0 INTRODUCTION

Chapter 1
Decision Theory
0

Introduction

First let us look at some games. In these games,

players will need to make decisions about the strategies they adopt.
Children deciding how to divide up a bag of
mixed sweets fairly
A manager deciding how to allocate the bonus
pool to his staff
The behavior of a predator and its prey
The UN setting pollution limits for different
countries
Criminals deciding whether to grass up their
accomplices

0 INTRODUCTION

In this chapter we will look at some methods that

can be used to help determine appropriate strategies in various situations.
We will look at GAME THEORY and STATISTICAL GAMES as in introduction to DECISION THEORY.
zero-sum two-player games
domination / minimax criterion / randomized strategies
statistical games
decision criteria
minimax criterion / Bayes criterion

1 ZERO-SUM TWO-PLAYER GAMES

Zero-sum two-player games

A game is said to be zero-sum when there are players in conflict and whatever one player loses in a
game another player wins.
MORE than two players / NOT zero-sum /
It is assumed in game theory that in choosing their
own strategy neither player knows what the other
player will do and once a strategy has been chosen
it cannot be changed.
The game can be represented by a matrix.
Player A and Player B
Options
Payoffs
Game theory seeks to establish optimum strategies: Most profitable to each player
Value of the game: expected payoff when the players use their optimum strategies.

1 ZERO-SUM TWO-PLAYER GAMES

1.1

Domination

There are several tools that we can use to helps

us find a players optimum strategy. The first of
these is to discard any dominated strategies.
In a payoff matrix one strategy is said to dominate
another strategy if the choice of the first strategy is
at least as good as the choice of the second strategy
and in some cases better.
A dominated strategy can always be discarded in
a game.

1 ZERO-SUM TWO-PLAYER GAMES

1.2

The Minimax Criterion

If we cannot determine the optimum strategy for

each player on the basis of domination alone, we
could use some other tools, e.g. the minimax criterion.
The minimax criterion: each player chooses the
strategy that minimizes their maximum loss or
equivalently, maximizes their minimum gain.
A SADDLE POINT: A pair of strategies will be in
equilibrium if and only if the element L(a, b) corresponding to the equilibrium is both the largest
in its column and the smallest in its row. Such
equilibrium is called a saddle point.
NOT all matrices have saddle points.
If a game DOES NOT have a saddle point, then
the minimax strategies are NOT spy-proof.
In cases such as this, each player should adopt a
randomized strategy.

1 ZERO-SUM TWO-PLAYER GAMES

1.3

Randomized Strategies

Given that a player does not know how his opponent will behave, and that his optimum strategy is
a function of his opponents, how should a player
behave in order to reduce his excepted maximum loss to a minimum?
One way to do this is to introduce a randomized
strategy, that is to adopt a strategy in which the
courses of action are chosen in some random way.
How do we choose the probabilities involved to
make the excepted maximum loss as small as possible?

2 STATISTICAL GAMES

Statistical games

In statistical inference, decisions about populations are based on sample data.

Therefore statistical inference can be regarded as
a game between NATURE and the statistician.
In a statistical game the statistician has some sample data, which will give some information about
Natures choice.
See an Example on pages 14-18.
Another Example on pages 19-20.

3 DECISION CRITERIA

Decision criteria

In general it is possible to find the best decision

function only in respect of some CRITERIA.
Two criteria are considered:
The minimax criterion
The Bayes criterion

3 DECISION CRITERIA

3.1

The minimax criterion

Under the minimax criterion the decision function

d chosen is that for which R(d, ), maximized with
respect to , is a minimum.

3 DECISION CRITERIA

3.2

10

The Bayes criterion

If is regarded as a random variable under the

Bayes criterion the decision function chosen is that
for which E[R(d, )] is a minimum where the expectation is taken with respect to .
The criterion needs to be regarded as a random
variable with a given distribution.