A Simple Model of Financial Epidemiology

Abstract

Declining economic conditions over the past several years have identified a disturbing trend; more and more households in the US are being pushed to the brink of financial insolvency. Current legal and market protections (including, but not limited to the use of collateral and mortgage insurance, consumer credit counseling and bankruptcy protection) provide relief after financial distress occurs, but do nothing to prevent the likelihood of distress. Recent research argues that the use of preventive measures are superior to ex post measures, but can only be implemented with the help of predictive models to identify at risk households. This paper uses tools drawn from evolutionary game theory, economics and public health to create a simple model of “financial epidemiology”, which illustrates the role that social dynamics play in shaping household financial decisions. The model facilitates the prediction of financial insolvency by constructing phase diagrams which illustrate “tipping points” beyond which households move down an inexorable path towards insolvency.