Shapley Value

Definition of 'Shapley Value'


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 'Shapley Value'


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.



comments powered by Disqus
Hot Definitions
  1. Federal Reserve Note

    The most accurate term used to describe the paper currency (dollar bills) circulated in the United States. These Federal Reserve Notes are printed by the U.S. Treasury at the instruction of the Federal Reserve member banks, who also act as the clearinghouse for local banks that need to increase or reduce their supply of cash on hand.
  2. Benchmark Bond

    A bond that provides a standard against which the performance of other bonds can be measured. Government bonds are almost always used as benchmark bonds. Also referred to as "benchmark issue" or "bellwether issue".
  3. Market Capitalization

    The total dollar market value of all of a company's outstanding shares. Market capitalization is calculated by multiplying a company's shares outstanding by the current market price of one share. The investment community uses this figure to determine a company's size, as opposed to sales or total asset figures.
  4. Oil Reserves

    An estimate of the amount of crude oil located in a particular economic region. Oil reserves must have the potential of being extracted under current technological constraints. For example, if oil pools are located at unattainable depths, they would not be considered part of the nation's reserves.
  5. Joint Venture - JV

    A business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task. This task can be a new project or any other business activity. In a joint venture (JV), each of the participants is responsible for profits, losses and costs associated with it.
  6. Aggregate Risk

    The exposure of a bank, financial institution, or any type of major investor to foreign exchange contracts - both spot and forward - from a single counterparty or client. Aggregate risk in forex may also be defined as the total exposure of an entity to changes or fluctuations in currency rates.
Trading Center