FIN 580ST / MBA 505ST Strategic Thinking, Incentives, and Information Course Syllabus Winter 2014 Charles M. Kahn

Transcription

1 University of Illinois Department of Finance FIN 580ST / MBA 505ST Strategic Thinking, Incentives, and Information Course Syllabus Winter 2014 Charles M. Kahn Tuesdays and Thursdays, BIF 3039 Note that the first team assignment is due on Sunday, January 26. Students are required to get their teams together by Thursday, January 23. See below for more details. This course provides a systematic approach to strategic thinking. The first part of the course applies game theory to the analysis of business decisions. It uses these concepts to understand how businesses interact strategically and to develop general principles for such interaction. The second portion of the course introduces incentive mechanisms. In order to cope with the strategic behavior of other parties (employees, customers, investors, suppliers and competitors) businesses are organized so as to channel strategic behavior through incentive mechanisms. We will examine some basic incentive devices and see some of the principles of their design. The course provides grounding that is particularly valuable for work in corporate finance and business strategy. It is also useful for aspects of work in other branches of finance and marketing and in international business. Objectives I have three different goals for the students in this class; various assignments and lectures are intended to help with one or another of these goals. First I want you to understand the concepts underlying game theory, strategic thinking and design of incentive systems. Second I want you to recognize and analyze strategic situations as they arise in real-world examples. Third I want you to practice applying the principles by developing strategies for simple strategic situations and seeing how your strategies fare against those of your classmates. Communication Most assignments will be submitted on compass. However for some assignments it will be necessary to use . The assignment will clearly indicate which method is to be used. My address is c-kahn@illinois.edu. When sending a message for an assignment or with respect to this course, the words Strategic Thinking must be included in the subject field; otherwise the messages may get lost. This is particularly important when submitting time-sensitive assignments. If an assignment is not received in time because this requirement has been forgotten, it will be treated as late. When team assignments are submitted by , always cc: all members of the team. Copyright/Recording The contents of the syllabus, class materials, lectures, and course book for this course are protected under the copyright laws of the United States. They are intended for the private use of students and may not be reproduced in any way, shape, or form without the express written permission of the author. Tape/video recording of course lectures is prohibited.

2 Teams You are encouraged to put together your own teams for this course. Teams will contain a maximum of four members each. Please let me know your team rosters in class on Thursday, January 23. Choose a team name and me with the team name and the names of the team members (do not send them in an attachment). Be sure to cc: each member of the team. Course Organization A course schedule with readings and assignments is attached. Due dates for post-class assignments are indicated in the schedule. The outline also indicates which assignments should be done individually and which are team assignments. Course materials are available on Compass, under Fin 580 / MBA 505 ST; assignments and other information will be posted on this site and students are responsible for checking the site regularly. NOTE: There will be a class scheduled on Friday February 7. Please make plans accordingly. There will be no classes scheduled during the week of the auction simulation (February 24-28) Quiz and Exam There will be a quiz during the session on Tuesday, February 4. There will be a final exam, tentatively scheduled during the week of March If you miss the quiz or the final exam you will receive a score of 0 for that component of your grade. Exceptions will be made only upon presentation of documented evidence indicating a serious illness, family emergency, job interview, or University-authorized absence. You are encouraged to inform me of any known conflict as soon as possible, but no later than one week before the date of the quiz or examination. If an exception is granted, then the decision will be at my discretion whether to schedule a make-up exam or to adjust the weight of the other components of the course grade. You are strongly urged to make every effort to take the quizz and exam as scheduled. Assignments The problem set is to be prepared individually. You may consult with other students on it, but you may not examine another student's solution. For the team projects and group memos, discussion must be confined to team members. Copying of solutions from any source is prohibited under any circumstances. Assignments must be submitted on time. Late submissions will be heavily penalized; submissions received after the grading has been completed will not be accepted. Grades The grade for the course will be determined as follows: Team Projects (2) 20% Quiz 10% Problem Set 10% Team Memos (3) 30% Final Exam 30% The course grade will be determined by aggregating the scores from each component shown above. Scores on components may be standardized to adjust for differences in means or 2

3 variation. The resulting standardized aggregate score will determine the course grade. Plus/minus grading will be used for the course grade. Academic Integrity Academic integrity is fundamental to the intellectual life of any university. Consistent with University and MBA and MSF Program policies, violations of academic integrity will be considered a serious offense. Any student who is judged to have violated academic integrity in this course will be subject to the penalties discussed in the student code. These penalties include, among others, failure for the course or dismissal from the University. Copying results on an exam, plagiarism of homework, or unauthorized use of materials from this course in previous years constitutes a violation of academic integrity. You are encouraged to read the code regarding student rights and responsibilities, which may be found at Texts The main text for the course is The Art of Strategy by Avinash K. Dixit and Barry J. Nalebuff. (DN) For those who would like a more formal account of game theory, I recommend: Games and Information by Eric Rasmussen, and Fun and Games by Ken Binmore. These additional texts are not required. Instead, I will provide handouts covering the material in a more applied fashion. I will also provide relevant newspaper articles via electronic reserve. The schedule for these articles and a link to electronic reserves will be available on Compass. You may wish to make copies to bring to class. During the course we will examine two case studies; instructions for purchasing them will be provided later. Office Hours I am happy to meet with you. I will generally be in the BIF atrium on Wednesdays from 12:00 to 12:30 for informal discussions. If you wish to meet at another time, please me (don t forget to put Strategic Thinking in the subject field). Disabilities To ensure that disability-related concerns are properly addressed from the beginning, students with disabilities who require reasonable accommodations to participate in this class are asked to see me as soon as possible. BIF Emergency Procedures Because BIF is not a designated tornado shelter, in the event of a tornado warning please seek shelter in the Wohlers Hall basement or the Armory (the nearest designated University tornado shelters). If a tornado is imminent, the BIF basement stairwells can be used on an emergency basis. In the event of a fire in BIF, exit BIF and proceed to 141 Wohlers Hall. In the event of threat from a shooter on campus, lock down the classroom and move to a place of safety within the classroom. If you encounter a suspicious package, do not touch the package, alert campus security, and refrain from cell phone usage until the situation is resolved. More detailed information and action instructions are available in the BIF Building Emergency Action Plan. 3

4 Tentative Schedule Part I, Game Theory Note: Handouts will be provided explaining the team projects in greater detail. In addition to the readings listed below, I will provide newspaper articles online, which you are required to read before the next class. SESSION 1: Tuesday, January 21, Sequential Games What is the key to strategic thinking? What is the fundamental rule for strategic behavior in sequential games? Read DN chapter 2 and work through game tree examples provided in class. Put together your team. Bring a copy of the roster to the next session, and send me an e- mail of the roster by 8 pm January 23. SESSION 2: Thursday, January 23, Simultaneous Move Games What are the principles for play in simultaneous move games? How do you distinguish simultaneous and sequential situations? Group Project 1: Develop a team strategy for playing a repeated prisoner's dilemma. This is due at 8 pm on Sunday, January 26. SESSION 3: Tuesday, January 28, Repeated Interaction How can repeated interaction avoid the prisoner's dilemma? What factors contribute to successful cooperation by rivals? Read DN chapters 3-4. SESSION 4: Thursday, January 30, Strategic Moves When is it advantageous to move pre-emptively? When are threats and promises useful? How can a player make a credible commitment to a strategy? Read DN chapters 6-7. Post-Class Assignment Several newspaper articles will be provided. For each article, think about how to reinterpret some significant aspect of the article as a game and decide how the players in that game should play. This assignment will form the basis of a quiz during the session on February 4. SESSION 5: Tuesday, February 4, Examples of Strategic Behavior: QUIZ Practice at recognition and analysis of strategic situations Prepare for quiz; see above. Team news memo: Find a newspaper article; reinterpret the situation described as a game. Describe the game and analyze the players' strategies in that game. Due March 6. SESSION 6: Thursday, February 6, Unpredictability When is unpredictability advantageous? How can a player ensure that rivals are unable to take advantage of his actions? Read DN chapter 5 Prepare memo for case 1. Due February 11 4

5 Part II, Mechanisms SESSION 7: Friday, February 7, Coordination NOTE DATE FOR THIS CLASS THERE WILL BE 3 SEPARATE SESSIONS: 9:30, 11:00 or 12:30. How do market imperfections affect strategic behavior? How can coordination be achieved when markets fail? Read DN Chapter 9 Read DN Chapter 11 SESSION 8: Tuesday, February 11, Case 1 (team memo for case 1 due) Problem set (individual). Due at beginning of class on February 20 SESSION 9: Thursday, February 13, Auctions and Bidding What bidding strategies will be most effective in different forms of auctions? none Read DN, chapter 10 SESSION 10: Tuesday, February 18, Auctions and Bidding II (hand in problem set) When does the winner's curse occur? How can it be avoided? Group Project 2: Develop a team bidding strategy for our simulation of the Nationwide Narrowband Electromagnetic Spectrum Auction. Bidding begins Sunday, February 23. The first written portion of this assignment will be due electronically before 5 pm on Monday afternoon, February 24; additional portions will be due as the auction progresses. (Supplementary readings by Peter Cramton, "Money out of thin air: The Nationwide Narrowband PCS Auction" and The FCC Spectrum Auctions: An Early Assessment, and Richard Thaler, The Winner s Curse will be available on reserve). SESSION 11: Thursday February 20, Information and Incentives How do moral hazard and adverse selection affect incentives? How can contracts alter incentives? How can contracts be used to elicit information? What is a lemon? What is a signal and when is it effective? Read DN chapters 8 and 13 No Classes Tuesday February 25 or Thursday February 27 (Auction simulation will take place this week; also use the time to work on team memo for case 2 and on the team news memo) SESSION 12: Tuesday, March 4, Case 2 (team memo for case 2 due) REVIEW SESSION: Thursday, March 6 (Reading day) We will review the major themes of the course; no new material will be presented. This will be an opportunity to ask questions. (team memo analyzing newspaper article due by , Thursday March 6) version 1/15/2014 5