Terrorists' Equilibrium Choices When No Attack Method is Riskless

Abstract:     

Von Neumann Morgenstern (NM) expected utility forms a part of the foundations of theoretical defence economics and the economic analysis of terrorism. NM expected utility maximisation can be used to derive important results with implications for government defence policies. However, the amount of light that it can shed on the selection of optimal decisions from a choice set when the choice set consists, for example, of possible combinations of attack methods (and the decision maker is a terroristic group) is limited. This paper builds on Phillips (2009) and enhances the NM expected utility analysis of terroristic behaviour by drawing on the fact that expected utility maximising behaviour in a setting where a terroristic group makes optimal decisions from a choice set containing combinations of attack methods can be analysed in terms of two moments (mean and variance) of the random payoffs associated with each attack method combination. The particular contribution of the analysis presented in this paper is the construction of an equilibrium relationship between the expected payoffs of attack method combinations and the risk associated with those payoffs. In essence, this is an equilibrium model of choice under uncertainty when the behaviour of interest is the selection by a terroristic group of an optimal decision from a choice set containing attack method combinations.

Keywords: expected utility, terrorism, mean-variance, equilibrium

JEL Classification: H56, G11