David C. Rode

Communication and Cooperation

Communication plays a vital role in the organization and operation of biological, computational, economic, and social systems. Agents often base their behavior on the signals they receive from others and also recognize the importance of the signals they send. Here we develop a framework for analyzing the emergence of communication in an adaptive system. The framework enables the study of a system composed of agents who evolve the ability to strategically send and receive communication. While the modeling framework is quite general, we focus here on a specific application, namely the analysis of cooperation in a single-shot Prisoners Dilemma. We find that, contrary to initial expectations, communication allows the emergence of cooperation in such a system. Moreover, we find a systematic relationship between the processing and language complexity inherent in the communication system and the observed behavior. The approach developed here should open up a variety of phenomena to the systematic exploration of endogenous communication.

Catastrophic Risk and Securities Design

The anomalies, inefficiencies and difficulties in the market for catastrophic bonds are so pronounced as to lead strongly to the inference that psychological factors have a major impact on the pricing of these bonds, and on the lack of acceptance they have encountered from investors. In this article, we examine major factors influencing the market for catastrophe bonds. Most of the economic factors involved-considered either singly or in combination-are insufficient to account for the magnitude of the anomalies observed. Decades ago, irregularities in the orbit of the planet Uranus allowed astronomers to deduce the existence of another planet, subsequently named Pluto. Since the economic forces at work in the marketplace cannot satisfactorily explain the situation in the catastrophe-bond marketplace, we infer that the gravitational pull of psychological forces is at work. We discuss eight psychological dynamics that may influence the pricing, mispricing, acceptance or lack of acceptance of catastrophe bonds. Losses from catastrophic events represent an increasing problem for the property and casualty insurance industry. These losses have significant repercussions not only for insurance firms, but also for governmental policy makers and consumers in the insurance market. In principle, one way to deal with these risks is through securitizing them. Doing so would allow spreading risks of local disasters across global capital markets. However, previous attempts at securitizing insurance risks have, by most accounts, met with minimal success. This paper examines possible barriers to securitization, focusing on behavioral responses to such novel instruments. These barriers include the difficulties of conveying the associated risks, even to investors who are sophisticated about finance. Our analyses will draw on research in behavioral decision making and psychology. They will lead to proposals for empirical research and general strategies for making securities design more consonant with investor behavior.

Probabilistic Risk Analysis and Project Capital Structures

Increases in the securitization and syndication of credit have led to a growing distance between borrowers and the ultimate lenders. As trends continue to encourage the efficient packaging and sale of loans, it has become important for lead lenders to convince fellow syndicate banks of the risk profile of the credit as quickly and effectively as possible. Likewise, having an understanding of how a firms value has changed as a result of financial distress is invaluable during a restructuring process. A key element in understanding the impact of risk on firm values is the differential response of the managers (equity) and lenders (debt) toward volatility. This article develops a framework for using simulation analysis as a common platform from which to communicate about financing risks and capital structure. The methods outlined here can be used to optimize responses to restructuring scenarios by enabling a better match between expected cash flows and capital commitments.

Will We Always Have Paris? CO2 Reduction without the Clean Power Plan

I 2009, the United States pledged at the United Nations Climate Change Conference in Copenhagen to reduce overall greenhouse gas emissions by as much as 83% by 2050 and by 17% as early as 2020. This pledge was made in the context of a line of legislative and regulatory attempts at CO2 regulation in the U.S., culminating with the U.S. Environmental Protection Agency’s Clean Power Plan (CPP) in 2015. The CPP would have led to a 32% reduction (from the 2005 level) in CO2 emissions from fossil fuel power plants by 2030a reduction intended to provide between one-third and one-half of the U.S.’s total intermediate-term Paris Agreement commitment. But, as so often happens, the political winds blew differently, and the succeeding Trump administration began the process of undoing the CPP and withdrawing from the Paris Agreement. Amidst this reversal of federal policy objectives, several municipalities, states, and companies have indicated their intent to comply with the Paris Agreement, even if it is no longer mandated by federal policy. Is a middle ground possible? Is there a way to move toward Paris without the Clean Power Plan? Our work in this area suggests that yes, there is a path to Paris. Specifically, we used data from the U.S. Energy Information Administration’s 2017 Annual Energy Outlook (AEO) to examine projected power sector CO2 emissions under different natural gas price scenarios to determine if the 2020, 2025, and 2030 emissions targets set in the CPP can still be met in its absence. Before considering the future, it is worth examining just how far we’ve already come without any federal CO2 regulation (for existing power plants) in the U.S. Figure 1 illustrates historical

Upside is missing from assessments of nuclear costs

This potential upside is rooted in the justification (both theoretical and real) for the provision of loan guarantees by the government: direct future tax revenue from the entities receiving the guarantees will be increased by an amount sufficient to offset the cost of any losses from the provision of the guarantees. In addition, there are a slew of indirect gains accruing for the government.