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Chap 1

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09/19/2013

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# 0 INTRODUCTION

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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

– zero-sum two-player games ∗ domination / minimax criterion / randomized strategies – statistical games – decision criteria ∗ minimax criterion / Bayes criterion . • We will look at GAME THEORY and STATISTICAL GAMES as in introduction to DECISION THEORY.0 INTRODUCTION 2 • In this chapter we will look at some methods that can be used to help determine appropriate strategies in various situations.

• The game can be represented by a matrix. • 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. – 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 3 1 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. .

.1 ZERO-SUM TWO-PLAYER GAMES 4 1.1 Domination • There are several tools that we can use to helps us ﬁnd a player’s optimum strategy. • A dominated strategy can always be discarded in a game. • 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. The ﬁrst of these is to discard any dominated strategies.

2 The Minimax Criterion • If we cannot determine the optimum strategy for each player on the basis of domination alone. then the minimax strategies are NOT spy-proof. • If a game DOES NOT have a saddle point. . maximizes their minimum gain. • NOT all matrices have saddle points.g. b) corresponding to the equilibrium is both the largest in its column and the smallest in its row. the minimax criterion. Such equilibrium is called a saddle point. • In cases such as this. each player should adopt a randomized strategy. • A SADDLE POINT: A pair of strategies will be in equilibrium if and only if the element L(a. • The minimax criterion: each player chooses the strategy that minimizes their maximum loss or equivalently. e. we could use some other tools.1 ZERO-SUM TWO-PLAYER GAMES 5 1.

• How do we choose the probabilities involved to make the excepted maximum loss as small as possible? . 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.3 Randomized Strategies • Given that a player does not know how his opponent will behave.1 ZERO-SUM TWO-PLAYER GAMES 6 1. and that his optimum strategy is a function of his opponent’s. that is to adopt a strategy in which the courses of action are chosen in some random way.

which will give some information about Nature’s “choice”. • In a statistical game the statistician has some sample data. • Another Example on pages 19-20. • See an Example on pages 14-18.2 STATISTICAL GAMES 7 2 Statistical games • In statistical inference. • Therefore statistical inference can be regarded as a game between NATURE and the statistician. decisions about populations are based on sample data. .

• Two criteria are considered: – The minimax criterion – The Bayes criterion .3 DECISION CRITERIA 8 3 Decision criteria • In general it is possible to ﬁnd the best decision function only in respect of some CRITERIA.

maximized with respect to θ. . is a minimum. θ).1 The minimax criterion • Under the minimax criterion the decision function d chosen is that for which R(d.3 DECISION CRITERIA 9 3.

2 The Bayes criterion • If Θ is regarded as a random variable under the Bayes criterion the decision function chosen is that for which E[R(d. . • The criterion needs Θ to be regarded as a random variable with a given distribution.3 DECISION CRITERIA 10 3. Θ)] is a minimum where the expectation is taken with respect to Θ.

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