Mathematics for Decision Sciences

- Game Theory
o Game: players make strategies to make decisions
o Normal form
 Table of numbers with strategies listed among the margins of the table and the
payoffs for the participants in the cells of the table
 Strategy = rule or plan of action
 Payoff = value associated with a possible outcome of a game
o Simultaneous Games
 Normal Form (table)
 Maximin Solution
o Safety First
o Maximum among your worst payoffs
o Proposed by John von Neumann

 Worst Payoff for Alice

 Plays A = 1
 Plays B = 2
 2 is the max so B
 Worst for Bob
 Plays C = 2
 Plays D = 3
 3 is the max so D
 Solution is (B,D) (2,4)

 Nash Equilibrium
o This solution concept was named after John Forbes Nash, Jr.His
theories are used in economics, and in fact he won the Nobel
Prize for Economic Sciences in 1994.
o Every player is the best response to the other players reaction

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 o A Nash equilibrium is a state where no one person can
improve,given what others are doing.
o A Nash equilibrium is a set of “no regrets” strategies. Given
what the other players chose, you have no regrets for your
choice.
o Steps
 Best response of row player to all strategy of column
player (vice versa)

 Best response for row player if column if W is T
 Best response for row player if T is T
 Best response for column player if W is T
 Best response for column player if T is T
 NASH EQUILIBRIUM is T and T (T, T)

 Dominant Strategy
o Any strategy that always does better than any other strategy,
Hence, a rational player should always choose this strategy. You
can rely on a rational rival always playing a dominant strategy
o
 Player 1 does not have
 Player 2 has which is Y
 Y = 2 dominant ones

Sequential Game

- involves multiple players who do not make decisions simultaneously. Instead, one player chooses
their action before the others choose theirs.
- Importantly, the later players must have some information of the first player's choice so that
one player's decision affects the outcomes and decisions of other players.
- A sequential game is represented by a game tree (also called the extensive form) with players
moving sequentially.
- Ex: Universal Studio charges $1.0mn for product placement
o Product placement for Mars
 Gross profit increase by $.08mn = -.2
 Hershey decrease by $0.1mn = -.1
 = -.2
o Product Placement by Hersey
 Gross profit increase by $1.2mn = +.2
 Mars decrease by $.5mn -.5
o No product placement
 Same as usual = 0

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 - Game Tree

- Strategy

Backward Induction
- Simplification of sequential game
- Eliminate actions at the final node and work ones way forward
- Choose actions that would not maximize an individual profits at that point
- Rational player always tries to maximize profit
- Ex of mars and Hershey
o Mars must accept product placement despite -.2mn since Hershey is guaranteed to
accept since it increases profit
o Lessen the burden
o Eliminate Hersey not accepting since they don’t gain anything
- Ex of price setting
o Firm A must go low since firm b will choose low either choice and choosing low
guarantees $5 instead of $0
- \

- Subgame

o Decision point and all other parts of the diagram emanating from it
o It is the decisions after the first parties decision

Social Choice Theory

- tackles processes by which different and conflicting choices of members of a group are
consolidated into a single choice of the group.
- The basic question of social choice theory is on how groups can best arrive at decisions. Is the
choice the least unpopular, broadly acceptable, winning in all one-for-one contests, etc.?
- A related social choice problem is the selection of a good voting system. Voting is the main
vehicle by which decisions are arrived at in a democratic society. It lies at the very heart of
representative government and participatory democracy. Any voting system must produce at
least one winner to be considered legitimate.
- Math
o Define voting method precisely
o Formulate precise definitions

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 Preference Tables

- A preference ballot is a ballot on which each voter ranks all eligible candidates, from first to last
place, with no tied ranks.
- A preference table or schedule is a table showing how many times each possible ballot was
submitted.
-

- A voting method is a mathematical procedure that uses data from preference table to determine
a winner.

Majority vs. Plurality

Majority Rule

- In this method, the candidate who receives majority (more than 50%) of the first-place votes
wins the election.

Plurality Method

- In this method, whoever receives the most first-place votes is declared the winner. This is, by far,
the most simple and widely-used voting method (though it may require a tie-breaker).

- Voting systems which make use of the plurality method include barangay, local, and national
elections in the Philippines. However, voters simply choose candidates without ranking them.

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