Thursday, June 27, 2019

"Kidnapped by Pirates at Sea? Here's How Economics Can Save You"

Be prepared.
This is a repost from 2012.
From The Atlantic:

Lessons from Plutarch to Planet Money, including the First Rule of kidnapping insurance: Don't tell anybody about your kidnapping insurance

800px-Capture-of-Blackbeard.jpgGabriel Rossman -- Sociologist at UCLA.  His work applies economic sociology to media industries. He blogs at Code and Culture and is the author of Climbing the Charts
A couple years ago NPR's Planet Money podcast had an episode about Somali pirates. (The pirate part starts at 9:35). There was all sorts of interesting stuff about division of labor, allocation of shares, pirate venture capital, etc. Some of this paralleled early modern piracy (as given a scholarly analysis in Peter Leeson's work and a romantic perspective in innumerable books and movies since Treasure Island) but in other respects it's very different. In particular, whereas early modern piracy was mostly about seizing cargo and the crews were left alone if they surrendered promptly, Somali piracy is more similar to piracy in antiquity in that it's basically maritime kidnapping. The typical instance of Somali piracy isn't that different from what a young Julius Caesar experienced when he was kidnapped by pirates and held for ransom on his way home from political exile in Asia Minor. One interesting detail in Plutarch's report is that, "When these men at first demanded of him twenty talents for his ransom, he laughed at them for not understanding the value of their prisoner, and voluntarily engaged to give them fifty." 
It's not entirely clear if we should take Plutarch's report at face value (he also tells us that Caesar constantly insulted his captors as being, for instance, too uncivilized to appreciate his poetry) but for the sake of argument let's accept that Caesar rather brashly gave away too much information in the game of price discovery. According to a hostage negotiator quoted by This American Life, giving away this information is apparently typical of hostages and is counter-productive to their release as it narrows the bid-ask spread. Economists would describe hostage negotiation as a bilateral monopoly price negotiation that is structurally just a special case of chicken. That is, unlike a barrel of oil or a freight car full of soybeans which can trade on an extremely liquid market with innumerable buyers and sellers, a hostage has exactly one seller (the kidnappers) and exactly one buyer (the employer and/or family of the hostage). When there is only one buyer, the opportunity cost for ransoming the hostage is zero. Likewise, the employer and/or family has no realistic alternative means to recover the hostage. In order for everybody to walk away happy, we need a cooperate-cooperate outcome: the kidnapper has to give up the hostage and the employer/family has to give up a ransom. This structure also characterizes art theft, which in practice is not a matter of fencing art on the black market but ransoming art to a museum's insurance company. 
If we model a bilateral monopoly negotiation only two things should matter. The first is, as always in a game of chicken, the willingness to accept failure. The more willing you appear to walk away, the more bargaining power you have. In a more protracted game this can cash out as willingness to delay which we can treat as a defect-defect outcome on the installment plan. In fact in the Planet Money episode on Somali piracy, the hostage's party did balk and break off negotiations for weeks at a time until the pirates were willing to come down on price.
The other thing that should matter is the capacity to pay. If the pirate knows for an absolute fact that the hostage's people simply can't raise more than a million dollars then it would be pointless for them to demand two million dollars. Of course there is an issue of information asymmetry in that the hostage's party has much better information on its assets than do the pirates and so the pirates may be skeptical of the hostage's party pleading poverty (especially if the hostage has foolishly told them how much money they can get). We see this at work in the TAL story's point that kidnapping insurance holds the condition that you can't tell anyone you have kidnapping insurance....MORE
HT: Economic Policy Journal

Not all pirates fly the Jolly Roger (upper right in above pic), be on guard at all times.
German pensioners ‘kidnap and torture their investment adviser’
Also, in a July '07 post "FBI: Goldman Sachs threat not of 'high credibility' (Off-topic)" I blog-begged about a different abduction:
...2) Does anyone remember the story of the dentist who put on a Santa Claus suit, kidnapped his stockbroker and tortured him for three days with a cattle-prod, all the while screaming the names of the lousy deals the broker had put him in?

When I ask this question at parties I get funny looks and solitude.
If you have any details please email....
I received some confirmations from folks who recognized the story but no citations. If you've got the cite, drop us a line.:...

See also 2017's News You Can Use: "The Economics of Kidnap Insurance".

Okay, so despite your best precautions you've been kidnapped, now what?
Don't despair, you can get out of this.
Having thought ahead, you have your team in place:
Insurance—"The business of kidnapping: inside the secret world of hostage negotiation" 

And your pre-positioned superyacht getaway submarine:

"The Paranoid World of London's Super-rich: DNA-laced Security Mist and Superyacht Getaway Submarines"
Interestingly, considering this article's topic, the owner of the LES is a Russian former oligarch, although his fortune has been declining since he got into the newspaper biz and who may not even be a billionaire any more.

From the London Evening Standard:...