Session14: Portfolio Strategy and Game Theory

1. Manning School of Business Session14: Portfolio Strategy and Game Theory Dr. Mark H. Mortensen 66.490.211 and 212 Tues &Thurs 2:00 to 3:15 3:30 to 4:45

2. Today • Discussion on portfolio strategy • Group workshop on portfolio strategy • Assignment for next class

3. Managing a portfolio of products

4. Workshop on Product Portfolio Come up with some examples of products that occupy the various positions on the matrix. Discuss in your groups how you would manage the different products in the matrix.

5. Game Theory “The study of mathematical models of conflict and cooperation between intelligent rational decision-makers.“ Often explains why groups of people, or companies, seem to act in a way that is contrary to the best interests of all. Also are good tools for making strategic decisions.

6. Examples of “Games” Decision Trees and group decisions Prisoners’ Dilemma Tragedy of the Commons Chicken

7. Decision Trees A decision tree is a decision support tool that uses a tree-like graph or model of decisions and their possible consequences, including chance event outcomes, resource costs, and utility. It is one way to display an algorithm. More a part of operations research than game theory, but important, nonetheless.

8. Group Decisions – The Abilene Paradox • Organizations frequently take actions contrary to the desires of any of their members, and defeat the purposes they're designed to achieve. • How his entire family agreed to take a rather unpleasant trip to the town of Abilene, Texas, despite the fact that no one individual wanted to go. Each person agreed to go because: • They thought everyone else wanted to go or • Everyone had strong objections to every place else on the list • The corollary to the Abilene Paradox is that the inability to cope with agreement, not conflict, is central.

9. Prisoners’ Dilemma Two members of a criminal gang are arrested and imprisoned. Each prisoner is in solitary confinement with no means of speaking to or exchanging messages with the other. The police admit they don't have enough evidence to convict the pair on the principal charge. They plan to sentence both to a year in prison on a lesser charge. Simultaneously, the police offer each prisoner a Faustian bargain. If he testifies against his partner, he will go free while the partner will get three years in prison on the main charge. Oh, yes, there is a catch ... If both prisoners testify against each other, both will be sentenced to two years in jail.

10. Tragedy of the Commons Several sheepherders share a common field. A sheepherder finds it in his own best interest to overgraze. But then there is less for the next flock. So it is in that sheepherder’s best interest to overgraze even more before the field is ruined. And it goes on And the field is ruined Any everyone loses.

11. Chicken Because the loss of swerving is so trivial compared to the crash that occurs if nobody swerves, the reasonable strategy would seem to be to swerve before a crash is likely. Yet, knowing this, if one believes one's opponent to be reasonable, one may well decide not to swerve at all, in the belief that he will be reasonable and decide to swerve, leaving the other player the winner. The “unreasonable” player wins!

12. Workshop

13. Workshop Describe what kind of a “game” this is and why the players do what they do. Discuss how it could be resolved, if you have time. Anybody who has lived in IIT Kharagpur for any length of time knows that just outside the campus there is a railway level crossing (actually two) which are a reliable source of traffic jams on a regular and repeatable basis. Every day, 365 days a year, the gates close two or three times every hour and each time when they reopen there is a always traffic jam. This is jam that can be modeled very easily. This is a two-lane road and if cars (and rickshaws, cycles, motorcycles ) stick to their designated left lane, both North and South bound traffic can move smoothly when the gates open. But this never happens because vehicles on both sides of the closed gate invariable occupy both lanes and when the gate finally open, both North and South bound traffic is blocked on both lanes leading to a jam. It takes quite some time (and a lot of shouting and cursing) before vehicles blocking the right lane manage to squeeze into the left lane and finally both lanes move again ... but after everyone has spent a considerable amount of time standing at the open gate ! Fiscal Cliff in Washington. An airline drops its prices. Cities draw water out of a river as it flows. Traffic in India

14. For Next Tuesday • Use the Apple Case Study that you bought. • Has Apple finally solved its long-standing problems • With respect to the Macintosh business? • With respect to its broader strategic position? • Going forward, what should Apple do?

15. Strategic Management – Spring 2014