U and You

Andres Carvajal. That's a name I cannot pronounce, but one I will not forget. He was my Mathematical Economics 1A lecturer last year, a module that focused on Decision Theory and Game Theory. Fascinating, right? I thought so too. The exam, however, wasn't as fascinating. But that's another story.

Why do I bring him up? Because one day in class he taught us the Mathematical concept of 'Independence' (I won't bore you with it), and then went on to criticise it and show how it wasn't a great assumption. Then, after teaching us Nash Equilibrium, he proceeded to tear it apart and tell us that he didn't much care for it. And all I thought was - Woah! You can criticise mathematical concepts? Woah. You can criticise anything.

And those lectures got me thinking about Utility - essentially, economics lingo for happiness; and Utility Functions - essentially, all the factors that influence your happiness; and us economists like to believe that rational people (hah!) do their best to maximise their utility subject to constraints they face (that's really everybody's motivation).

Fairly straightforward, right? You do what you can to make yourself happy. But do we really know what makes us happy? Economists will sit and assume certain things that they think will make you happy, but really, that's just approximations. In truth, I don't believe we ourselves know what makes us happy all the time (we know certain conscious things that make us happy, but then there are sub conscious things which we act on, but by definition, don't consciously know). Makes sense? We want to be happy. We act to make ourselves happy. But we aren't always conscious of the things that make us happy.

I believe the one thing Economists got right, though, is that life and its decisions is about maximising our happiness.

So really, our utility functions are very vague, abstract entities. Rarely are they quantifiable and are highly dynamic in nature, changing constantly. So here's my poker example of this thought:

If you assume that everybody who sits down to play poker is only looking to maximise the amount of money they are going to win, then you're wrong. Truth is, different people sit down for different reasons with different motivations. Let us take 2 people, A who plays poker /only/ for money, and B who just plays poker for a variety of reasons. Let us say they are both contemplating raising, their thought processes (conscious and sub conscious) would look like this:

A: raises for value/protection, to bluff and steal, for image

B: raises for value, to bluff, to impress the really cute dealer chick that just sat down, to get back at that guy who bluffed him, to be baller and say, 'all in.'

Now if we analyse the way these two play poker (when they raise), we might find many spots where B makes -EV plays (burns money) as compared to some of the plays A makes. But has B made a mistake? No. He's simply maximised what is important to him. He hasn't really played it wrong, he just cares for different things. He might not even consciously know that he's flexing his biceps when the dealer chick sits down, but flexing maximises his (emotional?) EV (actually, Expected Utility).

And what does that mean? That economists over simplify; that utility functions are nearly impossible to define; and that whenever you do something, you do it because you think it'll make you happiest (short or long run, depending on whats important to you).

So really, in a convoluted sort of way, I'm saying that we shouldn't second guess ourselves and the decisions we make. Try and understand why you made them (jump into your sub conscious, a la Freud), learn about you and don't regret anything - you maximised your utility (subject to what you knew then about the world and you).

So when you're broke, and lying in bed, and wondering why you shoved all in pre with 7-2 off, know that you did it because doing it made you happiest then. And maybe, just maybe, that cute dealer chick thought you were quite baller for it.