Four dot points to end the chapter

  • • Terrorist groups diversify. Even if they do this naively, it shapes the group’s risks and rewards.
  • • Terrorist groups diversify their attack methods and targets. International terrorism allows further diversification, increasing the payoffs that can be obtained at each level of risk.
  • • Modern portfolio theory (MPT) is a complete framework for analysing the risks and rewards that terrorist groups confront and the choices that they make.
  • • Behavioural portfolio theory (BPT) expands on MPT by allowing such things as aspirations and mental accounts to shape decisions.


  • 1 Dobson and Paine (1977, p. 15).
  • 2 The GTD classifies the Munich attack as an ‘assassination’.
  • 3 Also see Phillips and Pohl (2012).
  • 4 This has been a hotly contested and much researched sub-field in financial economics. To name just a selection of important papers, see Baron (1977), Bessler, Opfer and Wolff (2017), Borch (1969), Feldstein (1969), Friedman and Savage (1948), Grinblatt and Han (2005), Hakansson (1971), Johnstone and Lindley (2013), Pulley (1983) and Tobin (1969).
  • 5 See Chapter 3.
  • 6 Shefrin and Statman (2000).
  • 7 We should also note that a complete opportunity set computed using the Markowitz MPT approach (depicted in a stylised fashion in Figure 6.2) is the opportunity set. A BPT decision-maker cannot craft anything different from the basic underlying statistical structure of the context.
  • 8 For a discussion of the application of SP/A theory to terrorist choice see Phillips and Pohl (2018).
  • 9 Sheffin and Statman (2000, p. 141) create such a situation.
  • 10 Sheffin and Statman (2000) also explore the evolutionary implications. BPT/MA decision-making will not generally be ‘growth optimal’. Like mean-variance decisionmaking, it depends on how closely the type of decision-making that is applied approximates the choices of the logarithmic utility maximiser.


Baron, D.P. 1977. On the Utility Theoretic Foundations of Mean-Variance Analysis. Journal of Finance, 32,1683-1697.

Berg, N. 2003. Normative Behavioural Economics. Journal of Socio-Economics, 32, 411-427.

Bessler, W.. Opfer, H. & Wolff', D. 2017. Multi-Asset Portfolio Optimisation and Out-of- Sample Performance: An Evaluation of Black-Litterman, Mean-Variance and Naive Diversification Approaches. European Journal of Finance, 23,1-30.

Borch, K. 1969. A Note on Uncertainty and Indifference Curves. Review of Economic Studies, 36,1-4.

Das, S., Markowitz, H., Scheid, J. & Statman, M. 2010. Portfolio Optimisation with Mental Accounts. Journal of Financial and Quantitative Analysis, 45, 311-334.

Dobson, C., & Paine, R. (1977). The Carlos Complex: A Pattern of Violence. London: Hodder and Stoughton.

Feldstein, M.S. 1969. Mean-Variance Analysis in the Theory of Liquidity Preference and Portfolio Selection. Review of Economic Studies, 36, 5-12.

Friedman, M. & Savage, L.J. 1948. The Utility Analysis of Choices Involving Risk. Journal of Political Economy, 56, 279-304.

Grinblatt, M. & Han, B. 2005. Prospect Theory, Mental Accounting and Momentum. Journal of Financial Economics, 78, 311-339.

Hakansson, N.H. 1971. Multi-Period Mean-Variance Analysis: Towards a General Theory of Portfolio Choice. Journal of Finance, 26,857-884.

Jenkins, B. International Terrorism: A New Kind of Warfare. Santa Monica, CA: RAND, P-5261,1974.

Johnstone, D. & Lindley, D. 2013. Mean-Variance and Expected Utility: The Borch Paradox. Statistical Science, 28, 223—237.

Kahneman, D. & Tversky, A. 1979. Prospect Theory: An Analysis of Decision under Risk. Econometrica, 47,263—291.

Keeney, G.L. & von Winterfeldt, D. 2010. Identifying and Structuring the Objectives of Terrorists. Risk Analysis, 30,1803-1816.

К roll, Y., Levy, H. & Rapoport, A. 1988. Experimental Tests of the Separation Theorem and the Capital Asset Pricing Model. American Economic Review, 78, 500-518.

Levy, H. & Markowitz, H.M. 1979. Approximating Expected Utility by a Function of Mean and Variance. American Economic Review, 69,308-317.

Lopes, L.L. 1987. Between Hope and Fear: The Psycholog)' of Risk. Advances in Experimental Social Psychology, 20,255-295.

Markowitz, H.M. 1952. Portfolio Selection. Journal of Finance,7, 77-91.

Midlarsky, M.I., Crenshaw, M. &Yoshida, F. 1980. Why Violence Spreads: The Contagion of International Terrorism. International Studies Quarterly, 24,262-298.

Phillips, RJ. 2009. Applying 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, 193-213.

Phillips, RJ. 2013. In Pursuit of the Lone Wolf Terrorist. New York: Nova.

Phillips, RJ. & Pohl, G. 2018.The Deferral of Attacks: SP/A Theory as a Model ofTerrorist Choice When Losses Are Inevitable. Open Economics, 1,71-85.

Pohl, G. 2015. Media and Terrorist Choice: A Risk-Reward Analysis. Journal of Applied Security Research, 10,60—76.

Pohl, G. 2017. Terrorist Choice and the Media. PhD Thesis, University of Southern Queensland, Australia.

Pulley, L.B. 1983. Mean-Variance Approximations to Expected Logarithmic Utility'. Operations Research, 31,685-696.

Shefrin, H. Sc Statman, M. 2000. Behavioural Portfolio Theory. Journal of Financial and Quantitative Analysis, 35,127-151.

Surette, R., Hansen, K. & Noble, G. 2009. Measuring Media Oriented Terrorism. Journal of Criminal Justice, 37,360-370.

Thaler, R.H. 1980. Toward a Positive Theory of Consumer Choice. Journal of Economic Behaviour and Organisation, 1, 39—60.

Thaler, R.H. 1985. Mental Accounting and Consumer Choice. Marketing Science, 4,199-214.

Thaler, R.H. 1999. Mental Accounting Matters. Journal of Behavioural Decision-Making, 12, 183-206.

Tobin, J. 1958. Liquidity Preference as Behaviour towards Risk. Review of Economic Studies, 25,65-86.

Tobin, J. 1969. Comment on Borch and Feldstein. Review of Economic Studies, 36,13-14.

Tversky, A. & Kahneman, D. 1981 .The Framing of Decisions and the Psychology of Choice. Science, 211,453-458.

Tversky, A. & Kahneman, 1986. Rational Choice and the Framing of Decisions. Journal of Business, 59, S251-S278.


< Prev   CONTENTS   Source   Next >