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Management > International Trade and Strategy: Game Theory > Flashcards

International Trade and Strategy: Game Theory Flashcards

1
Q

What is a problem?

A
  • difference between current and preferred situation
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2
Q

What are the components of a problem statement?

A
  1. the nature of the current situation
  2. the nature of the preferred situation
  3. a central objective that distinguishes the two
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3
Q

What are the elements of decision problems?

A
  • decisions: choice between two or more alternatives, rectangle
  • uncertain events: situation outside the control of the decision maker, could result in either of two or more possible outcomes, oval
  • objectives: criterion for evluating the deriablitiy of a situation, rectable with rounded corners
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4
Q

What is an Influence Diagram?

A
  • visual representation o the relationship between decision elements
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5
Q

What is a Decision Tree?

A
  • detailed visual representation of all the paths that may prevail within a decision problem’s planning horizon
  • according to alternatives associated with each decision
  • possible outcomes associated with each uncertain event
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6
Q

What are the steps to structuring a decision problem?

A
  1. Create three lists: decisions, uncertain events, objectives
  2. Sort lists in decreasing order of importance
  3. Create initial influence diagram: decision –> objective
  4. Add elements one at a time until initial lists are exhausted
  5. Evaluate the overall strucutre and revise if necessary
  6. Ask others to evaluate the overall structure and revise if necessary
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7
Q

What is the basic risky decision?

A

specifications:

  • basik risky decision with multiple objectives
  • basic risky policy with multiple objectives
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8
Q

What is the difference between a basic risky decision and a basic risky policy?

A
  • in a basic risky decision, the decision does not influence the uncertain event
  • in a basic risky policy, the decision does influence the uncertain event
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9
Q

What kind of decisions are there?

A
  • basic risky decision
  • basic risky policy
  • basic risky decision with multiple objectives
  • basic risky policy with multiple objectives
  • multiple objective, no-risk deicison
  • multiple objective, multiple-apprach, no-risk decision
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10
Q

What kind of decisions are there?

A
  • basic risky decision
  • basic risky policy
  • basic risky decision with multiple objectives
  • basic risky policy with multiple objectives
  • multiple objective, no-risk deicison
  • multiple objective, multiple-apprach, no-risk decision
  • multiple-period sequential decision
  • prototype decision
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11
Q

What is the environment for Game Theory?

A
  • we’re not alone on the market

- our competitors might choose the same strategy

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12
Q

Which solution is the best solution?

A
  • not easy to identify
  • if money is the only objective –> the alternative that results in the greatest income or the smallest cost
  • maximizing monetary value
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13
Q

Which solution is the best solution in no-risk decisions?

A
  • not easy to identify
  • if money is the only objective and there is no risk (no-risk decision problem) –> the alternative that results in the greatest income or the smallest cost
  • maximizing monetary value
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14
Q

What is the formula for the Expected Monetary Value?

A

EMV = (p * outcome) + (p * outcome)
EMV = (p1 *x1) + (p2 * x2) + … + (pk * xk)
where,
pk = the probability of outome k
xk = the monetary payoff associated with the outcome k
k = the number of outcomes associated with an uncertain event x

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15
Q

What is the Net present value (NPV) and how to calculate it?

A
  • useful for comparison
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16
Q

How do you solve complicated decision problems?

A
  • reduce them to no-risk problems
  • one node at a time, from right to left
  • decisions: chose best solution
  • uncertainties: average the outcomes
  • continue until only the primary decision remains
  • -> no-risk, single-criterion decision, chose the largest EMV
17
Q

Which are the steps for solving a decision tree?

A
  1. identify rightmost node
  2. determine the EMV associated with the node –> decision: chose alternative with highest EMV, uncertainty: average payoff
  3. replace node with EMV
  4. return to step 1 until diagram is completely analyzed –> best alternative for primary decision
18
Q

What kind of models do exist?

A
  • deterministic models
  • pribability models
  • simulation models
  • discipline specific models
19
Q

What are the three uses of probabilities?

A
  • express long-term frequency of a recurring chance event
  • quantify a lack of knowledge about a past event
  • express likelihood that unique future event will occur
20
Q

What is the certainty equivalent approach?

A 
Certainty equivalent (CE) for risk lottery:
- maximum amount a decision maker is willing to pay in order not to face a risk
21
Q

What is the risk premium?

A
  • the difference between a decision maker’s certainty equivalent and the expected monetary value
  • Risk Premium = EMV - CE
22
Q

What are the three basic attitudes that can be identified by the sign of the risk premium?

A

positive:

  • risk aversion
  • decision maker is willing to pay extra in order to avoid risk

zero:

  • risk neutral
  • deicison maker is only interested in expected payoff

negative:
- risk seeking/ risk taker

23
Q

What is the risk premium?

A
  • the difference between a decision maker’s certainty equivalent and the expected monetary value
  • Risk Premium = EMV - CE
24
Q

What are the diminishing marginal returns of utility? (absteigender Grenznutzen)

A
  • additional satisfaction obtained from successive million dollars does not increase one’s happiness as much as the first million
25
Q

What is a utility scale?

A
  • satisfaction associated with an outcome = utility
  • not always proportional
  • if not proportional –> maximize expected utility (EU)
    1. convert values into associated utilities
    2. maximize like EMVs
26
Q

What is a score card?

A
  • table that reports each alternative’s desirability (utility) according to each objective
  • rows: objectives
  • columns: alternatives
27
Q

What is a utility scale?

A
  • satisfaction associated with an outcome = utility
  • not always proportional
  • if not proportional –> maximize expected utility (EU)
    1. convert values into associated utilities
    2. maximize like EMVs
28
Q

How to use the scorecard

A
  1. create a summary scorecard with all the combinations
  2. prepare utility scales for the non-monetary objectives
    2a. rank the alternatives for each objective
    2b. best alternative = 100, worst = 0
    2c. use direct approach or certainty equivalent approach to give a value to the other alternatives
29
Q

How to use the scorecard

A
  1. create a summary scorecard with all the combinations
  2. prepare utility scales for the non-monetary objectives
    2a. rank the alternatives for each objective
    2b. best alternative = 100, worst = 0
    2c. use direct approach or certainty equivalent approach to give a value to the other alternatives
  3. put values into scorecard
  4. apply multi-attribute utility theory
30
Q

What are tradeoff weights?

A
  • proportion of a decision maker’s total concern placed on each alternative
31
Q

What is total satisfaction?

A
  • weighted average of each outcome’s desirability accross all objectives, where the weights represent each objective’s relative importance
  • formula:
    Total satisfaction = Ewi*Ui
    –> additive utility function
32
Q

Summary: how to solve a scorecard?

A
  1. identify different objectives
  2. list the different alternatives –> compute utilities
  3. for each objective, rank the different alternatives
    - -> build utility scale for ranking alternatives
  4. for each objective compute weights –> sum of weights = 100
  5. fill in the score card
  6. compute the total utility of each alternative according to the objective and its weight
  7. choose the alternative with the highest multiple-attribute utility
33
Q

What are cooperative and non-cooperative games?

A

x

34
Q

How is the payoff designed?

A

g

35
Q

What is a symmetric 2x2 game?

A

g

Management (5 decks)

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