What is Strategic Thinking

1
Strategic Thinking

• What is Strategic Thinking
• Game Theory
• Applications to Business
• Applications to Life

2
Survivor Picking Sticks

• Rules
• 12 Sticks
• During a players turn each person can pick 1-3
  sticks.
• Last person to move wins

12 11 10 9 8 7 6 5 4 3 2
1
3
Modified Picking Sticks Game

• Rules
• 14 Sticks
• During a players turn each person can pick 1-3
  sticks.
• Last person to move wins

12 11 10 9 8 7 6 5 4 3 2
1
14 13
4
The Cambridge May Ball

• Casino Night
• Roulette
• Play Money
• Winner gets ticket to the ball
• In the final round Barry has 700, and Eva 300

5
The Cambridge May Ball

• Roulette
• Numbers 0-36
• 0 is green
• 1-36 odd numbers are Red, even are black
• Betting 1 on Red wins with prob 18/37 and pays
  2
• Betting 1 on a multiple of 3 wins with
  probability 12/37 and pays 3.
• What should each person do?

6
Forecasting Stock Performance

• Bob is a veteran predictor of stocks. His
  predictions appear on a popular Web-Site Each
  Monday Morning.
• Jim is unknown
• If his stocks perform better than Bobs he may
  attract attention
• If his stocks perform the same or worse than
  Bobs he remains unknown.
• When should Bob post his picks on his web-site?
  How should he make his choices?

7
Americas Cup

• A two boat sailing race
• The Australian boat starts out behind

8
Its your move Charlie Brown

• Lucy Ill hold the ball, you come running up
  and kick it Charlie Brown
• Charlie Brown This year Im gonna kick the ball
  out of the universe.

9
New Cleaners Fast Cleaners

• Vacuum Cleaners
• Existing company Fast Cleaners Vacuums
• Potential Entrant New Cleaners
• Post Entry choices for Fast Cleaners
• Accommodate entry
• Fight a price war

10
New Cleaners Fast Cleaners
Accommodate
100,000 to New Cleaners
Fast Cleaners
Enter
Price War
-200,000 to New Cleaners
Newcleaners
0 to New Cleaners
Keep Out
11
New Cleaners Fast Cleaners
Accommodate
100,000 to New Cleaners 100,000 to Fast Cleaners
Fast Cleaners
Enter
Price War
-200,000 to New Cleaners -100,000 to Fast
Cleaners
Newcleaners
0 to New Cleaners
Keep Out
12
Bargaining Ice-Cream Pie

• Take-it-or-leave-it offers
• The pie is melting

13
Politics and the High Road
High Road
Obama Wins
McCain
Low Road
McCain has a chance
High Road
Obama
McCain has a chance
High Road
Low Road
McCain
Low Road
Obama Wins
14
Dominant Strategies

• Professor Jones choosing the right grail
• Baseball 2-outs, 2-strikes, runner on first
• Terminology
• Dominant Strategy
• Dominated Strategy

15
Time and Newsweek
Newsweeks Choices Newsweeks Choices
AIDS Budget
Times Choices AIDS 35 / 35 70 / 30
Times Choices Budget 30 / 70 15 / 15
Magazine sales for Time Magazine sales for
Newseek
16
A different situation
Newsweeks Choices Newsweeks Choices
AIDS Budget
Times Choices AIDS 42 / 28 70 / 30
Times Choices Budget 30 / 70 18 / 12
17
Football
Defenses Strategies Defenses Strategies Defenses Strategies
Counter Run Counter Pass Blitz
Offenses Strategies Run 3 7 15
Offenses Strategies Pass 9 8 10
Offenses expected yardage gain
18
Missile warfare
C
Iraqi Ship
F
B
E
A
I
H
D
American Ship
G
19
Table of Hits and Misses
Iraqi Strategy Iraqi Strategy Iraqi Strategy Iraqi Strategy Iraqi Strategy Iraqi Strategy Iraqi Strategy Iraqi Strategy Iraqi Strategy
A M E R I C A N 1-IFCB 2-IFEB 3-IFED 4-IFEH 5-IHGD 6-IHED 7-IHEB 8-IHEF
A M E R I C A N 1-ABCF H O O O O O O H
A M E R I C A N 2-ABEF O H H H O H H H
A M E R I C A N 3-ABEH O H H H O H H H
A M E R I C A N 4-ABED O H H H H H H H
A M E R I C A N 5-ADGH O O O H H O O O
A M E R I C A N 6-ADEH O H H H O H H H
A M E R I C A N 7-ADEF O H H H O H H H
A M E R I C A N 8-ADEB H H H H O H H H
20
Dominated Strategies
Iraqi Strategy Iraqi Strategy Iraqi Strategy Iraqi Strategy Iraqi Strategy Iraqi Strategy Iraqi Strategy Iraqi Strategy Iraqi Strategy
A M E R I C A N 1-IFCB 2-IFEB 3-IFED 4-IFEH 5-IHGD 6-IHED 7-IHEB 8-IHEF
A M E R I C A N 1-ABCF H O O O O O O H
A M E R I C A N 2-ABEF O H H H O H H H
A M E R I C A N 3-ABEH O H H H O H H H
A M E R I C A N 4-ABED O H H H H H H H
A M E R I C A N 5-ADGH O O O H H O O O
A M E R I C A N 6-ADEH O H H H O H H H
A M E R I C A N 7-ADEF O H H H O H H H
A M E R I C A N 8-ADEB H H H H O H H H
21
Reduced Table of Hits and Misses
Iraqi Strategies Iraqi Strategies Iraqi Strategies
American Strategies IFCB IHGD
American Strategies ABED O H
American Strategies ADEB H O
22
Nash Equilibrium

• Definition
• Feast Too many equilibria
• Standards Driving on the right side of the road.
• Phone connection breaks off Who calls back
• Famine
• Re-examine the Missile game
• Mixed Strategies

23
Summary of Concepts

• Sequential Games
• First Mover Advantage
• Second Mover Advantage
• Solve the game backwards
• Simultaneous Move Games
• Look for Dominant Strategies
• If there are no Dominant Strategies, eliminate
  Dominated Strategies, and check for dominant
  strategies in the simplified game.

24
Summary Continued

• More on Simultaneous move games
• If all else fails use Nash Equilibrium
• Each player selects a strategy that maximizes his
  payoff given the strategy selected by the other
  player.
• Characteristics of Nash Equilibrium
• Sometimes there is more than one
• Sometimes there is no Nash Equilibrium in pure
  strategies. There is always a Nash Equilibrium
  in mixed strategies

25
Mary and Bob are playing the game described in
the table below. Bob picks the columns (either A,
B, C, D or E while Mary picks the rows (either
1, or 2). Use concepts from class to pick the
likely outcome of this game if their choices are
made non-cooperatively and simultaneously.
26

• Statement 1 Non-cooperative Nash equilibrium is
  the economists favorite solution to use in games
  because you can always find a single predicted
  outcome to any situation.
• Statement 2 When we say that a player has a
  Dominant strategy, we mean that no matter what
  his/her opponent does, that player will always
  make the same choice.
• a. Statement 1 is true, but 2 is false
• b. Statement 2 is true, but 1 is false
• Both are true
• Both are false

27
Alice and Bob are playing the game described in
the table below. Bob picks the rows (either A, B,
or C, while Alice picks the columns (either D, E,
or F). Use concepts from class to pick the likely
outcome of this game if their choices are made
non-cooperatively and simultaneously. a. Bob
will pick B and Alice D b. Bob will pick C, and
Alice F. c. Bob will pick C and Alice E. d. Bob
will pick A and Alice D. e. None of the above
are the solution to this problem
28
Bob and Alice are going to play the
non-cooperative sequential game described below.
Bob picks first choosing A or B. Alice picks
second, picking C or D. After Alice picks, Bob
gets to pick once again, choosing either E or F.
Payoffs marked with are for Bob and for
Alice. What is the likely outcome of this game
according to concepts discussed in class?
29
Statement 1 In a two-player, simultaneous-choice
game if strategy A is better for every possible
choice of your opponent than strategy B, then we
say that you have a dominant strategy. Statement
2 If there are no dominant strategies, and no
dominated strategies in a game, then there will
always be a single Nash equilibrium outcome to
help predict what will happen. a. Statement 1
is true, but 2 is false b. Statement 2 is true,
but 1 is false c. Both statements are
correct. d. Neither statement is correct
30
Statement 1 Players in a repeated, simultaneous
move game often wish to make a public claim
concerning what strategy they will select. One
strategy for developing the credibility needed
for opponents to believe the claim is to
establish a reputation for making that move over
time. Statement 2 In the situation mentioned
in statement 1, another strategy to develop
credibility is to publish your strategy in a
major newspaper. a. Statement 1 is true, but 2
is false. b. Statement 2 is true, but 1 is
false. c. Both statements are true. d. Both
statements are false
31
Statement 1 In the casino night story from
Dixit and Nalebuff by the last spin of the
roulette wheel in the evening Barry had 700 and
Eva had 300. Sine the money amounts were
significant only if you had the most at the end
of the evening, Barrys best strategy was to wait
for Eva to place her bet, and bet the same amount
on the same event. Statement 2 In the casino
night story mentioned above, Evas best choice
was to put her 300 on a multiple of 3 so that
she would receive 900 if she won. Realizing
this she should place her bet immediately and
hope Barry didnt know how to respond. a. Statem
ent 1 is true, but 2 is false. b. Statement 2 is
true, but 1 is false.. c. Both statements are
correct. d. Both statements are false.
32
Which of the following statements best describe
the situation in the simultaneous choice game
depicted above? a. Strategy F is a dominated
strategy for Edna, while strategy A is a
dominated strategy for Bob. b. Strategy E is a
dominated strategy for Edna, while strategy A is
dominated strategy for Bob. c. There are no
dominated strategies in this game. d. Strategy F
is a dominated strategy for Edna, while strategy
c is a dominated strategy for Bob.