Dataset Information

Individual versus systemic risk and the Regulator's Dilemma.

ABSTRACT: The global financial crisis of 2007-2009 exposed critical weaknesses in the financial system. Many proposals for financial reform address the need for systemic regulation--that is, regulation focused on the soundness of the whole financial system and not just that of individual institutions. In this paper, we study one particular problem faced by a systemic regulator: the tension between the distribution of assets that individual banks would like to hold and the distribution across banks that best supports system stability if greater weight is given to avoiding multiple bank failures. By diversifying its risks, a bank lowers its own probability of failure. However, if many banks diversify their risks in similar ways, then the probability of multiple failures can increase. As more banks fail simultaneously, the economic disruption tends to increase disproportionately. We show that, in model systems, the expected systemic cost of multiple failures can be largely explained by two global parameters of risk exposure and diversity, which can be assessed in terms of the risk exposures of individual actors. This observation hints at the possibility of regulatory intervention to promote systemic stability by incentivizing a more diverse diversification among banks. Such intervention offers the prospect of an additional lever in the armory of regulators, potentially allowing some combination of improved system stability and reduced need for additional capital.

SUBMITTER: Beale N

PROVIDER: S-EPMC3150885 | biostudies-other | 2011 Aug

REPOSITORIES: biostudies-other

ACCESS DATA

Publications

Individual versus systemic risk and the Regulator's Dilemma.

Beale Nicholas N Rand David G DG Rand David G DG Battey Heather H Croxson Karen K May Robert M RM Nowak Martin A MA

Proceedings of the National Academy of Sciences of the United States of America 20110718 31

The global financial crisis of 2007-2009 exposed critical weaknesses in the financial system. Many proposals for financial reform address the need for systemic regulation--that is, regulation focused on the soundness of the whole financial system and not just that of individual institutions. In this paper, we study one particular problem faced by a systemic regulator: the tension between the distribution of assets that individual banks would like to hold and the distribution across banks that be ...[more]

PMID: 21768387

Similar Datasets

Project description:Empirical findings on public goods dilemmas indicate an unresolved dilemma: that increasing size-the number of people in the dilemma-sometimes increases, decreases, or does not influence cooperation. We clarify this dilemma by first classifying public goods dilemma properties that specify individual outcomes as individual properties (e.g., Marginal Per Capita Return) and group outcomes as group properties (e.g., public good multiplier), mathematically showing how only one set of properties can remain constant as the dilemma size increases. Underpinning decision-making regarding individual and group properties, we propose that individuals are motivated by both individual and group preferences based on a theory of collective rationality. We use Van Lange's integrated model of social value orientations to operationalize these preferences as an amalgamation of outcomes for self, outcomes for others, and equality of outcomes. Based on this model, we then predict how the public good's benefit and size, combined with controlling individual versus group properties, produce different levels of cooperation in public goods dilemmas. A two (low vs. high benefit) by three (2-person baseline vs. 5-person holding constant individual properties vs. 5-person holding constant group properties) factorial experiment (group n = 99; participant n = 390) confirms our hypotheses. The results indicate that when holding constant group properties, size decreases cooperation. Yet when holding constant individual properties, size increases cooperation when benefit is low and does not affect cooperation when benefit is high. Using agent-based simulations of individual and group preferences vis-à-vis the integrative model, we fit a weighted simulation model to the empirical data. This fitted model is sufficient to reproduce the empirical results, but only when both individual (self-interest) and group (other-interest and equality) preference are included. Our research contributes to understanding how people's motivations and behaviors within public goods dilemmas interact with the properties of the dilemma to lead to collective outcomes.

Project description:Cooperative behavior is often assumed to depend on individuals' characteristics, such as altruism and reasoning ability. Evidence is mixed about what the precise impact of these characteristics is, as the subjects of study are generally randomly paired, generating a heterogeneous mix of the two characteristics. In this study we ex-ante create four different groups of subjects by factoring their higher or lower than the median scores in both altruism and reasoning ability. Then we use these groups in order to analyze the joint effect of the two characteristics on the individual choice of cooperating and on successful paired cooperation. Subjects belonging to each group play first 10 one-shot prisoner's dilemma (PD) games with ten random partners and then three consecutive 10-round repeated PD games with three random partners. In all games, we elicit players' beliefs regarding cooperation using an incentive compatible method. Individuals with high altruism are more optimistic about the cooperative behavior of the other player in the one-shot game. They also show higher individual cooperation and paired cooperation rates in the first repetitions of this game. Contrary to the one-shot PD games where high reasoning ability reduces the probability of playing cooperatively, the sign of the relationship is inverted in the first repeated PD game, showing that high reasoning ability individuals better adjust their behavior to the characteristics of the game they are playing. In this sense, the joint effect of reasoning ability and altruism is not linear, with reasoning ability counteracting the cooperative effect of altruism in the one-shot game and reinforcing it in the first repeated game. However, experience playing the repeated PD games takes over the two individual characteristics in explaining individual and paired cooperation. Thus, in a (PD) setting, altruism and reasoning ability significantly affect behavior in single encounters, while in repeated interactions individual and paired cooperation reach similarly high levels independently of these individual characteristics.

Project description:ObjectiveTo understand general practitioners' (GPs) use of individual risk factors (blood pressure and cholesterol levels) versus absolute risk in cardiovascular disease (CVD) risk management decision-making.DesignRandomised experiment. Absolute risk, systolic blood pressure (SBP), cholesterol ratio (total cholesterol/high-density lipoprotein (TC/HDL)) and age were systematically varied in hypothetical cases. High absolute risk was defined as 5-year risk of a cardiovascular event >15%, high blood pressure levels varied between SBP 147 and 179?mm?Hg and high cholesterol (TC/HDL ratio) between 6.5 and 7.2?mmol/L.Setting4 GP conferences in Australia.Participants144 Australian GPs.OutcomesGPs indicated whether they would prescribe cholesterol and/or blood pressure lowering medication. Analyses involved logistic regression.ResultsFor patients with high blood pressure: 93% (95% CI 86% to 96%) of high absolute risk patients and 83% (95% CI 76% to 88%) of lower absolute risk patients were prescribed blood pressure medication. Conversely, 30% (95% CI 25% to 36%) of lower blood pressure patients were prescribed blood pressure medication if absolute risk was high and 4% (95% CI 3% to 5%) if lower. 69% of high cholesterol/high absolute risk patients were prescribed cholesterol medication (95% CI 61% to 77%) versus 34% of high cholesterol/lower absolute risk patients (95% CI 28% to 41%). 36% of patients with lower cholesterol (95% CI 30% to 43%) were prescribed cholesterol medication if absolute risk was high versus 10% if lower (95% CI 8% to 13%).ConclusionsGPs' decision-making was more consistent with the management of individual risk factors than an absolute risk approach, especially when prescribing blood pressure medication. The results suggest medical treatment of lower risk patients (5-year risk of CVD event <15%) with mildly elevated blood pressure or cholesterol levels is likely to occur even when an absolute risk assessment is specifically provided. The results indicate a need for improving uptake of absolute risk guidelines and GP understanding of the rationale for using absolute risk.

Dataset Information

Individual versus systemic risk and the Regulator's Dilemma.

Publications

Individual versus systemic risk and the Regulator's Dilemma.

Similar Datasets

OmicsDI is part of the ELIXIR infrastructure

Tweets