Economics of Cybersecurity Prospect Theory Sophie Van Der Zee The - - PowerPoint PPT Presentation

Sophie Van Der Zee

The Computer Lab, University of Cambridge

Economics of Cybersecurity

Prospect Theory

• 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

Decision-making

• Daniel Bernoulli, 1738
• Dominant theory until the mid

20th century

• Three important concepts:
• Utility (psychological value)
• Wealth (current state)
• Rational choice model

Expected utility theory (1)

Utility

• Utility does not increase

proportionately with the amount of money

• Example:
• The first pound extra is worth

more than the 10th or the 100th

• A gamble should be assessed by

its expected utility, not by expected absolute value

Expected utility theory (2)

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

• r £100,000
• Wealth is included when

calculating the best option

Expected utility theory (3)

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

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

Expected utility theory (4)

• Although we could make

decisions based on rational cost- benefit 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

Issues with expected utility theory

• 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”

Prospect theory (1)

Prospect theory (2)

We experience stronger emotions during loss than during gain  Loss aversion

Prospect theory (3)

People are risk-seeking when faced with potential loss, while they are risk averse and prefer certainty for gains

• 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

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 Absolute outcome is the same

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  Risk averse in gain scenario

Example (1) – 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

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

Absolute outcome is the same!

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  Risk seeking when facing potential loss

Example (2) – Prospect theory

• People do not always make a

rational choice of the best

• ption
• 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”

Prospect theory (4)

Thank you for your attention!

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