 2003). Ask the Experts, Scientific America Pg. 124 (Edited byMatt Collins).

    Gately, E. (March 24, 2002). Movie Subject Advanced Game Theory, Economic Prin-ciples. East Valley Tribune (Mesa, Arizona) (Copyright 2002 Knight Ridder/Tri-bune Business News).

    Hilsenrath, J. E., (October 10, 2002). Nobel winners for economics are new breed, WallStreet Journal, page 1.

    If life is but a game, why not play by the rules? (January 11, 2002). Financial Times In-formation, Global News Wire, Katsuri & Sons Ltd.

    London, S. (March 26, 2002). Games or serious business? Financial Times (London,England) Section: Inside Track; Pg. 16.

    Major, J.A. (February, 2002). Advanced Techniques for Modeling Terrorism Risk,Guy Carpenter & Company, Inc. From Web Site www.guycarp.com, accessed onNovember 24, 2003.

    References in Majors Paper Quade, E. S. (1966). Analysis for military Decisions, Chicago: Rand-McNally. Woo, G. (2002). Quantifying insurance terrorism risk, Risk Management So-

    lutions, Inc. To appear in Alternative Risk Strategies, M. Lane, ed., Risk Publica-tions Ltd.

    Marano, L. (May 8, 2003). Expert: Nations must join against terror. United Press Inter-national.

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  • Matthews, R. (February 24, 2002). Its not how you play the game; its whether you ap-ply Nashs theory. Sunday Telegraph (London) Pg. 33.

    New Guy Carpenter report addresses challenges of modeling terrorism risk; Study usesgame theory to analyze terrorism risk for insurance industry. (March 25, 2002).Business Wire, Inc.

    Report: In principle, terror risk can be modeled, measures. (March, 2002). A.M. BestCompany, Inc., Best Wire.

    RMS launches game theory-based terrorism risk model; model introduced at seminaron terrorism risk attended by 250 RMS Insurance and reinsurance clients. (Septem-ber 18, 2002). PR Newswire association, Inc., Financial News.

    What is game theory? (April 21, 2003). The Economic Times of India, Coleman & CoLtd (Global News Wire).

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