Applications of Shapley Value to Financial Decision-Making and Risk Management

We investigate the application of the Shapley value in addressing risk-related challenges, focusing on two primary areas. The first area explores the role of the Shapley value in the financial sector, specifically in managing portfolio risk. By conceptualizing a portfolio of assets as a cooperative game, we analyze the contribution of individual securities to the reduction in overall portfolio risk. The second area addresses emergency facility logistics, where the Shapley value is utilized to optimize the selection of potential facility locations and mitigate the risks associated with the storage and transportation of hazardous materials. Using Markowitz’s mean-variance framework, the Shapley value facilitates a fair and efficient allocation of risk across portfolio assets, identifying both risk-increasing and risk-reducing assets. Through numerical experiments, we demonstrate that the Shapley value offers valuable insights into the equitable distribution of financial resources and the strategic placement of facilities to manage systemic risks. These findings highlight the practical advantages of integrating game-theoretic approaches into risk management strategies to enhance fairness, efficiency, and the robustness of decision-making processes.