# Monthly Archives: June 2015

## The Shapley Value: An Extremely Short Introduction

Posted by Graham Joncas

###### [For those who find the LaTeX formatting hard to read: pdf version + LaTeX version]

If we view economics as a method of decomposing (or *unwriting*) our stories about the world into the numerical and functional structures that let them create meaning, the Shapley value is perhaps the extreme limit of this approach. In his 1953 paper, Shapley noted that if game theory deals with agents’ evaluations of choices, one such choice should be the game itself—and so we must construct “the value of a game [that] depends only on its abstract properties” (1953: 32). By embodying a player’s position in a game as a scalar number, we reach the degree zero of meaning, beyond which any sort of representation is severed entirely. And yet, this value recurs over and over throughout game theory, under widely disparate tools, settings, and axiomatizations. This paper will outline how the Shapley value’s axioms coalesce into an intuitive interpretation that operates between fact and norm, how the simplicity of its formalism is an asset rather than a liability, and its wealth of applications.

**Overview**

Cooperative game theory differs from non-cooperative game theory not only in its emphasis on coalitions, but also by concentrating on division of payoffs rather than how these payoffs are attained (Aumann, 2005: 719). It thus does not require the degree of specification needed for non-cooperative games, such as complete preference orderings by all the players. This makes cooperative game theory helpful for situations in which the rules of the game are less well-defined, such as elections, international relations, and markets in which it is unclear who is buying from and selling to whom (Aumann, 2005: 719). Cooperative games can, of course, be translated into non-cooperative games by providing these intermediate details—a minor industry known as the Nash programme (Serrano, 2008).

Shapley introduced his solution concept in 1953, two years after John F. Nash introduced Nash Equilibrium in his doctoral dissertation. One way of interpreting the Shapley value, then, is to view it as more in line with von Neumann and Morgenstern’s approach to game theory, specifically its reductionist programme. Shapley introduced his paper with the claim that if game theory deals with agents’ evaluations of choices, one such choice should be the game itself—and so we must construct “the value of a game [that] depends only on its abstract properties” (1953: 32). All the peculiarities of a game are thus reduced to a single vector: one value for each of the players. Another common solution concept for cooperative games, the *Core*, uses sets, with the corollary that the core can be empty; the Shapley value, by contrast, always exists, and is unique.

To develop his solution concept, Shapley began from a set of desirable properties taken as axioms:

**Efficiency**: .**Symmetry**: If*v*(S ∪{*i*}) =*v*(S ∪{*j*}) for every coalition S not containing*i*&*j*, then*ϕ*_{i}(*v*) =*ϕ*_{j}(*v*).**Dummy Axiom**: If*v*(S) =*v*(S ∪{*i*} for every coalition S not containing*i*, then*ϕ*_{i}(*v*) = 0.**Additivity**: If*u*and*v*are characteristic functions, then*ϕ*(*u + v*) =*ϕ*(*u*) +*ϕ*(*v*)

In normal English, any fair allocation ought to divide the whole of the resource without any waste (efficiency), two people who contribute the same to every coalition should have the same Shapley value (symmetry), and someone who contributes nothing should get nothing (dummy). The first three axioms are ‘within games’, chosen based on normative ideals; additivity, by contrast, is ‘between games’ (Winter, 2002: 2038). Additivity is not needed to define the Shapley value, but helps a great deal in mathematical proofs, notably of its uniqueness. Since the additivity axiom is used mainly for mathematical tractability rather than normative considerations, much work has been done in developing alternatives to the additivity axiom. The fact that the Shapley value can be replicated under vastly different axiomatizations helps illustrate why it comes up so often in applications.

The Shapley value formula takes the form:

where |S| is the number of elements in the coalition S, i.e. its cardinality, and *n* is the total number of players. The initial part of the equation will make far more sense once we go through several examples; for now we will focus on the second part, in square brackets. All cooperative games use a *value function,* v(S), in which v(Ø) ≡ 0 for mathematical reasons, and v(N) represents the ‘grand coalition’ containing each member of the game. The equation [*v*(S) – *v*(S\{i})] represents the difference in the value functions for the coalition S containing player *i* and the coalition which is identical to S except not containing player i (read: “S less i”). The additivity axiom implies that this quantity is always non-negative.

It is this tiny equation that lets us interpret the Shapley value in a way that is second-nature to economists, which is precisely one of its most remarkable properties. Historically, the use of calculus, which culminated in the supply-demand diagrams of Alfred Marshall, is what fundamentally defined economics as a genre of writing, as opposed to the political economy of Adam Smith and David Ricardo. The literal meaning of a derivative as infinitesimal movement along a curve was read in terms of ‘margins’: say, the change in utility brought about by a single-unit increase in good *x*. Thus, although these axioms specify nothing about marginal quantities, we can nonetheless interpret the Shapley value as the marginal contribution of a single member to each coalition in which he or she takes part. This marginalist interpretation was not built in by Shapley himself, but emerged over time as the Shapley value’s mathematical exposition was progressively simplified. It is this that allows us to illustrate by examples instead of derivations.

**Examples 1 & 2: Shapley-Shubik Power Index (Shapley & Shubik, 1954)**

Imagine a weighted majority vote: P1 has 10 shares, P2 has 30 shares, P3 has 30 shares, P4 has 40 shares.

For a coalition to be winning, it must have a higher number of votes than the *quota*, here

Winning coalitions: {2,3}, {2,4}, {3,4} & all supersets containing these.

Since the values only take on 0s and 1s, we can work with a shorter version of the Shapley value formula:

Here, [*v*(S) – *v*(S\{i})] takes on a value of 1 iff a player is pivotal, making a losing coalition into a winning one. Otherwise it is either [0 – 0] = 0 for a losing coalition or [1 – 1] = 0 for a winning coalition.

For P1: *v*(S) – *v*(S\{1}) = 0 for all S, so *ϕ _{1}*(

*v*) = 0 (by dummy player axiom)

For P2: *v*(S) – *v*(S\{2}) ≠ 0 for S = {2,3}, {2,4}, {1,2,3}, {1,2,4}, so that:

By the symmetry axiom, *ϕ _{2}*(

*v*) =

*ϕ*(

_{3}*v*) = ⅓. By the efficiency axiom, 0 + ⅓ + ⅓ +

*ϕ*(

_{4}*v*) = v(N) = 1 →

*ϕ*(

_{4}*v*) = ⅓

It is worth noting that, within the structure of our voting game, P4’s extra ten votes have no effect on his power to influence the outcome, as shown by the fact that *ϕ _{2}* =

*ϕ*=

_{3}*ϕ*. A paper by Shapley (1981) notes an actual situation for county governments in New York in which each municipality’s number of votes was based on its population; in one particular county, three of the six municipalities had Shapley values of zero, similar to our dummy player P1 above. Upon realizing this, the quota was raised so that our three dummy players were now able to be pivotal for certain coalitions, giving them nonzero Shapley values (Ferguson, 2014: 18-9).

_{4}For a more realistic example, consider the United Nations Security Council, composed of 15 nations, where 9 of the 15 votes are needed, but the ‘big five’ nations have veto power. This is equivalent to a weighted voting game in which each of the big five gets 7 votes, and each of the other 10 nations gets 1 vote. This is because if all nations except one of the big five vote in favor of a resolution, the vote count is (35 – 7) + 10 = 38.

Thus we have weights of w_{1} = w_{2} = w_{3} = w_{4} = w_{5} = 7, and w_{6} → w_{15} = 1.

Our value function is Winning coalitions: {1,2,3,4,5, any 4+ of the 10}

For the 4 out of 10 ‘small’ nations needed for the vote to pass, the number of possible combinations is .

Hence, in order to calculate the Shapley value for any member (say, P1) in the big five, we take into account that *v*(S) – *v*(S\{1}) ≠ 0 for all 210 coalitions, plus any coalitions with redundant members; this is just another way of expressing their veto power. In our previous example, we were able to count by hand the members in each pivotal coalition S and multiply that number by the Shapley value function for coalitions of that size. Here the number of pivotal coalitions for each size is so large that we must count them using combinatorics. Our next equation looks arcane, but it is only the number of pivotal coalitions multiplied by the Shapley function. First we have the minimal case where 4 of the 10 small members vote in favor of the resolution, then we have the case for 5 of the 10, and so on until we reach the case where all members unanimously vote together:

= 0.19627

By the symmetry axiom, we know that all members of the big five have the same Shapley value of 0.19627. Also, as before, the efficiency axiom implies that the Shapley values for all the players sum to v(N) = 1. Since symmetry also implies that the Shapley values are the same for the 10 members without veto power, we need not engage in any tedious calculations for the remaining members, but can simply use the following formula:

Part of the purpose of this example is to help the reader appreciate how quickly the complexity of such problems increases in the number of agents *n*. Weighted voting games are actually relatively simple to calculate because v(N) = 1, which is why we just sum together the Shapley formulas for each pivotal coalition’s size; in our next example we will relax this assumption. In so doing, the part of the Shapley formula *v*(S) – *v*(S\{i}) gains added importance as a ‘payoff’, whereas the Shapley formula used in our weighted voting game examples acts as a probability, so that the combined formula is reminiscent of von Neumann-Morgenstern utility. The Shapley formula can be construed as a probability in the following way (Roth, 1983: 6-7):

suppose the players enter a room in some order and that all n! orderings of the players in N are equally likely. Then *ϕ*_{i}(v) is the expected marginal contribution made by player *i* as she enters the room. To see this, consider any coalition S containing *i* and observe that the probability that player *i* enters the room to find precisely the players in S – i already there is (s – 1)!(n – s)!/n!. (Out of n! permutations of N there are (s – 1)! different orders in which the first s – 1 players can precede *i*, and (n – s)! different orders in which the remaining n – s players can follow, for a total of (s – *i*)!(n – s)! permutations in which precisely the players S – *i* precede *i*.

One drawback to this approach is its implicit assumption that each of the coalitions is equally likely (Serrano, 2013: 607). For cases such as the UN Security Council this is doubtful, and overlooks many very interesting questions. It also assumes that each player wants to join the grand coalition, whereas unanimous votes seldom occur in practice. The main advantage of the Shapley value in the above examples is that another common solution concept for cooperative games, the Core, tends to be empty in weighted voting games, giving it no explanatory power. The Shapley value can be extended to measure the power of shareholders in a company, and can even be used to predict expenditure among European Union member states (Soukenik, 2001). We will go through another relatively simple example, and then move on to several more challenging applications.

Posted in Economics, Finance, Game Theory, Mathematics

Tags: accounting, Aumann, Shapley, social choice, tutorial