Behavioural Economics: Pirates anchor ransom price

Somali piratesA lot of behavioural economics textbooks look at the role of anchoring in our decision making processes. The anchoring effect is a type of framing where the appraisal of options is affected by an original starting value (or anchor). This is despite the anchor being arbitrarily chosen. For example, when asked to value the same property after being given different anchor values, real estate agents gave valuations that were significantly correlated with the arbitrary anchors provided.

With regards to the seizures of ships by Somali pirates, economists have had a particular interest in the negotiations that have taken place especially as the market has been generally free of government intervention. Research has shown that by sending consistent (cheap-talk) signals about their type (“sophisticated pirate” / “poor owner”), each side hopes to negotiate a better outcome but have reason to speed up the negotiation process:

Pirate – the hostages (and themselves) need to be fed
Crew – cargo might be perishable and the vessel is not in use therefore not making money.

Floor PriceHowever higher past ransoms are positively associated with subsequent ransom amounts – higher ransom amounts pass on a negative externality on future victims. This finding has policy implications for governments considering becoming involved in ransom negotiations. For instance, under political pressure to recover hostages, the Spanish government paid 1.2 million USD in 2008 for release of the Playa del Bakio, more than twice the previous record amount for a fishing vessel – source: Barrgh-gaining with Somali Pirates, 2012 by Olaf J. de Groot, Matthew D. Rablen and Anja Shortland. Therefore a floor price (see graph) has been set for future negotiations and it is a point of anchoring for the the pirates. Also from this paper is a graph (see below) that shows the duration of hijack and the ransom paid in US$m – there is a lack of correlation although the authors suggest that there is insufficient observations in this analysis.

The authors of the paper conclude by saying:

ransoms might be lowered by making rich ship-owners more patient by, for instance, by governments providing emergency loan guarantees to cover the running cost of the hijack, or compensating ship-owners for loss of hire, while offering
significant financial compensation to the crew.

Pirate eco

Leave a Reply

Your email address will not be published. Required fields are marked *