Economics of Cybersecurity

Transcription

1 Economics of Cybersecurity Prospect Theory Sophie Van Der Zee The Computer Lab, University of Cambridge

2 Decision-making People constantly make decisions involving different levels of risk and uncertainty Psychologists and economists have tried to capture human decision-making under risk in theoretical models to explain and predict people s behavior

3 Expected utility theory (1) Daniel Bernoulli, 1738 Dominant theory until the mid 20th century Three important concepts: Utility (psychological value) Wealth (current state) Rational choice model

4 Expected utility theory (2) Utility Utility does not increase proportionately with the amount of money Example: The first pound extra is worth more than the 10 th or the 100 th A gamble should be assessed by its expected utility, not by expected absolute value

5 Expected utility theory (3) Wealth Utility is dependent on the current state of wealth Example: 10 is worth more to someone who only has 10 than to someone who has 100, a 1000 or 100,000 Wealth is included when calculating the best option

6 Expected utility theory (4) Model of rational choice The utility of potential outcomes is weighted by the probability of its occurrence Example: 60% chance of + 10 = 6 50% chance of + 10 = 5 People are expected to choose the best option

7 Expected utility theory (4) Model of rational choice The utility of potential outcomes is weighted by the probability of its occurrence Example: 60% chance of + 10 = 6 50% chance of + 10 = 5 People are expected to choose the best option

8 Issues with expected utility theory Although we could make decisions based on rational costbenefit analyses, we often don t for two reasons: 1. People have an irrational tendency to be less willing to gamble with profits than with losses prospect theory 2. We use mental shortcuts instead of calculating all possible options heuristics

9 Prospect theory (1) Kahneman & Tversky (1979) People do not always make rational decisions because they value gains and losses differently Centred around loss aversion A bird in the hand is worth two in the bush

10 Prospect theory (2) We experience stronger emotions during loss than during gain Loss aversion

11 Prospect theory (3) People are risk-seeking when faced with potential loss, while they are risk averse and prefer certainty for gains

12 Example (1) Asian Flu There are 2 programs to battle a disease In program A, 200 people will be saved In program B, there is a 1/3 probability that 600 people will be saved, and a 2/3 probability that no one will be saved

13 Example (1) Expected utility theory There are 2 programs to battle a disease In program A, 200 people will be saved In program B, there is a 1/3 probability that 600 people will be saved, and a 2/3 probability that no one will be saved Absolute outcome is the same

14 Example (1) Prospect theory There are 2 programs to battle a disease In program A, 200 people will be saved In program B, there is a 1/3 probability that 600 people will be saved, and a 2/3 probability that no one will be saved Risk averse in gain scenario

15 Example (2) There are 2 programs to battle a disease In program C, 400 people will die In program D, there is a 1/3 probability that no one will die, and a 2/3 probability that 600 people will die

16 Example (2) Expected utility theory There are 2 programs to battle a disease In program C, 400 people will die In program D, there is a 1/3 probability that no one will die, and a 2/3 probability that 600 people will die Absolute outcome is the same!

17 Example (2) Prospect theory There are 2 programs to battle a disease In program C, 400 people will die In program D, there is a 1/3 probability that no one will die, and a 2/3 probability that 600 people will die Risk seeking when facing potential loss

18 Prospect theory (4) People do not always make a rational choice of the best option Experiments show that people deviate from rationality in a consistent, predictable manner One reason is that they value gains and losses differently It ain t what you say, but the way that you say it

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