Applying modern portfolio theory to the analysis of terrorism: computing the set of attack method combinations from which the rational terrorist group will choose in order to maximise injuries and fatalities

Article

Phillips, Peter J.. 2009. "Applying modern portfolio theory to the analysis of terrorism: computing the set of attack method combinations from which the rational terrorist group will choose in order to maximise injuries and fatalities." Defence and Peace Economics. 20 (3), pp. 193-213. https://doi.org/10.1080/10242690801923124
Article Title

Applying modern portfolio theory to the analysis of terrorism: computing the set of attack method combinations from which the rational terrorist group will choose in order to maximise injuries and fatalities

ERA Journal ID30484
Article CategoryArticle
Authors
AuthorPhillips, Peter J.
Journal TitleDefence and Peace Economics
Journal Citation20 (3), pp. 193-213
Number of Pages21
Year2009
Place of PublicationAbingdon, Oxon. United Kingdom
ISSN1024-2694
1476-8267
Digital Object Identifier (DOI)https://doi.org/10.1080/10242690801923124
Web Address (URL)http://www.informaworld.com/smpp/title~content=t713640174
Abstract

In this paper, terrorism is analysed using the tools of modern portfolio theory. This approach permits the analysis of the returns that a terrorist group can expect from their activities as well as the risk they face. The analysis sheds new light on the nature of the terrorist group’s (attack method) choice set and the efficiency properties of that set. If terrorist groups are, on average, more risk averse, the economist can expect the terrorist group to exhibit a bias towards bombing and armed attack. In addition, even the riskiest (from the terrorist group’s point of view) combinations of
attack methods have maximum expected returns of less than 70 injuries and fatalities per attack per year.

Keywordsterrorism; modern portfolio theory; mean-variance analysis; efficient choice set
ANZSRC Field of Research 2020520402. Decision making
380199. Applied economics not elsewhere classified
380107. Financial economics
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File reproduced in accordance with the copyright policy of the publisher/author.

Byline AffiliationsSchool of Accounting, Economics and Finance
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