Why Negotiating a Ransom Is the Trickiest Trade in the World

Tracy Alloway (0:08)

Hi, and welcome to another edition of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:13)

And I'm Joe Weisenthal.

Tracy Alloway (0:14)

So Joe, this is the third and final episode in our first ever series about the intersection of crime, finance and markets. Are you sad or excited for the finale?

Joe Weisenthal (0:29)

I'm really excited about this one. I mean, I really, you know, I think a general theme of all of our episodes has been the markets that, where markets appear that people don't talk about very much, but these crime ones have been really in the sweet spot. And I think today's is going to be a really good one.

Tracy Alloway (0:49)

All right. So one of the reasons that you and I find these sort of crime markets so interesting is that they often deal with really entrenched problems in economics. They're honestly some of the most difficult markets in the world. And I think the one that we are going to talk about today is probably the most problematic in all of existence. Like every single big economic problem you can think of, stuff like moral hazard, adverse selection, information asymmetry, all of that is present in this market. And if you get it wrong, someone might die. So there's an added bit of drama here.

Joe Weisenthal (1:33)

Right, the consequences of this market that we're going to talk about are enormous. Because as you mentioned, if the market doesn't work right, it could result in death. And on top of all the things that you mentioned, adverse selection, moral hazard, information asymmetry, there's also deep issues of emotion and morality. And economists sometimes like to abstract those things away and sort of assume that they don't exist, but we're going to be talking about a market where it's essentially impossible to wipe those things away, which has the benefit of sort of informing our understanding of all markets by forcing us to confront those things.

Tracy Alloway (2:14)

Yeah, that's exactly right. And one of the more amazing things about this particular market is that there's actually a pretty decent solution to these problems. A corporate entity has actually come up with a good way of dealing with these problems. And it seems to be working out reasonably well.

I guess we should go ahead and say what it is.

Joe Weisenthal (2:36)

We should stop tiptoeing.

Tracy Alloway (2:37)

Yeah, I know.

Joe Weisenthal (2:37)

Stop tiptoeing. Why don't you say what it is and introduce our guest?

Tracy Alloway (2:41)

We are going to be talking about the kidnapping market. How insurers actually insure kidnapping risk, how the whole process of ransom actually unfolds. So here with us today to discuss the kidnapping market is a woman called Anya Shortland.

She has written a fantastic paper on this very subject called Governing Kidnap for Ransom, Lloyd's as a Private Regime. She is also a reader in political economy at King's College London. So without further ado, Anya, thank you so much for joining us.

Anja Shortland (3:20)

Well, thank you for bringing me onto the program.

Tracy Alloway (3:23)

So did Joe and I get that introduction right? Is it fair to say that kidnapping or the kidnapping market is probably one of the most difficult markets around?

Anja Shortland (3:34)

Well, I certainly think of it as the trickiest trade in the world. So each individual trade is absolutely fraught with difficulty.

Joe Weisenthal (3:43)

I think this is a we have the title to this episode, The Trickiest Trade in the World. Thank you very much for that. That solves that problem.

Why is it? Why do you consider this the trickiest trade in the world?

Anja Shortland (3:56)

Well, it starts off with a random pairing of transaction partners. You don't get any choice about who you're going to be trading with. Usually a kidnap is a black box event. Somebody hijacks a car or a boat and out jump some hostages. So you don't know anything about the people that you're going to be transacting with, and then you have to do a one-off transaction with them.

The problem with that transaction and the incomplete information is that nobody knows what kind of price should be paid. So the people who have kidnapped a person don't know how rich or poor that person is. They might have a guess. However, for the hostage stakeholders, the question is not necessarily how much can I raise, but how much will the kidnapper settle for? So you have that bargaining problem with incomplete information.

Unfortunately, information can be extracted through the strategic use of violence. You can't stop the kidnappers from chopping off digits or at least threatening to do so.