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lecture9 - Game Theory Mike Shor Lecture 9"I like work It...

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Game Theory “I like work. It fascinates me. I can sit and look at it for hours.” - Jerome Klapka Jerome Mike Shor Lecture    9
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Strategic Manipulation                          of  Information Strategies for the less informed Incentive Schemes Screening Strategies for the more informed Signaling Signal Jamming Mike Shor Game Theory & Business Strategy 2
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Less-informed Players Incentive Schemes Creating situations in which observable outcomes reveal the unobservable actions of the opponents. Screening Creating situations in which the better-informed opponents’ observable actions reveal their unobservable traits . Mike Shor Game Theory & Business Strategy 3
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Moral Hazard & Roulette Mike Shor Game Theory & Business Strategy 4 $50
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Risk Aversion Mike Shor Game Theory & Business Strategy 5   Risk                        Risk                        Risk  Seeking      Neutral   Averse        Lottery       Corporations   (small stakes)        one-time deals         Multiple       Insurance           Gambles         (big stakes)
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Biased coin flip:   52%-48% Would you bet $1000 on it? Mike Shor Game Theory & Business Strategy 6 Chance  of Loss 48% 0 0.1 0.2 0.3 0.4 0.5 0.6 -$1,000.00 $1,000.00
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Biased coin flip:   52%-48% Would you bet $100 on it 10 times? Mike Shor Game Theory & Business Strategy 7 Chance  of Loss 33% 0 0.05 0.1 0.15 0.2 0.25 -$1,000.00 $0.00 $1,000.00
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Biased coin flip:   52%-48% Would you bet $1 on it 1000 times? Mike Shor Game Theory & Business Strategy 8 Chance  of Loss 10% 0 0.01 0.02 0.03 -$100.00 $0.00 $100.00
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Moral Hazard A project with uncertain outcome Probability of success depends on firm’s effort prob. of success = 0.6 if effort is routine prob. of success = 0.8 if effort is high Firm has cost of effort cost of routine effort = $100,000 cost of high effort = $150,000 project outcome = $600,000 if successful Mike Shor Game Theory & Business Strategy 9
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Compensation Schemes Benchmarks:
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