Systemic-risk Dilemmas Emerging from Reactive Investments

Boza, G. ORCID: https://orcid.org/0000-0001-6453-8254 & Dieckmann, U. ORCID: https://orcid.org/0000-0001-7089-0393 (2015). Systemic-risk Dilemmas Emerging from Reactive Investments. In: Systems Analysis 2015 - A Conference in Celebration of Howard Raiffa, 11 -13 November, 2015, Laxenburg, Austria.

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Abstract

The stability and prosperity of human societies depend on cooperative exchanges at many levels. While the emergence and stability of such exchanges has been studied extensively, the majority of these investigations have relied on the prisoner’s dilemma game. However, cooperative exchanges are typically more complex and involve decisions about continuous investments, instead of simple choices between cooperation and non-cooperation. Our aim here is to understand the factors promoting the emergence and stability of cooperative exchanges based on continuous investments, performed by individuals with reactive strategies. Through such strategies, agents continuously re-evaluate and adjust their investments according to the gains obtained from an exchange. Such reactivity provides a natural safeguard against exploitation, as it allows agents to fade out unprofitable investments. Here we show that these benefits of reactivity, which are so crucial at the level of agents, exact a high price at the level of the society, by exacerbating systemic risk. In particular, the spread of exuberant investors causes the emergence of boom-bust cycles, characterized by an increase in investment levels followed by a decline. We demonstrate that an optimal level of reactivity can stabilize cooperation while offering safeguards against both exploitation and exuberance. We also study three other fundamental factors: the pace of innovation enhancing strategy diversity, the modularity arising from dividing the collective of agents into smaller groups with sparse interactions between them, and the heterogeneity of such groups structuring social exchanges. We demonstrate how intermediate levels of these additional factors are optimal in terms of stabilizing cooperation while minimizing systemic risk. Our study identifies generally applicable countermeasures against ubiquitous threats to the stability of cooperative exchanges, with a view towards facilitating the design of corresponding future policies.

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