Games and Risk Analysis

The modeling and/or simulation analysis of a game between a manager or a government can be used to assess the risk of some management strategies and public policies given the anticipated response of the other side. Three examples are presented in this chapter: first, a principal-agent model designed to support the management of a project's development under tight resource (e.g., time) constraints, which can lead the agent to cut corners and increase the probability of technical failure risk in operations; second, a case in which the US government is facing one or more terrorist groups and needs to collect intelligence information in time to take action; and third, the case of a government that faced with an insurgency, is trying to balance the immediate need for security and the long-term goal of solving the fundamental problems that fuel the insurgency. In the first case, the result is an optimal incentive strategy, balancing costs and benefits to the managers. In the second case, the result is a ranking of threats on the US considering a single episode of potential attack and counter-measures. In the third case, the result is the probability of different states of country stability after n time periods, derived from the simulation of an alternate game between government and insurgents.