You Only Die Once: Managing Discrete Interdependent Risks

31 Pages Posted: 24 Jul 2003

See all articles by Geoffrey M. Heal

Geoffrey M. Heal

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Howard Kunreuther

University of Pennsylvania - Operations, Information and Decisions Department; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: June 2003

Abstract

This paper extends our earlier analysis of interdependent security issues to a general class of problems involving discrete interdependent risks with heterogeneous agents. There is a threat of an event that can only happen once, and the risk this poses to any one agent depends on actions taken by others. Thus any agent's incentive to invest in managing the risk also depends on the actions of others. Security problems at airlines and in computer networks come into this category, as do problems of risk management in organizations facing the possibility of bankruptcy, and individuals' choices about whether to be vaccinated against an infectious disease. Surprisingly the framework also covers certain aspects of investment in R&D. Here we characterize Nash equilibria with heterogeneous agents and give conditions for tipping and cascading of equilibria.

Keywords: Nash equilibrium, tipping, cascading, terrorism, security, interdependence

JEL Classification: C72, D80, H23

Suggested Citation

Heal, Geoffrey M. and Kunreuther, Howard C., You Only Die Once: Managing Discrete Interdependent Risks (June 2003). Available at SSRN: https://ssrn.com/abstract=419240 or http://dx.doi.org/10.2139/ssrn.419240

Geoffrey M. Heal (Contact Author)

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States
212-854-6459 (Phone)
212-316-9219 (Fax)

HOME PAGE: http://www.gsb.columbia.edu/faculty/gheal/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Howard C. Kunreuther

University of Pennsylvania - Operations, Information and Decisions Department ( email )

3730 Walnut Street
558 & 559 Jon M. Huntsman Hall
Philadelphia, PA 19104-5340
United States
212-854-0423 (Phone)
215-573-2130 (Fax)

National Bureau of Economic Research (NBER)

Register to save articles to
your library

Register

Paper statistics

Downloads
154
Abstract Views
1,431
rank
154,527
PlumX Metrics