a market approach to terrorism

From: Wei Dai (weidai@weidai.com)
Date: Thu May 08 2003 - 18:07:55 MDT

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    Suppose you are a benevolent dictator and you just obtained intelligence
    that suggest a particular person may be planning a suicide attack. You
    believe that the intelligence is correct with probability p, and if so
    there is a probability q that the attack will succeed and kill an expected
    N people. So the expected number of dead people if you do nothing is

    How high do p, q, and N have to be before you decide to arrest the
    person? Assuming you are a utilitarian, the answer is probably something
    like "if pqN > C", where C is the cost of arresting an innocent person
    divided by the cost of a death.

    Unfortunately, most governments are not benevolent dictatorships, so this
    answer doesn't work for them. The main problem is that if N is very large,
    the rule says to arrest the suspected terrorist even if p is small, which
    makes the system easy to abuse. Those in power can falsely accuse their
    enemies of terrorism knowing that it's virtually impossible for a
    defendant to establish with certainty that he is innocent.

    The rule that ends up being applied in practice is "if p > r" where r is
    some constant on the order of 1, which is obviously highly suboptimal,
    especially in cases where N is large.

    Here's where Robin Hanson's futarchy idea (see his post earlier today)
    comes in. Establish betting markets, three for each person, on whether
    that person will attempt an attack, whether he will succeed, and how many
    casualties the attack will cause. Then apply a rule based on the asset
    prices in these markets. Assuming that these markets cannot be easily
    manipulated, this should be a much more efficient way to deal with

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