Strategic Behavior in Business and Economics UAB – Study Abroad FALL 2010 Xavier Vilà.
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Transcript of Strategic Behavior in Business and Economics UAB – Study Abroad FALL 2010 Xavier Vilà.
Strategic Behavior in Business and Economics
UAB – Study AbroadFALL 2010Xavier Vilà
The CourseThis course in designed as a brief introduction to individual decision making.
Its main objective is to provide the students with Decision Theory and Game Theory techniques that can be useful to face and understand, using logical reasoning, strategic situations that appear not only in business environments, but also in everyday life.
“A theory provides a way to organize our thinking. Theory is the science of business, not the art.”
Mike ShorVanderbilt University
Administrativia• 23 regular lectures + 1 review session + 1 in-class presentations + 1 in-class exam = 26 sessions
• Up to four Problem Sets will be distributed during the course, collected one week later, graded, and returned back
• A Strategic Memo, that will consist of the analysis of one real-world-case using the tools learned in class, will be written in teams (of up to 5 members) and submitted before December 13th. In-class presentations will take place on December 13th. (Length: 2 pages including figures)
Administrativia
• A Final Exam consisting of questions and exercises on the topics covered in class and in the problem sets is scheduled for December 15th
• Your final grade will be based on the scores of the three activities above according to the following table
• WEBhttp://fawlty.uab.cat/Strategic
Problem Sets 45%
Strategic Memo 25%
Final Exam 30%
Administrativia
• Dixit.A.K and B. J. Nalebuff (2010) The Art of Strategy: A Game Theorist's Guide to Success in Business and Life. W.W. Norton & Company. New York
• Dixit.A.K and B. J. Nalebuff (1991) Thinking Strategically: The Competitive Edge in Business, Politics and Everyday Life. W.W. Norton & Company. New York
• Gibbons R. (1992) A primer in game theory. Pearson Higher Education
• Gardner, R. (1995) Games for Business and Economics. New York: Wiley
What are we going to do ?
The whole picture
Game andDecision Th.
Social ChoiceTheory
Game Theory
DecisionTheory
Decision Th.Under Cert.
Decision Th.Under Uncert.
Decision Problem
Ind
ivid
ual
Dec
isio
n
Col
lect
ive
Dec
isio
n
Unipersonal
WithoutRisk
WithRisk
Multipersonal
Decision Problem
The problem is to make the best choice possible, according to our interests, from a given set of feasible alternatives
Examples• How many pears and how many apples to buy ?
• What President should we have ?
• Should Georgia be allowed to join NATO ?
• How much to bid in an auction ?
• What chess move ?
• How many lotto tickets to buy ?
Individual Decision Problem
The decision has to be made by an individual agent (a person, a firm, a government)
Examples of Individual Decision
How many pears and how many apples to buy ?
What President should we have ?
Should Georgia be allowed to join NATO ?
How much to bid in an auction ?
What chess move ?
How many lotto tickets to buy ?
Collective DecisionProblem
The decision has to be made by a group of agents (a
group of countries, an electoral pool, a jury, etc.)
Examples of Collective Decisions
How many pears and how many apples to buy ?
• What President should we have ?
• Should Georgia be allowed to join NATO ?
How much to bid in an auction ?
What chess move ?
How many lotto tickets to buy ?
Game and DecisionTheories
They study how rational agents take individual decisions in different scenarios
Unipersonal Scenario
The final outcome of the decision depends only on the own decision (and maybe on chances), and not on the
decisions of others
– How many pears and how many apples to buy ?
How much to bid in an auction ?
What chess move ?– How many lotto tickets to buy ?
Multipersonal Scenario
The final outcome of the decision depends on the own decision, and also on the decisions of others.
Such situations are called “Games”
How many pears and how many apples to buy ?– How much to bid in an auction ?– What chess move ?
How many lotto tickets to buy ?
Decision Theory
Studies how rational agents take individual decisions in a unipersonal scenario. The focus is on the
expected outcome.
Game Theory
Studies how rational agents take individual decisions in a multipersonal scenario (a Game). The focus is on
the expected outcome.
Some “game” situations
Team Projects Dating Tennis Poker Traffic
Market Entry Patent Races OPEC-like behavior Procurement Corporate Takeovers Competition
What are we actually going to do?
Real World
situation
Model Outcome of the model
Real Outcome
Compare
Create Models as a simplification of reality !
Models
A model is a simplified (mathematical) representation of a real situation. Models are constructed in such a way that the analysis of such situation becomes easier
A good model contains only those key elements that are necessary for the analysis and is tailored to the situation at study
Example: A Map is a simplified representation of something real (a city), and so is a Travel Guide
Find your way Know the museums
Map ✔ ✖
Travel Guide ✖ ✔
Models
Models are based on simplifying assumptions, that are necesary to acomplish their goals
In this course ...
Rationality: Selfish players, profit maximizers, perfect calculatorsCommon Knowledge: I am rational, you know that I am rational, I know
that you know that I am rational, you know that I know that you know that I am rational, I
know that you know that I know that you know that I am rational, ...Perfect Information: All relevant information is available
ATTENTION !!
There is some
MATH !!
Models
Mathematics is a convenient language to create models. Mathematics makes it easier to explore and unfold all the logical consequences and implications.
The Prisoners' Dilemma
After a crime has been committed, of which the police has no clues, two suspects are arrested and kept in solitary confinement. In order to gather some evidence to take them to court, the police explains the situation to the two of them in the following terms ...
What we are going to propose to you, we will propose to the other suspect in exactly the same terms.We know that one of you two is guilty, but we do not have any evidence. Your deposition might be the only evidence we can take to court.If in your deposition you accuse the other suspect, we can use it in court as an evidence against him, and you will be freed right away. Nevertheless, if in his deposition the other suspect accuses you, then the judge will find the evidence inconclusive and both of you will be condemned to 1 year each.If you do not agree to collaborate with us and refuse to make a deposition, then the other suspect might do and hence all the evidence will point towards you. In such case the judge will condemn you to 5 years.If both of you refuse to make a deposition, then there is no way we can take you to court without any evidence. Nevertheless, just because you did not agree to collaborate with us, we will keep you two in jail 2 weeks.
Key information:
The “rules of the game” are clear: What the police just said
The “players” are the other suspect and myself.
My “choices” are clear: To accuse or To remain silent
Depending on my decision, and on the decision of the other suspect, I may end up free or spend 2 weeks, or 1 year, or 5 years in jail.
Key Information:
Accuse
Silent
Accuse Silent
Prisoner 1
Prisoner 2
1 , 1 0 , 5
5 , 0 2 w. , 2 w.
Payoff to Player 1
Payoff toPlayer 2
Brief Game Theory Timeline Late XIXth century: Mathematicians became interested in Economics
1928-1944 John Von Neumann, Oskar Morgenstern
1950-1955 John Nash
1955-1960 Links Games-Economics are stablished
1960- .... Developement ....
1994 Nobel prize: Nash-Selten-Harsanyi
2000 First World Congress of Game Theory
2005 Nobel Prize: Robert Aumann (et al.)
2007 Nobel Prize: Roger Myerson (et al.)
Lessons and Disclaimers
Game theory does not teach you “how to win”Framework for thinking strategically in a logical, systematic wayHelps to predict the logical outcome of a “game situation”Helps to understand and use the “rules of the game”Helps to organize your thinkingThe course is an introduction to the field