Targets for Characterizing Risky Behaviors: Analysis and a Case Study on Home Affordability

Risk is often measured in terms of variability in outcomes. Hence, a highly variable outcome is often described as risky. In this paper, we use thresholds, also called targets, to characterize risks. Targets have been widely studied in the literature on risk, especially in the context of the two popular metrics: downside risk and semi-variance. Downside risk is generally measured as the probability of revenues falling below a target or costs rising above a target. Semi-variance captures the component of variance below the target revenue (or above the target cost). Going too close to the target can be alluring, and yet even approaching the target can be dangerous, because accompanying it is the danger of falling off a cliff. This paper will focus on analyzing behaviors associated with hovering around the target. Such behaviors can be seen in numerous consumer and industrial activities, e.g., selling a house, changing raw materials of a product, introducing a new drug into the medicine market, offering financial schemes to consumers etc. Oftentimes, such behaviors are known to be fraught with danger, and yet vested interests prevent their risks from becoming well-known. The risks associated to these behaviors usually become apparent after disaster has struck, but at times their root causes can remain unknown even in the aftermath of a disaster.