A Game Theoretic Approach to Risk Management

• Activity Number: 292
• Type: Contributed
• Date/Time: Tuesday, July 31, 2012 : 8:30 AM to 10:20 AM
• Sponsor: Section on Risk Analysis
• Author(s): Timothy Hall*+
• Companies: PQI Consulting
• Keywords: risk management ; game theory ; zero-sum game ; random chance elements

Abstract

Risk management has traditionally been quantified by an expert-led assessment of the states of a process, and the likelihood and consequences of being in each state at a particular time or through a given sequence of previous states. As senior management sets the policies to address the issues raised by the risk assessment, its continual reconsideration of those policies as circumstances change puts an uncertain burden on those responsible for risk abatement.

However, rather than simply follow the lead promoted by classical risk assessment processes, an alternative approach might be developed. One of the alternatives is a game theoretic approach based on a model of "public" and "menace" activities. Such an approach could mathematically and dynamically chose a strategy for minimizing risk based on current resources and the state of the process.

The purpose of this paper is to present the nomenclature and elementary theory for a game theoretic application to risk management. It may be applied to any process where the competing interests of a structured two-person zero-sum interactive game with random chance elements may be applicable.