Shapley Value

A A A

DEFINITION

In game theory, a manner of fairly distributing both gains and costs to several actors working in coalition. The Shapley value applies primarily in situations when the contributions of each actor are unequal. The Shapley value ensures each actor gains as much or more as they would have from acting independently. This is important, because otherwise there is no incentive for actors to collaborate.

INVESTOPEDIA EXPLAINS

A famous example of the Shapley value in practice is the airport problem. In the problem, an airport needs to be built in order to accommodate a range of aircraft which require different lengths of runway. The question is how to distribute the costs of the airport to all actors in an equitable manner. The solution is simply to spread the marginal cost of each required length of runway amongst all the actors needing a runway of at least that length. In the end, actors requiring a shorter runway pay less, and those needing a longer runway pay more. However, none of the actors pay as much as they would have if they had chosen not to cooperate.








RELATED TERMS
  1. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that ...
  2. John F. Nash Jr.

    An American mathematician who won the 1994 Nobel Memorial Prize in Economics, ...
  3. Trembling Hand Perfect Equilibrium

    In game theory, an equilibrium state that takes into consideration the possibility ...
  4. Tit For Tat

    A game-theory mechanism which is subject to a payoff matrix similar to that ...
  5. Prisoner's Dilemma

    A paradox in decision analysis in which two individuals acting in their own ...
  6. Game Theory

    A model of optimality taking into consideration not only benefits less costs, ...
  7. Subprime Meltdown

    The sharp increase in high-risk mortgages that went into default beginning in ...
  8. Event Risk

    1. The risk due to unforeseen events partaken by or associated with a company. ...
  9. Marginal Rate of Technical Substitution

    The rate at which one factor has to be decreased in order to retain the same ...
  10. Sharpe Ratio

    A ratio developed by Nobel laureate William F. Sharpe to measure risk-adjusted ...
Related Articles
  1. Game Theory: Beyond The Basics
    Options & Futures

    Game Theory: Beyond The Basics

  2. The Basics Of Game Theory
    Fundamental Analysis

    The Basics Of Game Theory

  3. Herding Tendencies Among Analysts
    Investing Basics

    Herding Tendencies Among Analysts

  4. Great Company Or Growing Industry?
    Markets

    Great Company Or Growing Industry?

  5. Understanding Leveraged Buyouts
    Fundamental Analysis

    Understanding Leveraged Buyouts

  6. How The Sarbanes-Oxley Era Affected ...
    Fundamental Analysis

    How The Sarbanes-Oxley Era Affected ...

  7. Where's The Market Headed Now?
    Fundamental Analysis

    Where's The Market Headed Now?

  8. Does Higher Risk Really Lead To Higher ...
    Active Trading

    Does Higher Risk Really Lead To Higher ...

  9. Invest Like Madoff - Without The Jail ...
    Options & Futures

    Invest Like Madoff - Without The Jail ...

  10. Bad Investor Behavior: Overemphasizing ...
    Investing

    Bad Investor Behavior: Overemphasizing ...

comments powered by Disqus
Hot Definitions
  1. Degree Of Financial Leverage - DFL

    A ratio that measures the sensitivity of a company’s earnings per share (EPS) to fluctuations in its operating income, as a result of changes in its capital structure. Degree of Financial Leverage (DFL) measures the percentage change in EPS for a unit change in earnings before interest and taxes (EBIT).
  2. Jeff Bezos

    Self-made billionaire Jeff Bezos is famous for founding online retail giant Amazon.com.
  3. Re-fracking

    Re-fracking is the practice of returning to older wells that had been fracked in the recent past to capitalize on newer, more effective extraction technology. Re-fracking can be effective on especially tight oil deposits – where the shale products low yields – to extend their productivity.
  4. TIMP (acronym)

    'TIMP' is an acronym that stands for 'Turkey, Indonesia, Mexico and Philippines.' Similar to BRIC (Brazil, Russia, India and China), the acronym was coined by and investor/economist to group fast-growing emerging market economies in similar states of economic development.
  5. Pension Risk Transfer

    When a defined benefit pension provider offloads some or all of the plan’s risk – e.g.: retirement payment liabilities to former employee beneficiaries. The plan sponsor can do this by offering vested plan participants a lump-sum payment to voluntarily leave the plan, or by negotiating with an insurance company to take on the responsibility for paying benefits.
  6. XW

    A symbol used to signify that a security is trading ex-warrant. XW is one of many alphabetic qualifiers that act as a shorthand to tell investors key information about a specific security in a stock quote. These qualifiers should not be confused with ticker symbols, some of which, like qualifiers, are just one or two letters.
Trading Center