Cost Benefit Analysis of Terrorism

I am a big supporter of cost benefit analysis. For those that shy away from any sort of economics or math a few examples are best:

1. You can go to a fine dining resturant and get a burger for $20. You could go to a chain resturant and get a similar burger for $10. Cost benefit would suggest you should go for the $10 burger becuase you save half your money but only sacrifice a bit of quality.

As you can see cost benefit can be very useful when applied to certain situations. For example, I can do no work and get a good grade or I can do 4x as much work and get only a slightly better grade. I will take the less work. Cost benefit analysis can help people make certain decisions.

However, the main problem of cost benefit analysis is that you need to fix a price to something. In applying the rational to anti-terrorism measures we must attach a certain value to a human life. This task is inherently difficult. For example: Say that I could spend $1 million and reduce the risk of a given terroism attack that would kill 20 people by 10%. Is the measure worth it? Mind you, we don't know who those 20 people are. I for one do not want to be one of the 20 so I will approve the spending. However, I also point out that the risk is not completely eliminated only reduced. Let's say another million would reduce the risk another 5%. Would I do it? Most likely.

As the previous paragraph points out this is essentially the mathamatics of fear. We can all agree that terroism is a random event much like being hit by a bus or struck by lightning. However, we can spend money to reduce the risks. How much money? The how much is the question becuase it is impossible to attach value to life. There is even an argument we should spend nothing becuase such spending does not even eliminate the risk.

Although this piece offers no answers, I merely suggest that anti-terrorism measures take an economic toll as well. It is common for government to use cost benefit analysis to decide how much money to spend on certain projects. However, in deciding whether to fund increased anti-terror measures the theory doesn't work as well. The mathamatics of fear is a tough varible. At which point do anti-terror measures produce diminishing returns measured in restricted freedoms, loss of revenue, and lack of spending on other projects? The question is simple, but with hefty implications: How much would you spend to save a life?

Using Game Theory to Define the Housing Crisis

I was reading an interesting article the other day (hat-tip Congolmerate) on the housing crisis and the best time for investor who can't pay their mortgage to sell. This got me to thinking about game theory a bit.

Here are the basics: Remember when you used to play Monopoly as a kid and someone wanted to trade you a couple properties for your "Boardwalk". Now the boardwalk would give the other guy a monopoly, but the trade would also enhance your position by giving you a monopoly on a "weaker" set of properties. The debate was always whether you should do the trade and bank on the fact that you could get your hotels up and running before the other guy. I also should point out that by not doing a trade you could essential eliminate yourself becuase a 3rd player already had a monopoly and you did not. If you refused the deal you essentially allowed the other guy to win. What a dilemma. How much can you get for the guy you wants "Boardwalk?" Maybe you can get more. However, how long can you afford to hold out before you are gobbled up by the 3rd player?

I posit that many of the same decisions go into make a decision on whether to buy or sell a house. You are in the same position. You have a high mortgage and presumably can't afford the payments. You might be in a better position if you sold the house and "downgraded." However, much like the monopoly analogy, you think of whether you can get a better deal. Maybe by holding out a bit longer you might be get a "better" property. However, if you hold on too long you will be "gobbled up" by the third player (read Bank - who with foreclose). It appears from my observations that many people are stuck in this situation. Do you hold out in an an attempt to gain more, or do you make the "trade" an potentially improve you position, but lose out on the possibility of more short term gain.

Unfortunately, I do not know enough about mathamatics to justify what the best decision would be. I just remember my monopoly strategy. Becuase a trade would put me in the best position, I would usually do it. Considering the other players in the game (in the real world investors), generally seek to hold out for more, the "trade" might seem to be the more viable option. Although the thought of losing the current "property" is tough, it allows the owner to cut their loses and move into a new place that better suits their means. In Monopoly terms, the trade at least gives you a shot at the win.

- ps. If any math majors/professors read this please feel free to add on. Like I said, I'm no math major.

Legal Impacts of Endangered Polar Bears

In case you have not been following the news, on May 14 the Bush administration listed the Polar bear as a "threatened species" "becuase of" global warming. It is unclear what this listing means for the future of polar bears, but I want to explore the legal ramifications of such a listing.

The language that troubles me in the listing, is the "becuase of" part. I note that the admistration went further than listing the polar bear as simply an endangered species. By giving the reason for the decline of the polar bear, the administration has opened up a whole "legal can of worms."

The reasoning is simple. By declaring the source of the threat to the polar bear, the ESA can challenge companies producing greenhouse gases in an effort to thwart the spread of the global warming. Additionally, it would not suprise me if certain environmental groups such as Greenpeace or Friends of the Earth switched tactics and brought lawsuits based on the Endangered Species Act. Prior to declaring the polar bear endangered, such groups had already been bringing litigation against companies for production of greenhouse gases. Declaring the polar bear endangered "becuase of global warming" opens a whole to new tract of litigation that I believe will develop in the near future.

In a prior article currently availible on SSRN and pending publication, I explored the ramifications of global warming lawsuits on corporations and their insurance carriers. I look forward to seeing how this new declaration will impact global warming lawsuits. I suspect there will be an significant increase. However, I wonder if any plaintiff can win on something as nebulous as a global warming lawsuit. Presumably, plaintiffs would have to show that greenhouse gases directly and proximately caused damage to polar bears. Given the science, I doubt sucess is likely, but greenhouse gas emitters should be aware of yet a new wave of lawsuits on the horizon.

I would like to further explore the success of lawsuits asking the courts to slow greenhouse gas emissions in an effort to save an endangered species. However, this is a topic for another article, but I am interested in seeing what readers think.