Interdependent Security Games Under Behavioral Probability Weighting

We consider a class of interdependent security games where the security risk experienced by a player depends on her own investment in security as well as the investments of other players. In contrast to much of the existing work that considers risk neutral players in such games, we investigate the impacts of behavioral probability weighting by players while making security investment decisions. This weighting captures the transformation of objective probabilities into perceived probabilities, which influence the decisions of individuals in uncertain environments. We show that the Nash equilibria that arise after incorporating probability weightings have much richer structural properties and equilibrium risk profiles than in risk neutral environments. We provide comprehensive discussions of these effects on the properties of equilibria and the social optimum when the players have homogeneous weighting parameters, including comparative statics results. We further characterize the existence and uniqueness of pure Nash equilibria in Total Effort games with heterogeneous players.