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Leithner Letter No. 35
26 November 2002

You can’t do well in investments unless you think independently. And the truth is, you’re neither right nor wrong because people agree with you. You’re right because your facts and your reasoning are right. In the end that’s all that counts.Take the probability of loss times the amount of possible loss from the probability of gain times the amount of possible gain. That’s what we’re trying to do. It’s imperfect, but that’s what it is all about.

Warren E. Buffett
Chairman, Berkshire Hathaway, Inc.

If you don’t get this elementary, but mildly unnatural, mathematics of elementary probability into your repertoire, then you go through a long life like a one legged man in an arse-kicking contest. You’re giving a huge advantage to everybody else. Warren gets blinding headaches if he sits in a room full of people around a table, and a lot of people are saying dumb things on and on.

Charles Munger
Vice-Chairman, Berkshire Hathaway, Inc.

Nobel Triumph and Personal Tragedy

On 9 October The Royal Swedish Academy of Sciences awarded the 2002 Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel (commonly but inaccurately known as the Nobel Prize in Economics), to Daniel Kahneman of Princeton University and Vernon Smith of George Mason University. In the words of the Academy’s press release, “Daniel Kahneman has integrated insights from psychology into economics, thereby laying the foundation for a new field of research. Kahneman’s main findings concern decision-making under uncertainty, where he has demonstrated how human decisions may systematically depart from those predicted by standard economic theory. Together with Amos Tversky (deceased in 1996), he has formulated prospect theory as an alternative that better accounts for observed behaviour. Kahneman has also discovered how human judgment may take heuristic shortcuts that systematically depart from basic principles of probability. His work has inspired a new generation of researchers in economics and finance to enrich economic theory using insights from cognitive psychology into intrinsic human motivation” (see also Letter 9).

Although many did not hear the news until the next day, on 12 October 2002 many families, friends and acquaintances suffered terrible losses. In a bomb attack at Bali, Indonesia, approximately 200 people (the exact number is unknown), perhaps half of them Australian, were murdered. Many more were grievously injured. Australians, who are roughly one-fifteenth as numerous as Americans, thus suffered a loss of life of roughly half the order of magnitude that Americans did on 11 September 2001.

The attack at Bali was clearly a crime. Accordingly, it is imperative that its perpetrators be located, apprehended, tried and, if convicted, punished according to law. Equally clearly, to lose a family member or friend, whether through a criminal act, accident or natural causes, is a dreadful experience whose intensity may abate over time but never disappears. Hence the points that follow neither depreciate nor denigrate the grief of those who lost friends, mothers and fathers, brothers and sisters and children on that awful night (or, indeed, for any other reason on any other occasion).

Yet the shock of the event, and the emotional intensity of the images published and broadcast in its immediate aftermath, must not overwhelm dispassionate thinking about its causes and consequences. In that respect the insights of Kahneman, Tversky and other pioneers of behavioural finance (as the field they created has become known) can be used to evaluate the reactions of the general public and Commonwealth Government to the Bali bombing.

Among these insights: people, perhaps especially politicians occupying powerful positions, tend to be very poor calculators of risk; in particular, they tend drastically to overestimate and therefore to overreact egregiously towards exotic and statistically minuscule risks (and drastically to underestimate and therefore discount mundane but far more significant risks); and strong but often erroneous beliefs about particular risks and risk more generally, once formed, change very slowly if at all and are extraordinarily immutable in the face of valid, reliable and contrary evidence. For readable books that document this point in great detail and in a variety of contexts, see Letter 33. In politics as well as financial markets and other settings, then, seemingly smart people not only do very dumb things: they do them repeatedly and systematically (see also Letter 18).

Using these insights and readily available data, this Newsletter reasons towards three conclusions. First, the risk to Australians posed by subsequent attacks such as those at the World Trade Centre and Bali is infinitesimal. These attacks, to repeat, are crimes; and it is imperative that their perpetrators be apprehended, tried and, if convicted, suitably punished. Given hard data and even dour assumptions, however, the risk that any given Australian will die as a result of further attacks is so remote that it (as opposed to the grieving for and remembrance of the lives lost) is best ignored.

Alas, it is hardly being ignored. Quite the contrary: the Commonwealth Government is mobilising huge resources into a “war on terror.” The second conclusion is that this war, like the “war on poverty” and the “war on drugs” which preceded it, is inherently unwinnable. The third and related conclusion is that the cost of the Commonwealth’s drastic overreactions to the Bali bombing will exceed its benefits; indeed, these overreactions are likely to increase rather than decrease the inconsequential risk that such attacks pose to Australians. As in some other areas within their purview, Australian politicians are obsessing about a non-existent problem and their efforts may well worsen rather than improve matters. Only one good thing that can be said about responses to the Bali bombing: because the risk to individuals from further attacks is already so minute, politicians’ ineffective and negative impact will not significantly increase the risk of future attacks.

Historical Context

Other events transpiring on a single day at a specific place have killed large numbers of Australians. On 19 February 1942, for example, Japanese air raids at Darwin killed 243 people. Between 23 October and 4 November 1942 at El Alamein, the 9th Australian Division suffered 2,694 casualties, including 620 dead, 1,944 wounded and 130 taken prisoner. In late November 1941 (the precise date has not been established) HMAS Sydney disappeared off the coast of Western Australia. The cause of its disappearance, often thought to be a German U-boat, has been disputed; incontrovertibly and much more precisely, however, 645 of its personnel were officially classified as “missing presumed dead.”

The record of the First World War is even bleaker. (From the arrival and entry into combat of Australian military personnel in Europe, the Middle East, Southeast Asia and the Pacific until the conclusion of the Second World War at Tokyo Bay, Australian soldiers, sailors, airmen, medical and other military personnel died at an average rate of 16 per day. During the Great War the daily average was 37). In 1917, in battles at Bullecourt, Messines and the four-month campaign around Ypres (known as the battle of Passchendaele), there were multiple days on which hundreds of soldiers of the Australian Imperial Force were killed. Likewise at Gallipoli, where roughly 10,000 Australians and New Zealanders – and almost 50,000 Britons and Frenchmen and even more Turks – fell. Like its British and Canadian counterparts, the AIF’s single blackest day occurred in July 1916: at Fromelles, on the Somme, 5,533 Australians fell within 24 hours.

On 16 February 1983, seventy-five people died, 2,545 buildings were destroyed and more than 390,000 hectares of country laid waste by massive fires in Victoria and South Australia. With the exception of the Ash Wednesday fires, then, the loss of large numbers of Australian lives on a single day as a result of a single incident tends to occur during wartime; and considered as a single event, the bomb blast at Bali on 12 October killed more Australians than any other event since the Second World War. Perhaps for these reasons, and also because it is widely supposed by politicians, journalists, various “experts” and members of the general public that the perpetrator(s) of the attack at Bali are “terrorists,” particularly Islamic terrorists (on several occasions during the week of 20-24 October the op-ed pages of The Australian used the term “Islamofascist”), the Commonwealth Government regards its response to the attack as an integral part of its war on terrorism. As of 30 October, however, the identity of the bomber and the motive behind the bombing remain unknown. (On that day, Abdurrahman Wahid, a former president of Indonesia, wrote in an op-ed article published in The Australian Financial Review that “there has been widespread speculation that elements of the military and police are involved in acts of terror in Indonesia. It goes without saying that it is high time those in the security and intelligence community behind such acts of terror are arrested and investigated.”)

Terrorism, according to the U.S. State Department Patterns of Global Terrorism, Washington, 2001), is “premeditated, politically motivated violence perpetrated against non-combatant targets by sub-national groups or clandestine agents, usually intended to influence an audience.” In a thought-provoking article (The Definition of Terrorism, The Guardian, 7 May 2001), Brian Whitaker analyses this definition. Noting its inconsistent application to seemingly similar events and the pattern the term’s contradictory usage forms, he derives “a simpler – and perhaps more honest – definition: terrorism is violence committed by those we disapprove of.”

Even using an expansive definition of terrorism and including the WTC and Bali attacks, such incidents kill very few Australians per year; and arguably not since 13 February 1978, when a bomb exploded outside The Hilton in Sydney (the site of that year’s Commonwealth Heads of Government Meeting), killing three and seriously injuring several others, has such an incident occurred in Australia. According to the U.S. State Department publication Patterns of Global Terrorism (21 May 2002), no terrorist attacks occurred in Australia in 2001. And to search the Chronology of Significant Terrorist Incidents of the Dudley Knox Library of the Naval Postgraduate School is to search virtually in vain for incidents during the past ten years that have killed Australians. It is true that every year a handful of Australian tourists travelling overseas are kidnapped; thankfully, however, most are released.

But not all of them are. On 26 July 1994 the Khmer Rouge attacked a train and kidnapped (among others) an Australian, a Briton and a Frenchman. Each was subsequently murdered. And on 28 December 1998 armed militants kidnapped a group of tourists including twelve Britons, two Americans and two Australians travelling in Yemen. On 29 December Yemeni security forces undertook a rescue attempt during which three Britons and one Australian died. Yemeni officials reported that the kidnappers belonged to the Islamic Jihad and the investigation is ongoing.

Including these incidents and the WTC and Bali attacks, and assuming that 100 Australians perished at Bali, during the past ten years terrorist attacks have killed an average of 11 Australians per year and 55 per year during the past two years.

Is This a Significant Threat?

Pundits and politicians say almost unanimously and unequivocally – indeed, stridently – that it most certainly is. “The spread of terrorism across national borders in Indonesia, the Philippines, Singapore, Malaysia and Thailand poses grave threats to Australia and the region. ... The Bali bombings and threats of terrorism throughout Southeast Asia warrant a major rethink of the country’s defence. ... There can be no doubt that we have entered a period of extreme and violent anarchy, perhaps comparable with that at the turn of the previous century when anarchists committed widespread acts of terrorism in Europe” (The Australian 24 October).

They also assert that the Commonwealth Government is able to do something about it, and for this reason (as well as the “public interest,” a phrase that Glendon Schubert demonstrated in the 1950s and 1960s is bereft of coherent meaning) they insist that the government do something about it. “Taxpayers will have to face paying at least $1 billion extra a year to meet the greatest challenge to Australia’s security since the Cold War, Paul Dibb, the country’s leading strategic thinker, has warned.” This means “ensuring troops were properly equipped and readily deployable to remote trouble spots, buying more troop-lifting aircraft and helicopters, employing the latest electronic warfare technology, using reserves to protect domestic targets vulnerable to terrorism, and improving intelligence gathering.”

Further, “NSW Premier Bob Carr will today ask Prime Minister John Howard to create a ministry of homeland security. ... Carr also wants a big boost to resources given to the task. ... Our situation is not good and is in need of rapid repair. ... The top priority must be a massive infusion of new resources into the human intelligence side of counter-terrorism, especially ASIO. ... Carr wants urgency in this debate” (The Australian 24 October).

For its part, the Commonwealth appears to be more than happy to oblige. The Prime Minister “[said] yesterday that Australia will fight the global campaign against terrorism shoulder-to-shoulder with the U.S. .... He warned against any loss of blood providing a loss of nerve. Australians shouldn’t think ‘we’ve paid this price therefore we’d better back off’ ... Mr Howard said there was no other response but to stick with ‘the worldwide war against terror.’ ‘It’s a world threat,’ the Prime Minister told the Nine Network’s Sunday program. ‘And I think the answer must, in the name of the Australian dead, must necessarily be that we continue to fight on a global scale because this is a global problem’” (The Australian 21 October).

Asked whether the Bali bombing would prompt the Commonwealth to increase its defence budget, Mr Howard said “I think it is inevitable that we will have to spend even more on defence. I feel it in my bones. It is just elementary that when some transforming event like this occurs, you have to go back into your critical infrastructure in a whole lot of areas. That’s just inevitable” (The AFR 24 October). The 2002-2003 budget, presented to Parliament in May, unveiled a range of counter-terrorism measures that will cost $1.3 billion over five years. The defence budget is presently $13.1 billion, i.e., 7.7% of the Commonwealth’s $170 billion of annual expenditure.

Vast Overreaction Is the Norm

It is more than interesting, and perhaps not a co-incidence, that senior Australian military men, particularly those recently retired and thus able to speak relatively freely, are, like their American and British counterparts, far more calm, considered and cautious about these matters than the rhetorical warriors on the op-ed pages and floor of Parliament.

Perhaps this is because they (unlike many of the bellicose) have experienced the horror and suffering of war at first hand. Perhaps it is also because they are perceptive students of military history and therefore know that drastic overreaction plays a part in virtually every aspect of human activity (see, for example, David Dreman, Contrarian Investment Strategies: The Next Generation, Simon & Schuster, 1998, ISBN: 0684813505).

A typical example occurred on 2-4 August 1964, when two North Vietnamese torpedo boats in the Gulf of Tonkin allegedly attacked the USS Maddox. In response, members of Congress gave to President Johnson emergency powers that virtually abrogated the Legislature’s constitutional authority to declare war. Some historians have questioned whether the boats were remotely near the Maddox and whether the incident as reported by the Executive actually took place. So too have some key “insiders” (see, for example, Daniel Ellsberg, Secrets: A Memoir of Vietnam and the Pentagon Papers, Viking Press, 2002, ISBN: 0670030309). But no matter: Congress’s reaction was a key trigger for the enormous escalation of the Vietnam War and the resultant deaths of 58,000 American military personnel, 670,000 Viet Cong and NVA soldiers, up to one million ARVN and (estimates vary widely) as many as 2.5 million civilians.

Egregious overreaction accompanies much military thinking. Dreman notes that French military strategists attributed their country’s defeat in the Franco-Prussian War of 1870 to a lack of the dash and daring that had characterised the armies of Napoleon I. Marshals and generals subsequently emphasised élan above all else – even though weaponry had undergone revolutionary changes since Napoleon’s time. For 44 years afterwards, French military manoeuvres concentrated upon those tactics, particularly fixed bayonet attacks in closely packed ranks, which had won Boney victory after victory. But 1914 was not 1812, and at the commencement of hostilities in August (itself a gross overreaction to the assassination of the Austrian Archduke, Franz Ferdinand, in June) French infantry suffered horrific casualties from the rapid and precise fire of German machine guns and the enormous destructive power of German artillery. The overreaction to the Prussian defeat in 1870 caused, in the first six weeks of the Great War (not to mention the entire period ending 11 November 1918), the deaths of no fewer than 250,000 French soldiers. This number is roughly equal to the total number of American soldiers killed during the Second World War.

Obsessing About Individual Cases and Ignoring General Base Rates
Encourages Drastic Overreaction

According to the most recent available data (from Australian Bureau of Statistics publication 3302.0 and dated 11 December 2001), there were 128,300 deaths registered in Australia in 2000 and 128,100 registered in 1999. Australians thus died at an average rate of 352 people per day in 2000 and 351 per day in 1999. In 2000, cancer was the leading cause of death (35,600 deaths, 28% of all deaths or 98 deaths per day) and heart disease was the second leading cause (26,500 deaths, 21% of all deaths or 73 deaths per day). Stroke was the third most important cause (11%); chronic lower respiratory disease was the fourth-ranked cause (12,830 deaths, 10% of all deaths or 35 death per day); and accidents comprised the fifth leading cause of death (5,132 deaths, 4% of deaths or 14 deaths per day). The hundreds of other causes thus comprised 32% of all deaths (41,056 deaths or 112 deaths per day); individually, however, each of these many other causes comprised fewer than 3% of all deaths (3,849 deaths or 11 deaths per day).

Also according to the ABS (publication 3303 dated 11 December 2001), “external causes” encompassing deaths from accidents, poisonings and violence were responsible for 8,098 deaths or 6.3% of all deaths registered in 2000. Since 1990 there has been a 13% decrease in the standardised death rate for deaths from external causes, mainly due to a 37% decrease in the incidence of transport accidents. In 2000, there were 2,363 deaths attributed to suicide, 5.2% lower than the 1999 figure and 13% lower than the record 2,723 suicides registered in 1997. By Western standards Australia’s rate of suicide is very high: it accounts for more than one in five deaths of those aged 25-34 years.

Given that on 25 October at 13:06:05 (Australian Eastern Standard Time), the resident population of Australia was projected to be 19,767,520 (see the ABS Population Clock), given that 11 Australians per year, on average, have died in terrorist incidents during the past ten years and assuming that this toll will continue into the future, it follows that the likelihood that a randomly-selected individual will die under such circumstances during a given year is 0.0000006 (i.e., a chance of 6 in 10 million or 1 in 1.7 million). Further, given that 55 Australians per year, on average, have died in terrorist incidents during the past two years, and assuming that WTC and Bali-like incidents continue and therefore that this greater toll will continue into the future, the annualised risk of death from terrorism will increase to 0.000003 (i.e., 3 in 1 million or 1 in 333,333).

This risk compares to the odds, over the course of an average North American life span, that one will die from pesticide poisoning (1 in 200,000), AIDS contracted via a blood transfusion (1 in 96,000), drinking contaminated tap water (1 in 60,000), heart disease from eating one broiled steak per week (1 in 48,000), a lightning strike (1 in 30,000), cancer from eating one peanut butter sandwich per day (1 in 5,000), disease caused by drinking one beer per day (1 in 1,000), cancer caused by an average number of X-Rays (1 in 700), cancer caused by background radiation in nature (1 in 700), disease caused by indoor radon (1 in 440), an accident in the home (1 in 130), disease caused by heavy consumption of alcohol (1 in 100), a motor vehicle accident (1 in 60) and disease caused by smoking one packet of cigarettes per day (1 in 6) (James Walsh, True Odds: How Risk Affects Your Everyday Life, Silver Lake Publishing, 1996, ISBN: 1563431149; see also Joel Best, Damned Lies and Statistics: Untangling Numbers from the Media, Politicians, and Activists, University of California Press, 2001, ISBN: 0520219783; and Aaron Cohl, Are We Scaring Ourselves to Death? How Pessimism, Paranoia, and a Misguided Media Are Leading Us Toward Disaster, St. Martin’s Press, 1997, ISBN: 0312150563).

Clearly, then, relative to the major killers of Australians, the “terrorist threat” is minuscule; and to assert that terrorism poses a grave threat to our safety is simply false. To say otherwise is either hoodwink oneself or to seek, unwittingly or otherwise, to misinform others. If henceforth an incident of the magnitude of the Bali bombing occurred in Australia every fortnight and in perpetuity, the resultant annualised loss of life would approximate that presently caused by suicide. In 1914, HMG and British newspapers shrieked that German soldiers were bayoneting Belgian babies. In 1990 they screamed that Iraqi troops were disconnecting the incubators holding Kuwaiti babies. Both allegations, it was demonstrated subsequently, were false. Today Australian mass media repeat uncritically the mantra that the country’s “security” is gravely threatened by “terrorists.” Publicly available information and common sense tells us that this, too, is false.

A Curious Kind of War

Since 11 September 2001, American politicians have told Americans that their country is at war. Australia, too, according to many of its politicians and journalists, has been at war; and the frequency and stridency of their declarations have increased markedly since 12 October 2002. But this “war on terror” is peculiar. It is seemingly, given the indistinct nature of the enemy, a war with no clear objective, no strategy to achieve this objective and no criterion to determine whether it has achieved its end. But all of its proponents agree that it will last years and cost heaven and earth. What kind of war is that? It sounds more like a Great Society program, and in that respect there are disturbing precedents.

Wars on such “enemies” as poverty and drugs are endless wars because poverty and drug addiction, alas, are ineradicable. When the government declares “war” on poverty or drugs it means that the government decrees the mobilisation of taxpayers’ money and “committed” bureaucrats. In practice, it also signifies the government’s implicit admission that it cannot improve matters but that it can (and sometimes does) do much to worsen them. Indeed, in the names of “compassion” and “commitment” governments have repeatedly caused disasters where none previously existed (see in particular Charles Murray, Losing Ground: American Social Policy, 1950-1980, Basic Books, tenth anniversary ed., 1995, ISBN: 0465042333; Thomas Sowell, The Vision of the Anointed: Self-Congratulation As a Basis for Social Policy, Basic Books, 1996, ISBN: 046508995X; Thomas Sowell, Is Reality Optional? Hoover Institution Press, 1993, ISBN: 0817992626; and Eric Schansberg, Poor Policy: How Government Harms the Poor, Westview Press, 1996, ASIN: 0813328241).

Why It Will Fail: Three Laws of a “War on Terrorism”

If the analogy between the “war” on poverty, drugs and terror is even roughly approximate, then we can use the logic and evidence that Charles Murray used to evaluate major social programs in order to conduct a preliminary and very rough-and-ready assessment of the war on terror. Its results are hardly encouraging (also see Llewellyn Rockwell’s The Impossible War).

Law #1: The Law of Imperfect Selection

Murray finds that any rule that defines eligibility for a social program will, arbitrarily or irrationally, exclude some people. We have noted that “terrorism” is an elusive concept, inconsistently applied according to the whims of governments, and that in practical terms it refers to violence committed by those whom a particular government (let us call it Government A) disapproves. If Government B turns a blind eye to the violence (regardless of whatever lofty rhetoric it uses to denounce the violence), then B’s actions imply that it does not, in effect, regard the violence as terrorism.

This inconsistent treatment by different governments of the same violent people, organisations and incidents saves governments much embarrassment. If the American and British governments were truly at war against terrorism, for example, and if they applied the strategy adopted in the wake of 11 September to all organisations they have labelled as “terrorist,” then they would have unleashed their military forces not just upon Afghanistan but also upon the suburbs of Boston, Chicago and New York City – i.e., those areas a very few of whose residents have, according to the U.S. State Department, over the years lent moral and material support to Noraid and through it the Irish Republican Army.

Law #2: The Law of Unintended Rewards

Murray finds that any social transfer increases the net value of being in the condition that prompted the transfer. Applied to the war against terror, the hypocrisy of Western and other governments that stems from Law #1 is not lost upon the residents of certain areas and members of certain ethnic, religious, national and other groups who regard themselves as the victims of injustice, oppression – and, indeed, given the term’s elasticity, terror. Wars on terrorism, inconsistently applied, thus increase the incentives for members of aggrieved areas and groups to sympathise with and actively assist organisations and actions that some government (be it A or B or C) regards as terrorist.

Law #3: The Law of Net Harm

Murray finds that the less likely it is that the unwanted behaviour will change voluntarily, the more likely it is that a social program that is intended to induce amelioration will actually cause harm. Moreover, the more the net harm caused the more governments reward the offending programs with more resources. Allowing for the innate and perhaps insuperable difficulty of the tasks to which they are charged, the CIA, NSA and FBI were unable to alert Americans of the approach of suicide-hijackers; and ASIO, ASIS and other Australian organisations were unable to anticipate bombers at Bali. In response, politicians and various “experts” have clamoured that more money, staff and power be allocated to these agencies. Similarly, the “war on drugs” has failed to reduce the consumption of drugs; in response, and unintentionally echoing “the best and brightest” of the Vietnam War era, politicians and their advisors have greatly escalated the war’s reach, intensity and destructive effects.

The perverse logic of this “if at first you don’t succeed” approach, as it has been dubbed by a colleague in another Sunshine State, is that major programs that do not achieve their objectives and generate unintended consequences will be rewarded with more resources. Consider the impact upon bureaucrats’ incentives when their political masters in effect tell them: “if you succeed (and therefore need less money) we’ll either ignore your success or cut your budget; but if you fail spectacularly then (abetted by an uproar in the media and among the general public) we’ll quickly conclude that you’re ‘underfunded’ and shovel more resources your way.”

Australia’s Politicians Fall Into the Terror Trap

War, as Gwynne Dyer notes in an excellent article (“Falling into the Terror Trap,” The Toronto Star, 17 October), can and does devastate whole societies. Terrorism is not war: it is an essentially marginal activity, undertaken by the relatively weak, that succeeds only if it can provoke its much stronger nemesis into drastic overreaction. Dyer notes that from 1942 to 1945, after all the major participants had joined the carnage, the Second World War caused deaths at the rate more than 1 million per month. That is equivalent to a Bali bombing every 10 minutes, day and night, for four years. By that horrible standard and whatever its cause, terrorism is a localised, minor and tolerable (except, of course, by those whom it kills, injures and traumatises) phenomenon.

Over the past 12 months, excluding the mega-strikes at New York and Washington, the average monthly American death toll from terrorism has been fewer than three. If terrorist groups could undertake an 11/9-scale strike on American soil every year, their actions would cause an average of 250 U.S. deaths per month and an annualised probability of 1 in 100,000 that they killed a randomly-selected American; and to undertake a 12/10-scale bombing annually in Australia would generate 8 deaths per month and an annualised probability of 5 in 1 million (or 1 in 200,000) that it killed a given individual. Given such attacks in perpetuity, the average likelihood of death by terrorism in these countries would be comparable to the chances of winning a modest jackpot in a lottery.

Clearly, however, and as the research of Daniel Kahneman, Amos Tversky and others alerts us, this statistical reasoning utterly ignores the intensely emotional reaction of governments, journalists, “experts” and members of the general public to events that kill many people in a single place. Because politicians watch television, read the newspapers and participate in talkback radio, they, like most Australians, react instinctively and emotionally to heart-rending accounts in mainstream media – and not dispassionately from deductions from first principles using hard data. Indeed, James Walsh shows that far from having privileged access to valid and reliable information, politicians and governments assess risk just as poorly as the average person.

Accordingly, and precisely because terrorism is viewed in a unique light and its risk is vastly exaggerated, the Commonwealth Government is prepared to spend many times – probably several hundred times – more in response to one death from a terrorist attack than it is in response to one death from (say) heart disease, an accident in the home or a car crash. And most voters, journalists and “experts” strongly support this prioritisation. Human beings obsess about threats that they falsely think they (or governments) can reduce, minimise or eliminate; at the same time, they discount or ignore dangers that they falsely think they can do little to control. The result is the absurd and common reality of a (say) a middle-aged man who eats too much of the wrong things, exercises too little, drinks too much, smokes and drives long distances without rest breaks – and, whilst slouching in front of the TV, frets about anthrax, the Ebola virus and terrorist attacks.

Terrorists seem to understand this principle – established theoretically and empirically by Daniel Kahneman and others – and use it ruthlessly to their advantage. Hence, according to Gwynne Dyer, the first objective of any competent terrorist is to attract the attention of the target government and to make himself a primary focus of public concern and government policy. It is by provoking that far larger and more powerful society to over-react drastically and in ill considered and self-defeating ways that a terrorist seeks to achieve his objective.

As Murray Rothbard noted, governments’ standard response, the commencement of war in order to stop “terrorist aggression,” is predicated upon an invalid extension of the analogy of aggression by one individual upon another. Smith attacks Jones; nearby police rush to the defence of Jones; and they use “police action” to stop the aggression and subsequently undertake “peacekeeping action” to prevent its recurrence.

But “police action” makes sense only at the individual (i.e., Smith-Jones) level) and makes no sense whatever at a State-to-State level. Governments that commence war as it is presently practiced virtually necessarily become aggressors against non-combatants; indeed, on numerous occasions during the twentieth century, and whatever their initial intentions, they became mass murderers of civilians. The correct analogy is thus Smith attacks Jones; the police rush to help Jones; and in the course of trying to apprehend Smith they bombard a city block and fire machine guns into a crowd of innocent bystanders. Clearly, however, any “police” agency that behaved in this way would itself be a criminal aggressor – and commit far more aggression than the original Smith who commenced hostilities against Jones.

Disengaging from the “War on Terrorism”

Hence our three conclusions. First, empathy with those who lost friends and family on 12 October (and, indeed, on any other occasion) and the rightful demand that the perpetrator(s) of those murders be apprehended and punished should not distract attention from the fact that the risk to Australians posed by subsequent attacks is minute. Second, the “war on terrorism” is inherently unwinnable. Finally, Australian politicians’ responses to the Bali bombing will increase rather than decrease the inconsequential risk that such attacks pose to Australians. Their response fails the cost-benefit test set by Mr Buffett in the quotation at the top of this Letter.

The challenge is not, as this country’s “leading strategic thinker” alleged in The Australian (24 October), “for the Australian Government to devise a set of credible and affordable defence policies that accommodate our domestic and regional defence concerns, as well as [contribute] to the new war on terror.” Similarly, it is demonstrably false to say, as was said in The AFR on 31 October, that “only concerted action by the West that support[s] failing states and addresses developing countries’ claims for justice will undercut the appeal of fundamentalism.”

Rather, the challenge to Australia’s politicians is to learn the rudiments of risk and probability, to acquaint themselves with the history of drastic and disastrous over-reaction to minuscule risks, and to appreciate why Daniel Kahneman became a Nobel Laureate on 9 October. To fail this challenge is to embark upon a futile and misguided crusade that expends much energy and incurs no gain. It is, to borrow Mr Munger’s imagery, to go through a long life like a one legged man in an arse-kicking contest – and thereby to cede a huge advantage to others.

Only one good thing that can be said about Australian politicians’ over-reactions to the Bali bombing: because the risk to individuals from further attacks is already so small, the ineffective and negative impact of their responses will not significantly increase the risk of future attacks. At the same time, however, these overreactions and other negations of civilised relations with foreign people and places (see Ludwig von Mises, Liberalism: The Classical Tradition, Foundation for Economic Education, 1926, 1996, ISBN: 1572460229 and George Washington’s Farewell Address to the People of the United States) are likely to generate enmity in the countries in which the Commonwealth Government meddles. St Augustine once recounted a conversation between Alexander the Great and a captured pirate. “How dare you molest the seas?” asked Alexander. “How dare you molest the whole world?” the pirate replied. “Because I do it with a little ship only, I am called a thief. You, doing it with a great navy, are called an emperor.”

Chris Leithner


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