Randomization in Decision-Making


in Schelling's Game Theory

Published in print February 2012 | ISBN: 9780199857203
Published online May 2012 | e-ISBN: 9780199932597 | DOI:
Randomization in Decision-Making

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This chapter considers randomization, beginning with its history as “fairness” in making decisions. It then examines “mixed strategies” and von Neumann's Minimax Theorem. A segment from Poe's The Purloined Letter makes the point of randomizing one's choice when against an opponent who will outsmart you if you make a decision. A presentation of Schelling's class materials concerns randomizing to outsmart a burglar. The value of randomizing decisions is explained. These illustrations make the concept easy to comprehend without the complex mathematics often involved. The final section introduces the Nash Equilibrium, easily recognized in a 2 × 2 matrix, with examples. The Nash equilibrium often applies to bargaining and a matrix illustrates that Nash equilibria can exist and lead firms to form duopolies. There can be more than one Nash equilibrium. One solution, posited by Schelling, is that certain solutions have prominence and are selected among Nash equilibria. Schelling called them focal points.

Keywords: randomization; noncooperative games; mixed strategies; Nash Equilibrium; focal points

Chapter.  6514 words. 

Subjects: Economics

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