Decision Theory/Examples

Examples of Applications of Decision Theory

Two-Player Game

Consider a two-player game with an entrepreneur as one player and the competition (for example: the world, the environment, or a market) as the other player.

The entrepreneur may adopt any of a finite number of strategies, but knows only the probabilities that the competition will adopt each of its own strategies.

The payoff matrix gives the consequences (either gain or loss) to the entrepreneur for each action made, correlated with each action made by the competition.

Hence, knowing or estimating the probability of choosing a particular action made by the competition, the entrepreneur may calculate the expected payoff from a particular action.