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Effect of Bounded Rationality on Tradeoff Between Systemic Risks & Economic Efficiency in Networks

Published

Author(s)

Vladimir V. Marbukh

Abstract

This paper discusses effect of bounded rationality on the systemic risks vs. economic performance tradeoff in large-scale networks operating under economic pressures. Existence of systemic risks in economically incentivized networked systems is demonstrated by recent numerous systemic failures in various critical large-scale networked infrastructures. Using “Complex System” perspective, we consider systemic risks due to overload experienced by a sizable portion of the network. Economic pressures facilitate systemic overload by incentivizing (a) high level of dynamic resource sharing allowing the system to mitigate effects of inherently uncertain exogenous demand and limited system reliability, and (b) network operation on the stability boundary where all network resources are fully utilized. However, in practice these economic incentives are counteracted by bounded rationality of the network operator(s), e.g., due to limited information on the uncertain exogenous environment. We argue that bounded rationality reduces both the network operational region and risk of abrupt overload. Due to higher performance losses and lower predictability of a discontinuous/abrupt overload as compared to a continuous/gradual one, our results suggest that bounded rationality may benefit the system performance by allowing system to operate closer to the stability boundary.
Proceedings Title
The Eighth International Conference on Ubiquitous and Future Networks (ICUFN 2016)
Conference Dates
July 5-8, 2016
Conference Location
Vienna

Keywords

large scale network, economic efficiency, systemic risk, bounded rationality.

Citation

Marbukh, V. (2016), Effect of Bounded Rationality on Tradeoff Between Systemic Risks & Economic Efficiency in Networks, The Eighth International Conference on Ubiquitous and Future Networks (ICUFN 2016), Vienna, -1, [online], https://doi.org/10.1109/ICUFN.2016.7537047 (Accessed April 14, 2024)
Created August 11, 2016, Updated May 14, 2020