0:33 Intro. [Recording date: May 2, 2019.] [Note: This podcast episode contains some graphic descriptions of violence that may be unsuitable for young children. Parents or teachers may wish to listen to the episode before suggesting it to children.] Russ Roberts: My guest is Anja Shortland.... She is the author of Kidnap: Inside the Ransom Business, and her book is our topic for today.... The very first sentence of this book really got my attention. Here it is: Every year thousands of people are kidnapped, to be ransomed back to their families, employers, or governments. That's a stunning sentence for someone who is not an expert in this area. And, to be honest, my first thought was: That's a little hard to believe. Thousands every year? Is this true? And, how would we know? Anja Shortland: Yes, it is true. This is all around the world. And there are a large number of cultures in which kidnapping is very much part and parcel of what people do to be heard, for people to try and get a little bit of money. Almost all of those victims would be local people. So, it would be a local-on-local kidnap. And, we know this because people sometimes report it. But usually people only find out the true scale of kidnappings, and kidnappings for ransom, when the Truth and Reconciliation Commission comes afterwards and say, 'What happened to your family?' And then we get the true picture of how many people actually get kidnapped. Russ Roberts: There's no official database anywhere. Anja Shortland: No, there isn't. And the picture we would get from the media is very, very biased toward the kidnaps that go wrong. So, people who quietly resolve a kidnapping commercially through negotiation, etc., they don't want to advertise that they've paid money for their loved ones that they were able to raise--hundreds or thousands of dollars--to get someone back. So they tend to be very shy about revealing this. Russ Roberts: This is a very remarkable book. It's a superb window into the economics and politics and culture, sociology, of a world of economic exchange that most of us mercifully know nothing about--not just a little. Most of what we know about kidnapping, comes through[?] movies or extraordinary cases that get dramatized in various ways. And, what you're writing about is quite--I guess the word I would use is 'ordinary,' in a certain dimension. How did you do the research for this book? How did you discover the intricacies of this market? Anja Shortland: It all started off for me with Somali piracy. And, I was looking at this problem and I thought there were some things that were really puzzling. The first thing I found really puzzling was that you can take a multimillion dollar asset off the high seas and park it in plain view of the Somali coast--which is supposed to be anarchic. So I thought, 'Well, how does that work?' And then I watched people negotiating ransoms, and I thought, 'What is a fair price for a Greek supertanker?' And then I watched ransoms being dropped in the sea next to these ships, and I thought: How do they know the pirates are going to come off? Why did they always come off? Why didn't any ships get re-hijacked? Given that they were a slow and crude and traumatized crew, that would have been the obvious target for anybody else; yet they were never touched. There are all sorts of puzzles there that really intrigued me as an economist. How do you contract with a counterparty that you don't trust; you don't share any common ground with; you have all the worst suspicion about them? And, if they cheat you, there's absolutely nothing you can do about it. And yet, there was trade in high-tech ships--dozens and hundreds of ships--and somehow it almost always went right for almost everybody. So, that really piqued my interest as a researcher. Russ Roberts: Then you get into the--that's--'hijacking' would be the normal term for that. A form of kidnapping, because there's crew involved. But when we think of a kidnap, we think of a person walking along a street or driving along and being abducted at gunpoint; and that's what much of your book is about. So, how did you get into that; and then, how did you find out about it? Anja Shortland: Yeah. So, I was talking to the people who were resolving these hijacks-for-ransom, and I said, 'I'm really, really interested. Can you help me understand how this actually works?' And I spent years asking this question, until eventually they said, 'Look, we really cannot talk about Somali pirates because we cannot keep our customer confidentially if we start talking about Greek supertankers. But, we may be able to help you if you talk about petrol in Mexico City or Rosa in Bogota.' Because, once you've got a certain volume of business it becomes much easier to not talk about specifics. And that's where my project really broadened out; and I realized the same protocol for resolution, and the same business ideas apply regardless of whether somebody gets taken in Colombia or in Somalia or in the Congo or in the Niger Delta. It always works the same way.

6:57 Russ Roberts: So, let's talk about--you use the word 'tricky,' which is an understatement. So, talk about why kidnapping as an entrepreneurial activity--and of course there are many motives people have for kidnapping. You mention them in the book: You talk about for political purposes, terrorism, emotional needs to be noticed. But let's just talk about it as a business activity, which is a big part of it. Why is it tricky? On the surface, it seems pretty straightforward: You grab someone; you make a demand for money; you collect the money; and the person goes free. But, each of those steps is unbelievably fraught with uncertainty and strangeness, unlike a normal business transaction. So, what are some of those issues? Anja Shortland: So, somebody gets taken off the street, gets kidnapped; and the stakeholders--the family, the firm, possibly the government--will have to come to some sort of commercial agreement with the kidnappers. And this agreement will be a one-off transaction--or at least that will be what everybody hopes. As I said, there is no reason why they should trust the kidnapper: they haven't chosen to interact with the kidnapper; they know nothing about the kidnapper. And yet, they will have to engage in trade with them. They will have to find a price, where the price could be anywhere between the maximum amount the government might be prepared to pay to retrieve a citizen, and the minimum amount a street gang might be willing to settle for. Might be several million, a range of several million, to play with. And, if you've decided, settled on a price, somehow, you then have to make a transfer of money to the kidnappers; but your banker is not going to help you, because it's a criminal transaction, so it will probably have to be done in cash. You have to get the cash to where it's needed, and that's going to be difficult: if it's hundreds of thousands you can't just take a suitcase and take it through Customs. But on the other hand you don't necessarily want to alert the local authorities that thousands or hundreds of thousands of dollars or pesos or nairas are going to be needed for this. Then you have to get to the kidnappers, which also requires a leap of faith: What if they don't acknowledge payment? What if the hostage isn't even alive any more? If you do get it to the kidnappers then they don't necessarily have to acknowledge receipt. You can't prove that they've got it. It might have been intercepted. They might be very furious with you for not having done the right thing. And then they'd have to release the hostage--have to choose to release a potential future witness against them. So, why would they do that? So there are just so many things that can go wrong with this trade, that you'd say by Murphy's Law this [?] should just fail every time. And yet-- Russ Roberts: But it doesn't. Anja Shortland: And yet, so this was a really surprising statistic: I interviewed a large number of people from [?] the community; but it sort of all came out that about 97% of hostages come back alive, if you are insured for kidnap ransom. Russ Roberts: Yeah; we'll talk about the insurance in a minute. Listeners know I like to make fun of decimal points--I think 97% would be sufficient in that statistic. But, that data point, given that there are probably many of them that do not get reported, we don't have full information on. But it may be in those cases of insurance.

11:05 Russ Roberts: I want to tell a story: I've told it before; it's from my book on Adam Smith where, I stayed at a cabin in Big Sur, California, a beautiful spot. And I negotiated this deal sort of the last minute, and I had no chance to send a check to the owner of the cabin for the two nights we were going to be there. The one night, it turned out; but I paid a two-night minimum because I was so eager to have a day with my wife at Big Sur. And she said, 'Oh, don't worry about the check, sending me a check. Just, when you leave, just put the money down in cash on the table, the breakfast table. The cleaning lady will pick it up.' And, you know, that's an obvious classic problem of principle-agent trust: so many things could go wrong there. I could decide not to leave the full amount, because I didn't think it was fair after thinking about it, to pay for to nights when I'm only staying one. The cleaning lady could pocket the money. The landlady--the owner--could claim she never got the money. But, of course, none of that happened. I left the cash on the table. My joke is that I took a photo of it, just in case these things were claimed, which, of course, a photo has no value whatsoever, but it made me feel better. And, you know, through culture and even though there was no repeat business--it was a one-off transaction, almost surely--everything went fine, and smoothly. But this kidnapping--these kidnapping interactions are nothing like that. And, you never think about, as someone who hasn't[?] thought about this issue before, about the challenge of--you might have seen it in a movie; but the idea of the negotiation process. The idea of making sure the prisoner is alive. It's a classic thing in a movie, where the hostage is shown holding a newspaper from a recent time; and as you point out, Photoshop is reducing the value of that as a piece of useful information. But all these things are incredibly uncertain. So, one of the questions you have to ask, especially since many of the people involved in this have very different incentives and emotional stakes and all kinds of difficulties, why would it ever go smoothly? So, what did you discover that helps understand why it goes so well? Anja Shortland: The only reason for this kind of trade to go smoothly is what economists call the shadow of the future. So, people behave well this time 'round because it will help them in their business in future interactions. So, when I started saying what a tricky trade this was, I started off by saying this is a one-off transaction. And it would be for the factory. But, this will only work if the kidnapper understands that he's better off keeping the promises than breaking the promises. And that works because there must be a mechanism for information about good and bad behavior to be transmitted to future victims. So, if you have a kidnapping gang working in a city, then local gossip will probably ensure that people know whether or not they can trust the kidnappers. However, how does that work for transnational hostages? How does it work for the tourist that gets picked up in a bar late at night? How does that work for the aid-worker? How does that work for the expatriate? And that's where kidnap insurance comes in. It's the kidnap insurance and the fact that there's a very limited number of insurers, syndicates, underwrite kidnap-for-ransom; and they exchange information about trustworthy kidnappers and rogue kidnappers. And they make sure that rogue kidnappers will make it very difficult to continue in business, once they've broken their promises.

15:45 Russ Roberts: And, of course, as you point out, there are specialists who negotiate, help pay the ransom; and the insurance market is essentially coordinating that. It's a very strange market, because--I think you say this explicitly although maybe not quite the way I'm going to say it. Without the insurance role--without a role for insurance companies and the purchase of insurance to reduce the risk of kidnapping, or the cost of it, the kidnapping might not happen because it would be much harder to extract money. So, what the insurance does is--you use the phrase, 'it orders the market.' It creates certain stabilities, is the way I would describe it, that otherwise would keep these transactions from happening. So there's a certain level of, not micro moral-hazard, but I always[?] think of it as macro moral-hazard: Just the phenomenon that the insurance market exists and that you can insure against kidnapping--which is really, crazy--is what allows it to be an ongoing, in certain dimension, an ongoing business activity. So, let's start with: Who buys insurance? I've traveled abroad a few times in my life. I have never bought kidnap insurance. I don't even buy that insurance against my flight being messed up that they offer me for $17 or $32; and they send you that scary thing that says, 'You realize now that if your flight is canceled, or whatever, you are going to be in trouble.' And I just ignore it and go on and I've always been okay. But, I wonder how I would feel if it said, 'Would you like to buy kidnap insurance for your time in Caracas?' Or wherever. And so, talk about how that--who insures? Who buys kidnap insurance? Anja Shortland: You're absolutely right, pointing to moral hazard: the problem that people change their behavior because they are insured; and they become possibly more risk-seeking or less keen to minimize their risks if they know that there is insurance. So, the condition of kidnap insurance is that you don't know about it. So, it would be bought on your behalf by a responsible firm that is putting people in harm's way, whomso, if a firm operates in what the industry calls 'complex and hostile territories,' then they have the option of buying kidnap-for-ransom insurance for their employees. But they must not tell their employees that they have done so. Russ Roberts: I love that [?]. Anja Shortland: With the kidnap insurance also comes a responsibility to train people how to behave in the case of a kidnap. And, to put in place all sorts of security protocols to really minimize the kidnapping, the probability of a kidnapping occurring. So, Plan A, for an insurer is always that their customers do not get kidnapped. It is not in the insurer's interest to get into a ransom situation in the first place. So, it's a very cleverly structured contract to make it very unlikely that a kidnapping occurs. And then there's Plan B: If something goes wrong, it will almost always go right. We will make people come home, in a reasonable time, absolutely minimizing the dangers to them. Also minimizing the price. And therefore the incentives for the kidnappers to target their customer--that type of hostage--again. Russ Roberts: And what's Plan C? Anja Shortland: Oh, very rarely needs to be operated on, thankfully. But, yeah: The kidnap insurance will only work if Plan A works almost all of the time; and Plan B mops up almost all of the rest. Some people die in captivity for existing medical conditions. And some people try and escape--and that's very, very dangerous. But, yeah. There are [?].

20:28 Russ Roberts: So, let's go back to the beginning of the insurance story. It's a little bit strange because--I don't really--the moral hazard, as you point out in the book, is a little bit different than it is in other situations. I don't really have a very big incentive to go into the bad parts of a city, or the deserted stretches of highway, and putting myself at risk to be kidnapped, because I say to myself, 'Well, it's no big deal; I've got insurance.'-- Anja Shortland: Yes, but your employer might say, 'We'll travel down that road. We'll engage in this activity, because we are covered.' Russ Roberts: Right. They might expose me to the risk without my-- Anja Shortland: full knowledge. Russ Roberts: Yes. But the other part, which I think is also, in many ways, more interesting to me, is that the insurance company has a great deal of specialized knowledge that is not in the--that would be very expensive for the individual or for the firm to acquire. So, by buying the insurance I tap into that [?] as the firm--I tap into that knowledge. And of course, it is then in the insurance company's interest to make sure I act on that knowledge. And that's why you have the--you talked about training programs. I assume there's--I assume there's regions you are not allowed to go into, or your insurance is going to be voided. Correct? Anja Shortland: Indeed. Yes. There are certain things that are uninsurable; and that's very much part of the product. So, certain things cannot be done, unless whatever local, community, overlord, etc. sort out the protection arrangements that they are willing to afford to foreigners travelling through the area. Russ Roberts: And the insurance company obviously wants, has to be acquiring information constantly about where the worst dangers are, and so on. They want real time risk as closely as they can acquire it, and as accurately as they can get it. But, let's talk about a case where, despite those best efforts at prevention, there's a kidnapping. Are there certain--is there any pattern to what goes wrong and when someone does get abducted? Anja Shortland: If you know that somebody can kidnap you--if it's known there is an warlord or a rebel group or insurgent movement that has the power to kidnap people at will--then it is usually a good idea to pay the protection money. So that they don't do it. So, the kidnappers save themselves the hassle of actually kidnapping somebody and conducting a ransom negotiation, etc.--enough people coming then that works better, taking protection money actually works better than occasionally squeezing a hostage dry. And similarly for the firm, that wants to do business in a particular territory. It's better not to put the employees at risk of kidnapping. So, mostly we see kidnapping in areas where you don't know who to pay, because there are multiple kidnapping gangs, multiple people laying claim to a territory, or where the state moves in on drug cartels, for example: so that would be the Mexican story. If you don't know who governs, who rules a territory, then that gets difficult to organize, protect. And that's where we see kidnapping. So, that would be the pattern: You don't know who to pay for protection. Russ Roberts: Wouldn't that be a place that you wouldn't want to do business in? So, I guess the--I guess it would have to be the case that when you are operating, we see a business operating in an area where they don't know who to pay, and they then engage in kidnapping, insure--engage in acquiring kidnapping insurance: There must be enormous profits there for them to take that risk. Anja Shortland: Absolutely. And that's why mostly the companies that we see operating in these hostile and complex territories are oil companies, mining companies, etc. It's not worth trying to manufacture cars or print books or something like that.

25:03 Russ Roberts: You tell the story of a guy who is trying to get some equipment from Point A to Point B, and he's told by the rebels that he should put--I think it was $2000--he needed to pay $2000. Is that the right--do I have the right amount? Anja Shortland: That's right. Yes-- Russ Roberts: And he decided that was exorbitant; and he decided he'd just get in on his own. Tell what happened. Anja Shortland: Yes. So, this is someone who is told that there would be a roadblock if he wanted to get his goods from A to B. He didn't want to pay, basically. It wasn't about being exorbitant, but he just didn't want to pay. So he thought, 'I'm going to be clever about this. I'm going to hide the goods on a float. I'm going to put a band on it, and I'm going to let my goods join a procession in honor of the Virgin Mary, and nobody will know that I'm taking these goods across this road.' And the fiddlers fiddled and the pipers piped and everything was absolutely wonderful; and he arrived at the destination with a big grin on his face. And then he realized his friend was missing. His friend has been kidnapped on the way. So, he knows exactly what's happened. Goes off to find the rebels in the jungle camp, this is Colombia, so FARC [Fuerzas Armadas Revolucionarias de Colombia]. People know where they are. He gets directed to the [?]; and they basically tell him that he's been a very naughty boy and that he better go talk to the accountant to arrange a fine for his transgression in trying to evade this £2000 [U.K. pounds v. U.S. dollars?--Econlib Ed.] fee for passing the road. So, he goes into a tent. He finds the accountant with a database, two computers; and the accountant looks at his firm's data and decides that the fine will be $10,000 dollars. And a small tip will be helpful; and also they would like some prescription glasses and a few painkillers to be delivered alongside this ransom. So, this man agrees to everything; get's reunited with his friend. They drive out together. The FARC only keeps the friend's car--which they say will be required on FARC business, for a while at least. So, he goes off home; goes into the next town; raises the ransom; gets the army to help him deliver the ransom and the painkillers and the prescription glasses to the agreed spot. And then a few days later his friend's car arrives as well. And I thought, 'That's a really interesting story, because while there is a kidnapper at the heart of it, it very much sounded like a government enforcing a tax demand by making an arrest.' And I think a lot of the time that's how locals operate in these territories: They just pay whatever is necessary to do business. And, also, the rebel groups will tax business activity within their territory, but they will tax it at such a rate that makes it unprofitable to engage in that business, because they want future business, and therefore they'll be cautious about how much they demand and how unpleasant that demand is made. Russ Roberts: But the friend was okay. The friend was released, right? Anja Shortland: Immediately-- Russ Roberts: and his car came back. Yeah. Anja Shortland: Exactly. So, basically everyone afterwards reverted to equilibrium behavior. The businessman now knew that he was not going to mess with the FARC. If they asked him for money then they would get it. And they didn't hassle him or kidnap anybody else. And everything worked fine after that. So, I think it's really interesting to think of kidnapping as part, really, of an intended protection relationship. Russ Roberts: We'll talk about that. By the way, FARC is an acronym for a rebel group in Colombia, right? Anja Shortland: That's right. Revolutionary Armed Forces of Colombia. Russ Roberts: But, how did the government get involved in making that delivery? They don't get along, right? The government and FARC, right? Aren't they enemies? Anja Shortland: Well, this is some time ago. And, I found it interesting. I wasn't able to get to the bottom of this. But it did seem to be some sort of live-and-let-live arrangement at the very local level. Something that the central government probably had no idea about. But basically, if you leave people in peace out in the periphery, eventually they seem to come to cooperative solutions that allow people to bring investment goods from A to B--you know, the store[?] of them--and, yeah, how the local population improve their lives. Russ Roberts: With a little slice for the rebels to finance their computers, and-- Anja Shortland: Indeed.

30:37 Russ Roberts: So, let's talk about the negotiation. Because, in the movie version, usually, it goes something like, 'We need $10 million dollars or you'll never see your loved one again.' Then people scramble around. Usually in the movies they work with the police. They find $10 million dollars; it's usually then marked. The criminals demand that it be unmarked; and there's always some secret way that the police try to mark it so that they can trace the money, or trace the criminals--the kidnappers. And then the money gets paid--in a suitcase, usually. And sometimes the hostage release goes well; sometimes it doesn't. And we'll get to that piece in a minute. But, the negotiation itself is quite fascinating. Talk about who does the negotiating in most of these situations. Because, it's not the police; and it's not the loved ones, directly. It's a consultant. So, describe how that works. Anja Shortland: We talked about moral hazard before. And moral hazard really kicks in with kidnap for ransom. If you think you are insured for a million, and as an insured person you want to make sure you are treated as well as is possible, and you divulge that information to the kidnappers, and then they know how much money they are talking about. So, that's why that information is kept from the insured person. What insurers want to happen is that the kidnapped person, the hostage, tells their kidnapper is, 'Look, you've got to call my wife.' Or, 'You've got to call my husband,' or 'You've got to call my uncle. Because they are going to be responsible for getting me back. My firm won't take responsibility for me.' So, what that achieves is that the incredibly financially constrained party fronts the negotiation. And that makes it easier to manage the kidnapper's expectations about how much money there is going to be got out of a negotiation. And, the other thing that one really needs to think about is what the negotiation needs to achieve is, a). a price. But b), also it needs to work as a self-enforcing contract, in that it's got to be in the kidnappers' best interest to release the hostage after they've got the money. So, not only do you have to negotiate a price that is acceptable on some level to the kidnapper, but you've got to find a price that convinces the kidnapper that they've got everything that they could possibly have got out of this. Russ Roberts: So, how does that happen? Anja Shortland: The way this process has been described to me, on many occasions, is one of squeezing the towel dry. So, you start squeezing and a lot of water will run out of the towel. You keep squeezing, and you keep squeezing harder; and you give it another twist, and another twist. But whatever you do, eventually nothing else comes out. Or, rather, the drips and drabs that come out are not quite worth holding onto the hostage for. Now, if you know it is going to cost you $500 to hold onto the hostage for another week, and the weekly increment has slowed down to $300 or $200 or $100, it's just not worth holding on any more. So, you start off with a demand. That demand needs to be quite strongly resisted. Because it's not a price as we'd think of in a supermarket. But, it's a figure beyond somebody's wildest dreams of avarice. And if you say, 'That's fine; I'm happy to pay that,' then they will just revise their demand upwards. In a well-organized ransom negotiation, you will have increments on a rather low first offer; but these increments have really got to slow down. So, mimicking this process of squeezing, squeezing the towel dry. The key to, um, paying a morally, ethically responsible ransom is to manage the size of the towel that the kidnappers think they are squeezing. Russ Roberts: How can you possibly do that? Obviously one way is to say, you know, 'My uncle is going to pay for this.' And, 'He doesn't have much money.' He's got a low-paying--you describe his job and describing how low-paying it is. But when the kidnappers expect that you have a corporation behind you, they start with a large number. As you say. And if you respond--do you respond with an incredibly low number? And who is responding? How does that work? And how does the insurance company get involved on the ground with that actual process? Anja Shortland: Well, somebody will take, officially take responsibility for the negotiation. Sometimes that will be the company. And often it will be the family. The family, or the company, whoever takes responsibility, makes all the decisions here. And they are making the decisions in the best interest of the hostage. But they will get advice and they will get coaching, and that coaching and advice will be dispensed by a highly experienced specialist, who has dealt with dozens and perhaps a hundred of this type of cases before. And, who can steer the conversation, and help the stakeholders understand that it's not in the best interest of the hostage to necessarily react positively, in a way, to horrible threats being made. That, to coach them and help them to say: What is the right level? What would be the right increment? Etc. The decisions are made by the stake-holder. All that can be offered as advice and guidance; but it is offered by very charismatic, very calm, and very experienced people. And most people find that very helpful indeed.

37:47 Russ Roberts: And you talked to some of those folks, I assume? Anja Shortland: Yes. I have. Russ Roberts: And, they are probably not like most people you talk to, in the world. They are probably a little bit unusual, I assume. It takes a certain kind of person to find that line of work appealing and to be good at it. Anja Shortland: Absolutely. Most of them are former elite military personnel. And, yeah, they are very calm under pressure. They understand the criminal mindset. They are not easily flustered. Russ Roberts: Tell the story--you tell the story in the book of the family, it was what's in a photograph of a finger being chopped off, with blood everywhere? Anja Shortland: Yes. Oh, absolutely. Russ Roberts: What happened? Anja Shortland: A horrid picture where the family had been threatened with mutilation. And then this picture arrives in the post. The very second where a finger is being chopped off. And the family of course goes into a tailspin. And, the consultant says, 'Well, hang on. They chopped off the finger. Where is the finger? Why haven't they sent us the finger?' Russ Roberts: Spoken like an economist, of course. But, that hostage did come back with ten digits, if I remember correctly. Anja Shortland: Absolutely right. And yes. What the kidnappers had done--a carefully prepared knife, with a little bit spared out. So it looked like fingers were being chopped off. But they weren't. Because, ultimately it's not in the kidnappers' interest to mutilate hostages, to get into a situation where people think they need to mount a rescue: this hostage is lost; whatever is going to happen, anyway. So, it's, it's a really interesting game of signaling, where the stake-holders want to signal that they are patient and that they are financially constrained. And the problem, if you react to a threat like this, you say, 'Well, okay, I told you I've only got $50,000; but, if you chop us a finger I can go up to $100,000.' Um, then you can guarantee that all 10 fingers are going to come off, one after the other. Until you stop reacting in this way. Russ Roberts: Yeah. That's very good parenting advice, actually. I've been on a couple of programs recently on parenting, and I'll just let listeners draw their own conclusions there. Before we go on, I want to ask you-- Anja Shortland: It's all about incentives, isn't it? Russ Roberts: And managing expectations. And the shadow of the future--as you mentioned.

40:32 Russ Roberts: I don't want to miss this chance to ask this question. There's a--the book is, um--it's a little bit chilling, because it deals, of course, with a very unpleasant side of life that, fortunately most of us haven't been exposed to. But it does give you pause about travel. And I'm curious if, having written the book and done all the research that you did, and talked to all the people you did, if it had an impact on your state of mind? Your willingness to travel; your unease? You talk about, at one point in the book, being I think it enables and somebody reassuring you, 'Oh, don't worry. The mafia makes everything safe here.' But, that was in the past. I'm curious where you are now. Anja Shortland: There are certainly some places that I wouldn't want to travel. Anymore. Or never did want to travel. I've done a lot of work on Somalia, but I mostly[?] rely on satellite images, and for information I talk to other people about [?]. To me, what [?] I found so super-interesting was the ingenuity of people, and a lateral[?unilateral?] thinking[?] of how you resolve these issues--how do you contract with these parties? How do you make a self-enforcing contract? How do you find a structure that incentivizes people to give excellent service over and over again--for people not to run with money when they could? And to me it was a real revelation about how good markets are and in particular Lloyd's market is at creating institutions and creating processes that deal with these completely impossible situations. And, we often ask companies to do mutually exclusive things, like go and do business in complex and hostile territories so that we can drive cars, etc. Do that with taking care of fulfilling the duty of care towards their employees. And yet not engaging on some level with whoever controls that territory. So, we're asking really difficult questions of people and they come up with solutions, and then we can wonder whether they are good solutions. But, they are workable. And I find that interesting. Russ Roberts: You mentioned Lloyd's. Lloyd's plays an important role in the book. Lloyd's, for listeners who don't know, is a legendary insurance company in the United Kingdom--in England. And, if you had asked me, 'What's special about them?' I'd have said, 'Well, they are famous for insuring things that other people won't insure.' They insure the knee of a basketball player or the arm of a pitcher in baseball, or various esoteric things like that, that might be quite expensive in terms of premiums for the person who is insured. I knew nothing about this, of course; but you point out that they play a central role in the market. So, talk about what they do and how that organizes the insurance market; and then, in turn, affects the market for kidnapping. Anja Shortland: Yes. So the interesting thing about Lloyd's is, it's not a company. It's a market in which companies come together to insure Special Risks. So, if you go to Lloyd's and want to buy kidnap insurance, you will approach a Lloyd's broker, and within the market the 20 or so companies that are willing to underwrite this Special Risk. So, here you have a club of companies that will compete for business with each other; but on the other hand, they are also close enough together--and they are geographically co-located in one big room, which allows them to come to agreements about what is and what isn't insurable, on what conditions it would be insurable. And, that way the customer gets a choice about what to ensure exactly under what conditions and at what price. But on the other hand, these companies work well enough together to create that shadow of the future--the idea that if a pirate group in Somalia misbehaves and starts torturing sailors, they will be out of business, or their business will work really badly across the board because everyone will treat them much worse.

46:11 Russ Roberts: But is there some reputational force there? We've been talking about this as a one-off transaction, and you mentioned the local knowledge that might spread about the unreliability of a kidnapper's promises. Do the insurance firms know who these people are that they're dealing with? When we get to the situation where the executive of an oil company is abducted--or not an executive but some relatively low-level person who is out on the street doing some actual work gets abducted--does the insurance company's consultant actually know who they are dealing with on the other side? Is there really a shadow of the future for that individual? To put it more clearly-- Anja Shortland: Yes. That's exactly what it is. It's not the insurer. It's the crisis responder who is retained by the insurer. But yes: the crisis responder will have the data, will have experience, and will probably have met that kind of group or that group at some previous point. And they will have also the ability to find out all the information that they need, that they can get at the local level. So, yeah, they plug into the local knowledge and they have their own knowledge, and probably know quite well from the interactions with the Somali pirates that people basically met each other again. So, [?] reputation-- Russ Roberts: So, in that case-- Anja Shortland: reputation stabilized this game even though the insurers themselves remain in the background. They make it clear that bad behavior will be punished. Russ Roberts: Because you'd think, to pick a gruesome example, that chopping off a finger is a threat; and then carrying it out would be often an effective way to get a larger sum of money. And yet, you suggest it rarely happens in these cases. You know, obviously there is an enormous range portrayed in the book of street gangs who kidnap people, resolve it quickly for a few hundred dollars, but also there are many, many cases of tens of thousands of dollars. You'd think there would be more of that kind of threat by the kidnapper to find out what level of payment might be possible, and to test-- Anja Shortland: That's right. There's always the threat. There's always the threat. The question is: How do you respond to that threat? Do you respond to that threat by offering more money? Or, do you respond to that threat by saying, 'If you are making that kind of threat I can't talk to you'? Russ Roberts: Why wouldn't they just carry it out without the threat and just, say, to credibility, why wouldn't they just chop off a finger to start with and say, 'Double the amount you've suggested you are going to pay or we're going to keep going'? Why can't they ratchet it up? Anja Shortland: Some kidnappers do. But, generally--where is it going to end? There is no obvious end, except the death of the hostage--which is not in the kidnapper's interest. Russ Roberts: Yeah; I guess a fingerless hostage adds additional costs and challenges to keeping him alive, etc., as well. Anja Shortland: Exactly. So, how do you provide the right incentive for the kidnapper to stop hurting the hostage? Well, you cannot reward bad behavior. Russ Roberts: Yeah. That's like back to the parenting lesson.

50:06 Russ Roberts: So, let's get to the transfer of money and body--alive, we hope. I never really thought enough about it. You promise to drop off a large sum of money in cash. Besides the problem of showing that you really didn't mark it--put marks on it to identify it--you have to drop it somewhere. And then, that puts the kidnappers at risk of being observed. And so, you'd think this would be extremely difficult to coordinate. And then, once the money is collected, the incentive to kill the hostage because the hostage has information about where the kidnappers are, what they look like, or something about the location, is also large. So, in the movies it's usually--in the hand-offs, there's a physical-- Anja Shortland: That's usually where it all goes horribly wrong in the cinema[?]. Russ Roberts: Right. So, how does it ever go right? How does this market work to make this happen correctly and safely? Anja Shortland: It's really interesting, because different places find different solutions. So, the problem here is, besides basically acting opportunistically here. So, the stakeholders might turn up with the police. And, the kidnappers might kidnap whoever is sent with the ransom. And then you suddenly have two hostages and no money left. So, it's a really, really tricky place to make that work. And there are different models that work in different circumstances. So, one way of doing it was the way that Somali hijack cases were resolved, where the money was dropped in canisters next to the ship--making it very unlikely that the ransomer would be kidnapped because he would be high up in the sky. In other places, you find really interesting solutions, where somebody says, 'My business is to provide a neutral territory, where people can come with the ransom, and people can come with hostages. And I will protect that exchange.' Russ Roberts: A middleman. Anja Shortland: Well, you might also have a middleman who walks with the ransom from one to the other; but then you also have the problem of how do you keep the middleman true? So, lots of different ways that people have overcome this. But, again, it always works when there is a shadow of the future. When the pilot doesn't fly off with the ransom. When the middleman faithfully delivers the ransom. And the person with the shop in which the hostage and the ransom envoy can meet doesn't go rogue and gets hold of both. So, again, it's reputations. It's long-running exchanges, where every time they happen you take account, that's how it works, when it works. But, otherwise, it is[?] almost impossible to order. Russ Roberts: That neutral land spot is a very clever idea, because, as you say, you send in a middleman to be the collector--the deliverer of the money and the collector of the hostage--there's always this question of that person's reliability. But the land can't move. So, there's a certain collateral there for honesty that, you'd think that might help with. I don't know if that's a common solution--that a person offers the equivalent of a safe house for making these kind of transfers and then becomes a known arbiter of these kinds of transactions. Anja Shortland: It happens often enough. But it can only happen where you have a rebel gang or a mafia or a cartel that can credibly exclude the police from their territory. So, it works quite well: In Mexico it used to work very well; in Colombia it works; in Pakistan; and in Afghanistan. But, if you've got a state that could sweep in on a transaction like this, then of course it doesn't work. Russ Roberts: But, as you point out, essentially--not essentially, but it's often the case that the state is very weak in these situations. That's why this kidnapping took place-- Anja Shortland: Exactly-- Russ Roberts: That's why there's a group there that has the opportunity to do these kind of things.

55:08 Russ Roberts: I don't want to miss a proverb that you passed along. It's just an interesting cultural observation. And it reminded me of an interview I did with Sam Quinones on his book Dreamland, which is about the drug traffic coming out of a particular province in Mexico. You talk about how, in at least Somalia, where it's a little more chaotic maybe--it's hard to believe--but even more chaotic than some of these other situations: That these people who were successfully hijacking these ships and getting large sums of money don't get particularly rich. And you have this proverb: If you have a hundred goats and your cousin has none, you are a poor man. That there is a cultural expectation of sharing across a large group of people. Anja Shortland: Absolutely. And, the way that the insurers make sure that a ransom doesn't trigger a new spate of kidnappings is to make sure that nobody gets rich. If people get rich from kidnapping, you cannot control the dynamics of the market. It will just get out of hand. So, yes: People sometimes get big ransoms; but they will have worked very, very hard for that money, for a long period of time. They'll be sharing that ransom with a huge number of people. Russ Roberts: In the case of--in Mexico, there are lots of--if I remember correctly, when people would return from the United States they would be expected that they would throw a large party; that they would do all kinds of things to--and it was a status, an important status-creator for the people who had made the money. Anja Shortland: Indeed. Yes. But, if you are going to hold somebody for 6 months, 12 months, 18 months, you will have to pay off the people in the vicinity as well. So, the longer these things run, the more people expect a cut in the ransom. And, the less profitable it is for original kidnappers it is to be in that business. And, by making ransoming difficult, by making kidnapping difficult, but particularly by making ransoming difficult, it puts kidnap-for-ransom outside the sort of criminal capacities of the ordinary street gang. And they quite rationally decide they are better off at the cash point than trying to engage in a ransom negotiation. And that's ultimately what makes this predictable and insurable in the sense of people will buy this product at a price that's affordable for them and somewhat profitable for the insurer.

58:18 Russ Roberts: So, you say at nearly the end of the book, a remarkable quote. You say [pp. 214-215], When I first studied economics, I was taught that markets work well if there is perfect competition, perfect information, and there are no externalities or public goods problems. I learned that if these conditions are not met, governments should intervene to correct the market failure or directly supply the goods that the market fails to deliver. The market for hostages and the market for kidnap insurance turns this textbook wisdom on its head. Explain. Anja Shortland: Well, we've got the Lloyd's market for kidnap insurance, which is a market. But I wouldn't say there is one in which there is perfect competition, because after all you only have 3 or 4 major providers, 20 altogether, all sitting in one room, all members of one club. Yes, they're competing. But, it's a limited sort of competition. And it's built on cooperation: on ordering the market jointly. Perfect information. You certainly do not want the kidnappers to have perfect information. They don't want to know--they better not know--for how much people are insured, whether they are insured, etc. So, the market works well, remains small enough to be insurable when the kidnappers don't know about insurance. Don't know what people are worth. Etc. Um, no externalities. Well, we've got big externalities here, because if I jump ahead and pay a very large ransom for a loved one because I really couldn't contemplate celebrating my birthday without them, that creates massive externalities for the next person that walks down that street with a kidnapper who is just having bragged to all their friends about how much money they got. So, we need[?really?] a system for containing these externalities. And, um, yeah. The other thing: The state is definitely not the answer. That was the other thing that really came out of that research for me: That, when governments come in with unlimited resources and very little time because they are under pressure from the media and from pressure groups and online, fora, etc. They tend to mess up [?] and negotiations, big time. They tend to pay far too much. Various often[?] negotiators, because they truly are in these one-off scenarios where the Swiss government just hopes that the next hostage is going to be French; and the Italians hope it's the Spanish who are going to pick up the tab next time. Because there is--that they are missing that coordinating mechanism, they tend to create big, big problems in the market for hostages. Russ Roberts: Well, if I may use a particularly à propos metaphor: They don't have skin in the game. The hostages really have skin in the game. Their families have skin in the game; and of course, the insurance company and the consultants have skin in the game in a way that the government probably doesn't in that situation. Anja Shortland: Well, certainly the bureaucrats who are catapulted into this horrible situation do not have the same sort of incentive structure that a professional ransom negotiator faces, where, if they messed up around some negotiation--if they paid too much, if they lose a hostage--um, if they don't get a clean finish, they are really in trouble career-wise. It's career-limiting. Whereas, for a bureaucrat paying too much, 'Oh, well, he never had a chance anyway.' So-- Russ Roberts: [?]-- Anja Shortland: yes. So, that's the problem. And how do you demonstrate a budget constraint? How can the Spanish government say, 'Well, 3 million and no more? We have no more than 3 million.' Well, of course they do. But how much? So, it's much, much, much more difficult for a government to negotiate. And that's why some governments say, 'We just don't. Because we know we can't.'

1:02:56 Russ Roberts: Now, one of the stranger things about this market--and, it's a nice illustration of your point about perfect information, is, I would call it--in textbook economics, the way I used to teach micro, theory, I used to emphasize the law of one price: Prices vary for the goods of the same quality. It creates an arbitrage opportunity, and so those prices tend to, not literally be uniform in a market, but close together. Price dispersion is limited by arbitrage and the incentive for participants on both sides to gather information. And here's a case where, on the surface, there's almost no information. There's no public--certainly transaction information. Nobody knows what the last 25 kidnappings earned, the kidnappers, in terms of ransom. And yet, I had the feeling reading your book, this was effectively a market price. Is that an accurate--for kidnap victims of a certain kind, that the ransom does tend to hone in on a certain range? That it's imaginably predictable in advance. Is that correct? Anja Shortland: That is correct. That is ideally where we want to get. That, there is a going rate. That there is a modus operandi that somehow everyone can live with. So, for example, in the Niger Delta: for years and years, um, all companies occasionally had pirates taking some people off their ships or off their platforms. They were almost always returned within 45 days for $10,000. This was not--again, in which there was careful scoping of how much these hostages were really worth. There wasn't any need to drag this out. It was just understood that this was just part of doing business, in the Niger Delta. And, it kind of worked for everybody. It wasn't pleasant for the hostages when it happened, but it happened rarely enough that people to not to feel that they were under threat. And as I say, it almost always went right. And, this $10,000 also nicely judged because somebody didn't have the benefit of insurance. And the local worker, they would also be able to raise something in that region. So, it was also wasn't a price that set everybody's mind's thinking, 'Oh, we should be getting into kidnapping. Kidnapping is so much better than driving taxis.' It's that kind of equilibrium that is kind of ideal in areas like the Niger Delta where you just--the putting on guards, on every little boat, that is moving around these waterways would be prohibitively expensive. So--in a way you've got an equilibrium kidnapping situation there, or had for many years. And at the moment it's more troublesome and opposite. But, uh, yeah: there was an understanding about how this market would work and how people would behave on both sides. And it has a sort of theatricality about it. Russ Roberts: Well, one of my favorite movies is Midnight Run. I'd say it might be--it's in my Top 10 for just pure entertainment. I think I've seen it three or four times. It's Robert DeNiro and Charles Grodin. And it's just a fantastically entertaining movie. And, there are a number of kidnapping moments in that movie. [More to come, 1:07:03] And, part of the--it's actually a comedy, although there are some nice emotional moments as well. But, a lot of the comedy comes from the stupidity of the kidnappers. Or the players, generally. They make threats that turn out badly, or they carry out threats that turn out badly. Or they just do things that are just revealing information that turns out to harm their case. All the participants just have this issue. But it's a particularly blatant one when a kidnapper takes a photograph of one of the victims holding a newspaper and in the background you can see the name of the hotel on the towels. It's a very small spoiler. I apologize if you haven't seen the movie. But that's a moment number, I'd say 50 in delightful moments in the movie. But, the movie is: The movie is entertaining; and it is actually at times moving, but, because of the mix of human frailty with greed and pure self-interest and opportunism all mixed in to together, and there's some shadow of the future working there too. But, when I read a book like yours, which is predicated in analysis, effectively predicated on what I would call the homo economicus model that people are rational. Now, you concede in the book that hostages die. Things go wrong. It doesn't always work smoothly. Negotiators on both sides make mistakes. Information gets revealed that changes things and causes things to drag on. You are not--this is not a book about how models work perfectly. What's impressive about the book is that they shows that they work at all. And I'm--just let's close with your thoughts on this mix of rationality versus emotion. There's an enormous amount of fear on all sides of this, of these transactions. There's a lot of adrenalin pumping at various times. And, as you were talking to the people involved in these worlds, in this world, and you are thinking about them as most of the time as "rational" and worried about that Shadow of the Future, we are also aware, I am sure, that people sometimes don't do things that are in their self-interest, or that are emotionally driven and turn out to be mistakes. How do you think about that mix, as you wrote the book, and in general? Anja Shortland: In the book, the negotiators, the professional negotiators, have a very clear key position in the system; and that is because they see things, you know, in a very, very rational manner. And they need to help people who are in a completely different case, or in a funk, or in a panic, and a state of emotional turmoil, to make rational decisions. And the interesting thing is that through the charisma that they have, and through the experience that they have, the persona that they project, they not only help the families make the right decisions, but they also help the kidnappers see things through more rational perspective. And, they educate them. And say, 'Yes, we don't want you to hurt Uncle Ted.' And, 'You're not going to get anything out of hurting Uncle Ted.' And they just help the kidnappers see how that strategy is not going to be helpful. I mean, sometimes you have very emotional kidnappers. Sometimes you have stupid kidnappers. But stupid kidnappers will reveal information. And ultimately it is in the insurer's interest to eliminate stupid kidnappers--well, eliminate kidnappers where possible. But if you have stupid kidnappers who make mistakes, you can remove them from the market by dropping some hints to the police. So, insurers don't necessarily, beautiful long-run relationship with kidnappers. If kidnappers make mistakes, then they are out of business.