Multiple Decision Makers, Subjective Probability, and Other Wild Beasts
Paolo Brandimarte · 2011
This chapter begins formalizing decision problems characterized by the presence of multiple noncooperative decision makers. Then, it illustrates the effect of misaligned incentives in a stylized example involving two decision makers in a supply chain. The two stakeholders aim at maximizing their own profit, and these results in a solution that does not maximize the overall profit of the supply chain. Such noncooperative behavior is the subject of game theory. The chapter shows a more practical example related to equilibrium in traffic networks; this example, known as Braess’ paradox, shows that quite counterintuitive outcomes may result from noncooperative decision making. It also discusses how the dynamic interaction among multiple actors may lead to instability and, ultimately, to disaster, by analyzing a couple of real-life financial market crashes. Finally, the chapter provides the reader with a scent of Bayesian statistics. Controlled Vocabulary Terms Bayesian statistics; game theory; probability