Terrorism and the Economy

The far-reaching effects of terror attacks 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 behavior.

The recent terrorist attacks in Paris illustrates the global reach of the war on terror and the lasting ramifications that such acts of violence have on human behavior. Fear perpetuated by terrorism has a huge impact on subjective beliefs and individual choices. Although the likelihood of being harmed by terrorism is insignificant, the anxiousness created by terrorism has enduring effects that extend beyond the direct loss of human life. The thought of violence or being harmed in a terrorist attack alone has countless repercussions, such as increasing security at events to abstaining from air travel all together.

Fear can be defined as the degree to which subjective beliefs about danger deviate from objective assessments of the actual risk. This fear inhibits people from objectively controlling their emotions and recognizing the narrow likelihood of becoming a victim of a terrorist attack.  So, instead of continuing to make the economic decisions they would have made regardless of the attack, they make irrational ones, in response to the terror. The economic cost/benefit principle can, to some degree, explain this behavior.  Terrorism generates fear, which in turn amplifies 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, or by taking costly actions to control fear by actively changing their perception of the risk of consuming such a good. Those who can overcome fear can then take advantage of the market, when the prices of these publics goods are low. Frequent users of bus or plane rides have more of an economic incentive to invest in terror-affected goods, while occasional users have weaker economic incentives in overcoming fear and may, instead of a plane, choose another, possibly more expensive alternative. This highlights the idea that economic incentives undermine emotional impulses when individuals make choices.

The fear of terror and economic incentives play a major role in dictating individual decision making.  It is quite interesting, however, to see the different levels of reaction people have to terror. While everyone has innate emotional responses to terrorism, they 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 overcome, and the impact that terrorism has on an individual’s economic decisions is much less.