Edited by Harry W. Richardson, Peter Gordon and James E. Moore II
Chapter 3: You Can Only Die Once: Interdependent Security in an Uncertain World
* Geoﬀrey Heal and Howard Kunreuther INTRODUCTION There are certain bad events that can only occur once. Death is the obvious example: an individual’s death is irreversible and unrepeatable. More mundane examples are bankruptcy, being struck oﬀ a professional register, and other discrete events. In addition there are other events that can in principle occur twice but that are so unlikely and/or so dreadful that one occurrence is all that can reasonably be considered. The events of 11 September 2001 are perhaps of this type. A nuclear meltdown in a highly populated region is another. The fact that such events are typically probabilistic, taken together with the fact that the risk that one agent faces is often determined in part by the behavior of others, gives a unique and hitherto unnoticed structure to the incentives that agents face to reduce their exposures to these risks. The key point is that the incentive that any agent has to invest in riskreduction measures depends on how he expects the others to behave in this respect. If he thinks that they will not invest in security, then this reduces the incentive for him to do so. On the other hand should he believe that they will invest in security, then it may be best for him to do so too. So there may be an equilibrium where no one invests in protection, even though all would be better oﬀ if they had incurred this cost. Yet this situation does not have the structure...
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