Risky Business

By Roger M. Williams '56
One of Darius Lakdawalla's findings—that terrorists behave strategically and rationally—could have important implications for terrorism policy around the world.

“Risk is risk,” says Darius Lakdawalla ’95 briskly. He is responding to a question about why he, a well- established health economist, veered off into the study of terrorism. “Both of those areas involve risk,” he says, “and for me that’s the link.”

At Amherst, Lakdawalla was a risk taker in his own right. He pursued the unusual double major of mathematics and philosophy, yet he wrote an honors thesis under professors from two other departments—economics and political science. He devoted himself to music as well, coming away with the Sylvia and Irving Lerner Piano Prize. One can imagine a fussing aunt saying, “For heaven’s sake, Darius (pronounced Dah-RYE-us), settle down!” In his own way, he did, if graduating summa cum laude and Phi Beta Kappa can be taken as evidence.

Lakdawalla has written only two articles on terrorism, both for specialized journals and both co-authored, but has made a significant impact with each. The first, which appeared in The Journal of Public Economics in 2005, delved into “the rationale for public intervention in the terrorism insurance market”—that is, for making the federal government the insurer of last resort in the case of terrorist attacks. The second, published in Defence and Peace Economics two years later and based on the authors’ study of terrorism against Israeli targets, argued that Arab terrorists “seem to respond rationally to costs and benefits.” Although that might seem an unremarkable conclusion to most observers, it caused a stir among terrorism analysts, many of whom regard suicide bombers and the like as mindless religious zealots.

As auntie might put it, what’s a nice Indian boy-turned-economist doing mucking about in terrorism research? Lakdawalla’s “risk is risk” epigram provides one explanation. More nuanced is the fact that, for him, economics is a broad and flexible field, more an opportunity than a discipline and certainly not confined to the number crunching and standard concerns most of us associate with it. Traditional parameters of economics, or any other intellectual realm, neither satisfy nor restrict Darius Lakdawalla. Soon after graduate school at the University of Chicago, he demonstrated his taste for expanding the working boundaries of health economics in particular. As the name implies, the field encompasses issues related to the health of a society’s inhabitants and the allocation of care in their behalf. Among the ongoing concerns of health economists are supply and demand; planning, budgeting, delivery and monitoring; and dealing with indirect but important influences such as eating habits and economic hard times. Given the near-constant debate over health care in broad form during recent decades, it is not surprising that Lakdawalla, with his broad-ranging mind, has stretched the field’s traditional limits. For example, he has authored papers on such topics as the growing rate of obesity (before the current references to it as an epidemic), increasing disability among the young and the effects of on-the-job physical exertion on body weight.

Except for his time at Amherst and Chicago, Lakdawalla has lived in Los Angeles—where he works for the RAND Corporation and a University of Southern California academic center—since arriving in the United States as a child. But his youngest years, and, even more so, the lives of his forebears, were a merry-go-round of moves from one country—or part of the world—to another. By heritage, he is an ethnic Parsee, descended from a group that fled persecution [Note: Mistake Corrected] to settle in India. As Parsees, his family found tolerance but not assimilation in India, leading them eventually to move to Sri Lanka. There they prospered in the flour business while Lakdawalla’s grandfather, an architect, designed the national university. Lakdawalla’s father became an accountant, but the Sri Lankan civil war—especially the suspension of English-language instruction—prompted him to take his own family, including young Darius, to England and subsequently to L.A.

“I wanted to leave Southern California, get away,” says Lakdawalla in explaining why he enrolled in a college in the East. People at Amherst were “a little surprised” at his math-philosophy major, but it did not create difficulty: the era enshrined at the college the values of free and unconventional student choice. In any case, he remembers fondly his “great mentors” in economics—Geoffrey Woglom (the Richard S. Volpert ’56 Professor of Economics) and Professor of Economics Daniel Barbezat—who served as advisers for his thesis on the philosophy of economic thought. Along with Professor of Political Science Thomas Dumm, “they inspired me to think a little differently about subject matter that came before me”—a sentence that amounts to a good offhand definition of a liberal arts education.

Norton Starr, the longtime math and computer science professor who retired in 2009, recalls Lakdawalla as “not only very bright but also blessed with a wry sense of humor—a real pleasure to deal with.” Starr playfully dubbed his pupil “Radius Wakdaladder,” and still keeps abreast of his career moves and achievements. Starr provides insight on the math-philosophy double major: “Part of what drove that was the fact that math at Amherst traditionally had one of the most difficult senior comprehensive exams. Word gets out about that sort of thing, so a lot of math students—not Darius, I’m sure—doubled up their major to be sure of graduating.”

For most of his undergraduate career, Lakdawalla lived with the same especially brainy cluster of students. One of the group, Jordan Vinarub ’95, who says he himself was “not one of the brainiacs,” extols Lakdawalla as having had “the greatest intellectual impact of anybody in my life” and having been “the very model of the Amherst ideal of intellectual growth. He was a total genius—but also ethical, a great friend, a humanitarian.” Vinarub vividly recalls bull sessions that Lakdawalla transformed into genuine learning experiences “by challenging conventional wisdom. I was shocked by some of his positions, such as flatly rejecting capital punishment even if your own family members were the murder victims. ‘What are you saying? That’s crazy!,’ we’d shout at him. ‘Violence is never the answer,’ he’d reply calmly, and we’d be forced to think about the issue in a different way.

“At the same time, Darius was definitely a regular guy, a down-to-earth knucklehead like the rest of us. And he still is: we play the Xbox video game online a lot together.”

When it came time to make a decision on post-graduate work, the young economics-mathematics-philosophy-music devotee chose the first of those because “economics provides the undergirding for dealing with so many of today’s issues and challenges.” Adds Lakdawalla, with a rueful laugh: “But if I hadn’t majored in math, I would have crashed in graduate school. I competed there with lots of European students who were better prepared than any of us Americans—in various subjects, not just math; none of us had as much academic background to draw on as the Europeans did.”

Despite his summa and Phi Beta honors, only one of the grad schools to which he applied, the University of Chicago, admitted him. Vinarub, like Lakdawalla himself, brushes aside that metaphorical stiff arm. “We all posted our grad-school rejection letters on the walls,” Vinarub says. “We’d scrawl our responses to them right on the letter. Anyway, it wasn’t like Darius was not sought after. When he’d leave Amherst to attend conferences on economics or whatever, various graduate institutions, especially business schools, would aggressively recruit him.”

Lakdawalla frankly expresses his feelings about Chicago. “I wouldn’t have gone there if I’d had choices. I was averse to the ideology, the epistemology, of the place, which centered on theory and behavior to a degree that turned off a lot of economists. In those days, Chicago students were encouraged to tackle more complex and ambitious projects than they may’ve been prepared to handle. To a degree, that still seems true.” Nevertheless, Lakdawalla retains a considerable respect for Chicago-trained economists and often advocates hiring them.

In June 2000, with his newly minted Ph.D., he sought an academic post. Again, the pickings were slim. He says he rejected one university’s offer because he didn’t want to live in the rural South. His only other bid came from RAND, the sprawling, half-federally-funded think tank. It seemed to be a natural fit: RAND emphasizes interdisciplinary studies, marrying, as one knowledgeable assessment puts it, theoretical concepts and formal economics with applied science and operations research.

A confirmed Angeleno, Lakdawalla chose to work in RAND’s Santa Monica, Calif., headquarters. He lives nearby with his wife, Emily Stewart Lakdawalla ’96, and their two daughters. Making his way up RAND’s precisely calibrated organizational ladder, he has authored or co-authored more than two dozen articles. The topics range from Medicare and the poor (“results suggest the crucial importance of accurate poverty measurement in evaluating the progressivity of complex government programs like Medicare or Social Security”), to “disability forecasting” (Medicare projections should include that as well as traditional data), to the effects of food prices on body weight (“As we have gotten wealthier and more technologically advanced, food has gotten cheaper and work more sedentary.”). In addition, Lakdawalla has served as a peer reviewer of some 25 articles in refereed journals.

At the same time, he has successfully pursued administrative positions, becoming a “founding father” of an organization called Precision Health Economics, which describes itself as a health care consulting company providing “sophisticated quantitative analysis” on a “wide array” of subjects, and research director for a part of RAND that deals with the economics of health care. In September 2009, the University of Southern California created the Schaeffer Center for Health Economics and Policy, and he became its first director as well as a USC tenured associate professor; in the process, he retained a formal RAND affiliation.

At age 36, the boyish, slightly built Lakdawalla projects the quiet professional self-confidence of an older man. Easygoing and somewhat self-deprecating in conversation, he nonetheless takes care to express his thoughts with precision. Those qualities have served him well in developing the skills of an administrator/manager and grafting them to those of a researcher/analyst. In October 2009, he took time from his directorship and professorship at USC to accept (along with several collaborators) the prestigious Eugene Garfield Economic Impact of Medical and Health Research Award for their paper “U.S. Pharmaceutical Policy in a Global Marketplace.” The paper addresses the issue of levying price controls on prescription drugs. “Our research shows controls to be risky policy,” Lakdawalla says. “Better to expand access to drug insurance than to reduce prices.”

The field into which the health economist chose to expand is very free-form by academic standards. Since the 9/11 attacks, anybody with minimal credentials, perhaps even none, has been able to set up shop as a terrorism analyst. Retired field-grade military officers, including some who’ve never been within earshot of a suicide bombing, deliver weighty pronouncements as TV talking heads. Professors in various disciplines do the same, though with greater circumspection and better-marshaled evidence, in a wide assortment of journals. The field has matured, as the Internet measures maturity: Google “terrorism experts,” and a bit of browsing produces one link promoting an “online anti-terrorism studies certificate” and others touting dating services (“Find Arabic Singles”).

Easy entry aside, Lakdawalla says, terrorism research and analysis “was for a long time a fringe field. RAND’s Brian Jenkins was its founding father. His work was triggered by the hostage events at the 1972 Munich Olympics and continued for decades.” Jenkins published extensively on the subject; his series of articles in the 1980s contained the memorable phrase, “Terrorists want a lot of people watching, not a lot of people dead,” an aphorism that thousands of bombing victims would doubtless dispute.

Lakdawalla made his first foray into terrorism research and analysis to explore the issue of federal insurance coverage in case of additional terrorist attacks on the United States. That study grew out of a phone conversation with George Zanjani of the Federal Reserve Bank of New York. “George and I were writing a paper on a technical topic, health insurance and sick days. He was at the time the New York Fed’s insurance expert, so he, like me, had a strong interest in risk and precaution.”

Their resulting article on the terrorism-insurance market addressed a question given unprecedented urgency by the 9/11 attacks: whether the property-casualty insurance industry alone should have to provide coverage for similar attacks. Although bills creating a federal umbrella had been introduced repeatedly over decades, they always foundered. In 2002, Congress finally passed one, the Terrorism Risk Insurance Act, but it was good for only three years. The case mounted by Lakdawalla, Zanjani and allies helped secure an extension in 2005 and again in 2007. (Assistance is at present capped at $100 billion per year.)

In the authors’ view, federal intervention, as insurer of last resort, is essential to mitigating terrorist damage. One of their concerns was leveling the field of risk, preventing a shift in the focus of terrorists from sites that are less vulnerable (insured and heavily guarded) to those that are more vulnerable (uninsured and lightly, if at all, guarded). Potential targets of terrorism, Lakdawalla says, “protect themselves too much, because they fail to consider how safeguarding their own facility physically will tend to push terrorists onto their neighbor’s. As economists, we view that not as unethical but as socially inefficient—a pure waste.”

Does that amount to original thinking on the part of Lakdawalla and his co-author? He replies, with typical modesty and preciseness, “Perhaps original with regard to terrorism. The same idea with regard to crime has been around for a while: installing a burglar alarm in your house simply sends a would-be thief elsewhere.” (Ultimately, however, that might be more than self-serving: if all people alarmed their houses, burglars would have no place they could safely rob, and—logically—home robberies would cease.) 

In 2007, Lakdawalla took a very different look at terrorism. With co-author Claude Berrebi, an Israeli, he examined factors motivating terrorist attacks against Israel since its founding in 1948, aiming to uncover the “most important determinants of terrorism risk.” Two questions, the authors argued, lead to that determination: “Do terrorists behave rationally when they decide which targets to attack most often?” and “What is the empirical pattern in terrorists’ decisions about when to attack?”

Lakdawalla and Berrebi employed a series of complicated (to the layman) mathematical formulas, data tables and calculations involving space (geographical location of terrorists and their targets) and time (the interval between attacks). They also created a “terrorism risk thermometer” for various Israeli localities and charts showing “hazard rates” according to weeks elapsed since an attack. The conclusions: At least in Israel, terrorists “hit targets more accessible from their own home bases and international borders, closer to symbolic centers of government administration, and in more heavily Jewish areas,” the article states. In addition, “long periods without an attack signal lower risk for most localities but higher risk for important areas such as regional or national capitals.”

Should we be surprised at such findings? Surely not at the first three, but that doesn’t reduce their value. Terrorism analyst Todd Sandler, a professor at the University of Texas at Dallas who admires Lakdawalla’s “innovative and convincing” work, notes that, “People have a tendency to say, ‘The goals of terrorists are irrational, so they’re irrational, too.’ That’s not how economists look at the situation. They ask, ‘Given their goals [or, as Lakdawalla puts it, ‘Given that they became terrorists’], do terrorists respond in appropriate ways to their opportunities and constraints?’ In that sense, they do act rationally; they just don’t do so in ways and on behalf of goals that we like.” In other words, empirically based conclusions such as those of Lakdawalla and Berrebi can dispel illogical and harmful biases that impede a clear view of terrorism.

Another analyst, Max Abrahms of Stanford’s Center for International Security and Cooperation, gives a lukewarm endorsement of the “rational” theory. “Terrorists probably are rational,” he says, “but not necessarily in the sense that they’re looking to achieve a coherent political agenda. They could be using terror for numerous other, personal ends—prestige, identity, direction in life, a sense of belonging, to escape boredom, even for money.”

(Adds Abrahms, in a critique directed at other writings by Berrebi, Lakdawalla’s co-author, “He believes targeting civilians—inflicting maximum casualties on them—is effective in forcing their governments to make political concessions. I’ve studied that a lot, and I find just the reverse. Attacks tend to get those governments to dig in their heels, which is one reason so many of the terrorist groups—ETA, the IRA—have been toiling for decades without substantive success.”)

From all that a question arises naturally: can any of Lakdawalla’s conclusions be applied to the terrorist threat to the United States? Lakdawalla replies as the properly cautious—or just precise—economist he is: “I would not apply it wholesale to the U.S. without further study. One can never tell how countries differ in their institutions and responses without looking at further data. But our findings—that terrorists behave strategically and rationally—may have important implications for terrorism policy around the world.”

Lakdawalla virtually dismisses another question asked of every terrorism analyst for the past several years: why have there been no organized, successful attacks on the United States since 9/11? “Nobody knows why. Terrorism isn’t like earthquakes—it doesn’t strike randomly, without regard to the vulnerability of the target.” He takes that opportunity to castigate the federal practice of color coding so-called threat levels: “It’s stupid. It’s risky for the government to lower the level, since this sends a signal of relaxation that might encourage terrorists to attack. But it’s also difficult to raise the level, since it is hard to undo the escalation. The entire scheme is built on the naïve assumption that it’s possible to disclose the risk of terrorism without simultaneously influencing that risk.” (A Homeland Security advisory panel has been pondering a reduction in the number of coded colors from five to three—“new colors for spring!” comments a wag; this change would not meet Lakdawalla’s objections.)

Lakdawalla takes strong exception to a basic tool of U.S. anti-terrorism policy, the pervasive, post- 9/11 “hardening” (increased fortification) of overseas bases and embassies. “Nobody in Congress appears to have asked what I think is the logical question: is it wise to expose more civilians to terrorism risk in exchange for reducing the risks faced by trained and armed soldiers guarding bases and embassies? There is a tendency among policymakers to protect everything that can be protected and to leave exposed all the targets that can’t be. That is why we have lock-downs at airports, military installations and government buildings, yet porous train stations, public buses and shopping malls.
“We need to think proactively about protection in a way that funnels terrorists to the targets where they will do the least damage. In game theory, that is sometimes called the ‘honey pot/briar patch’ strategy, because it invites the opponent to shift toward a target where an attack is less costly.”

Lakdawalla advocates an approach “not unlike the shift toward the Cold War doctrine of ‘mutually assured destruction.’ At the time, it was similarly controversial to argue that the U.S. did not need to emphasize protection against a nuclear attack, but should instead emphasize overwhelming retaliation. That was widely regarded as a crazy idea when RAND propounded it [ignoring the implications of the acronym MAD], but perhaps something like it may be needed now in our response to terrorism.”

During our conversation over a recent breakfast at a Washington, D.C., hotel, Lakdawalla mused about terrorism in other ways he finds interesting and instructive. Three examples:

(1) “In our research on terrorism in Israel, we came across a kind of chronology of IRA attacks. First they were against British soldiers. Then, when the soldiers were issued flak jackets, against the police. When the police got the jackets, against politicians. Who after that? Since a jacket can’t be issued to every civilian, it was civilians. It’s not that the terrorists wanted to kill civilians, but they were the logical next target.”
(2) “Among defenses against terrorists, not building large, vulnerable structures downtown might seem logical. Not traveling on planes or trains might seem so, too. But they would represent capitulation to terrorism and a blow to our national prestige.”
(3) “From an insurance standpoint, a terrorist attack is the worst risk. A nuclear attack would be the worst. But it’s hard to get people to buy catastrophe insurance. Nobody wants to think about a catastrophe, and buying insurance against it acknowledges implicitly that you are thinking about it. That’s ostrich-like behavior.”

When he finds himself immersed too deeply in theory and postulations, Lakdawalla often remembers a lesson from his first year of graduate school: “You needn’t sit around studying economic models to know what makes sense, what works. Mom-and-pop stores, with no economists advising them, learn to survive by making decisions that accord with the market. At Chicago, Milton Friedman pointed that out. Pool players provide another example: they don’t have degrees in physics, but they know the ‘laws’ governing the game—literally how to play the angles.”

These days, Lakdawalla is less immersed in anti-terrorism projects, although he and Zanjani remain involved in some aspects of anti-terrorism work vis-à-vis their insurance research. “At this point, the whole thing’s a bit been there, done that for me,” he says of the anti-terrorism work. “I need to be energized. Besides, it’s hard to be a health economist nowadays and not be actively involved in that area.”

In fact, he’s never been far from it. His current emphasis: what he calls “the economics of health care innovation. For instance, my colleagues and I are interested in finding the best ways to encourage new medical breakthroughs while at the same time ensuring that many patients can afford to use the latest medical technology.” They contend that, rather than capping or regulating prices, a better policy is to offer subsidized, low-cost health insurance that covers breakthrough treatments. “The potential health benefits dwarf the cost of such a policy,” he says.

And in Lakdawalla’s foreseeable future? “There’s a great deal of controversy surrounding the practice of marketing prescription drugs to patients and physicians,” he says. “Proponents argue that marketing provides valuable information and improves patient access to new treatments; critics argue that it distorts prescribing patterns and results in inappropriate use of therapy. Several collaborators and I are investigating and evaluating various aspects of the issue.”

On a personal level, however, Lakdawalla finds himself still looking at the world through anti-terrorism lenses. His frequent trips to the Los Angeles airport provide ample fodder. “I routinely see a hundred people waiting to reach the security checkpoints, with one bored-looking cop standing nearby. Why? Because the system focuses heavily on baggage screening, which creates enormous vulnerabilities: for example, lines of passengers who present an easy target. So I think, ‘That cop is all that’s standing between us and a terrorist attack.’”

Umar Farouk Abdulmutallab, who allegedly tried to ignite explosives on a Northwest Airlines flight last Christmas Day, now faces multiple charges, including attempted murder of the  passengers and crew. "Vulnerability is inevitable in a free society," Lakdawalla says.

As we all came to realize last Christmas Day, sometimes even the cop isn’t standing between. On a Northwest Airlines flight from Amsterdam to Detroit, that was left to an ordinary passenger, Jasper Schuringa, who spotted another passenger attempting to ignite explosives and helped wrestle him into submission before any major damage occurred. The alleged bomber, Umar Farouk Abdulmutallab, now faces multiple charges, including attempted murder of the passengers and crew. 

Lakdawalla takes a measured view of that near-disaster. “Vulnerability,” he says, “is inevitable in a free society, whose citizens will tolerate only so much government intrusion in the name of security. While airline passengers may be some of the most ‘screened’ people in Europe and America, even they are not—or not yet—subject to extensive interrogation or full-body searches. And, sadly, intelligent terrorists will always choose a route of entry that we have chosen to permit. For instance, the Christmas Day bomber strapped explosives to his groin, where he could be confident that even a properly trained airport security guard would not dare to trespass.

“On the other hand, that event also illustrates the strength of an open society. Although intelligent terrorists exploit vulnerabilities, intelligent citizens can anticipate threats and prevent the past from being repeated. Ultimately, it was not an intrusive security apparatus that foiled the destruction of that Northwest Airlines flight, but the quick reaction of another passenger.”

Ah, the complexities of modern life. Remember when Delta Air Lines proclaimed that “Getting there is half the fun”? Until those distant days return, we might consider anointing Darius Lakdawalla as Philosopher-King of Risk-Free Travel.

Roger M. Williams, a magazine journalist since graduation, worked on the staffs of Time, Sports Illustrated and the now-defunct Saturday Review and has freelanced for many other national and foreign publications. He is writing a play set in Budapest during the Holocaust.

Top photo by Drew Reynolds

Bottom image © Jerry Lemenu/EPA/Corbis