Strategic Decisions

1
Strategic Decisions

• Developing Skills with Interdependent Decisions
  (IDs)

2
OBJECTIVES

• Gain awareness of common situations involving
  interdependent decisions
• Highlight cases where interdependent decisions
  crop up in business and life
• Develop (some) insight and skills in the analysis
  of such decisions
• Become better (not perfect just better)
  decision makers

3
Benefits?

• Assuming your opponents behavior (or teammates)
  is fixed can be hazardous to profits, finances,
  time, health, ...
• IDs (aka strategic games, game theory) not a set
  of pat rules
• However, some scenarios very common and can be
  used (with caution) as templates
• Check out BN Ten Tales of Strategy for next
  class
• Can be used for wider range of decisions by
  developing skills in identifying aspects of
  situations and likely behavior of opponent (or
  teammate)

4
IDs at the Movies

• The Godfather
• Princess Bride
• FailSafe
• Doctor Strangelove
• My Cousin Vinnie
• The Good, The Bad, The Ugly

5
A Sampler of IDs in Everyday Life

• ID Situations
• Parent-Child
• Wife-Husband
• Sibling-Sibling
• Professor-Student
• Sellers (homes, yard sales, )
• Buyers (Cars, Homes, )
• Job Market
• Interviewee
• Interviewer
• Auctions
• Games (Poker,
• Dating
• Marriage
• Group Dynamics

• ID Behavior
• Signaling Information
• Altering Perceptions-Beliefs
• Filtering Information
• Changing Rules (nature of game)
• Repeated IDs
• Mixing Actions
• Incentives for Cooperation
• Cooperation-Compete Dilemmas
• Free-Riding

6
A Sampler of IDs in Business

• ID Situations
• Price Competition
• Price Wars
• Implicit Cooperation
• Product Development-Marketing
• Labor Market Incentives
• Ownership-Management
• Management-Labor
• Contractual Negotiations
• Office Politics

• Examples
• MS v. Apple, Netscape, Sun, Google,
• Coke v. Pepsi
• OPEC
• Local retail (fast food, gas,)
• Executive pay, stock options,
• Employee incentive pay

7
Analyzing IDs

• Analytical Tools (Theory) v. Case-by-Case Study
• Tradeoff in Methods
• Case-by-Case memorable but limited in generality
  
• Analysis flexible but sometimes hard to apply
• Most applicable to small number of decision units

8
Background on Analyzing IDs

• John von Neumman Oskar Morgenstern (Theory of
  Games Econ Behavior, 1947)
• Thomas Schelling (Strategy of Conflict, 1960)
• 1994 Nobel Prize in Economics
• John Nash focus on mathematics of basic
  solution concepts
• Richard Selten focus on games that evolve over
  time
• John Harsanyi focus on games with limited
  information
• See 1994 Press Release _at_ www.nobel.se/economics/

9
Six Essentials Elements of ID

• Decision makers (units)
• Who are the decision entities?
• Timing of Decisions
• Sequences or simultaneous? One-shot or repeated?
• Information Available
• What do players know?
• Actions (decisions)
• Aggressive/passive high/low fold/bluff
• Payoffs to decisions
• Quantitative qualitative
• Manipulation Possibilities
• Can decision makers alter rules or beliefs of
  others?
• NOTE Simplifying some of these elements is often
  necessary to successfully analyze a game
• Involves art, science, and practice

10
Take-Away Lessons

• Sometimes the best decision depends critically on
  someone elses decision
• IDs or Strategic games study of such situations
  
• Many similar situations everyday life business
• With some analytical skills, ideas applicable to
  many (but not all) situations
• The first (and maybe most critical) skill is to
  identify the essential elements of the situation