Terrorism, fear and the impacts on economic rationality

The recent terrorist attacks in Kenya and Pakistan have reinvigorated the worldwide fear of extremist violence. The far-reaching effects of these tragic events have substantial impacts on the way people choose to live their lives. Terrorism induces fear. This natural human reaction causes subjective beliefs and reality to diverge. Exploring the consequences of terrorism is a challenge for economists, especially with regard to the effects on rationality, consumption and economic behaviour.

The terrorist attacks on September 11 illustrate the global reach of the war on terror and the lasting ramifications such acts of violence have on human behaviour. Fear perpetuated by terrorism has a distortive impact on subjective beliefs and individual choices. Although the likelihood of being harmed by terrorism is negligible, the angst created by terrorism has enduring effects that extend beyond the direct loss of human life. The intensity of the fear or the level at which it is prolonged depends on the individual. Imagined dangers of violence have other long-term repercussions, such as the costs of increased measures to national security, or changes in individual choices such as abstaining from air travel.

The distortive impact of terrorism is limited by the economic benefits of controlling the innate emotional response. For simplicity, let us define fear as the degree to which subjective beliefs about danger deviate from objective assessments of risk. This way, we can better understand the distortive effects of fear on human behaviour and explain ‘irrational’ responses to acts of terror. One could argue that the willingness to control one’s emotions depends on the economic costs and benefits associated with acquiring this sense of self-control. In a world where human nature and behaviour is motivated by emotions, economic incentives play a fundamental, if not overriding role in dictating the level at which an individual chooses to succumb to fear or objectively control their emotions. By way of analogy, ‘objectively controlling emotions’ is to recognise the narrow likelihood of their becoming victim of a subsequent terrorist attack and continue making the same economic decisions they would have made regardless of the attack. Such economic decisions could include buying a plane ticket to Nairobi despite recent events.

The capacity to control fear is gained through training, past experience, and other forms of investment in this type of human capital.[1] Building on an individual’s capacity to deal with fear is costly, and the returns are not comparable between individuals. How much an individual is willing to invest in overcoming fear differs, due to their individual budget constraints and utility functions. However, the cost of overcoming fear has a powerful fixed cost component. The cost of eliminating the ‘fear’ of the first bus or airline ride goes a long way towards reducing the fear of future plane or bus rides. Therefore, when frequent users invest in controlling their fear through doing the very things that are ‘feared’, they keep their consumption closely aligned with objective dangers. Occasional users, on the other hand, substitute out of the ‘terror-affected good’ and make choices consistent with their fear-induced subjective assessment of risk.

Terrorism generates fear, which in turn exaggerates subjective beliefs on the marginal impact of consuming a good (like a bus ride) on the probability of survival. People respond to fear by reducing the consumption of the terror-affected good (which comes at a utility cost), or by taking costly actions to control fear by actively changing their perception of the risk of consuming such a good. Such investments, such as more stringent measures to protecting national security are not a ‘free lunch’. Only those who invest in overcoming fear can reap the benefits of such a public good. Frequent users of bus or plane rides have more of an economic incentive to invest in terror-affected goods, whereas occasional users have weaker economic incentives in overcoming fear and may, instead of a plane, opt for a private jet to take them to their destination. However this is not always a possibility as it is not within the individual’s budget constraint. This highlights the idea that economic incentives trump emotional impulses when individuals make choices.[2]

The role that economic incentives play in dictating individual decision-making is no surprise. Applying this model to the real world situation of fear induced by terrorist attacks shows people are both emotional and rational. People have both innate emotional responses to terrorism, but also have the capacity to control their emotions and limit overreactions, especially if they have prevailing economic incentives. If these incentives are powerful enough, the innate emotional response to terrorism is quelled, and the distortive impact that terrorism has on an individual’s economic decisions is much less.