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Posts tagged with utility theory

Perception is reality. Any beer drinker who is surprised that Guinness has a unique and excellent taste and PBR tastes exactly like Budweiser needs to switch to Guinness because your taste is objectively awful.
That’s why Guinness’ branding is a seal with a ball and Budweiser needs to use bikini babes.

There’s something much deeper going on here, though: a fundamental problem with utility theory and hence, with economic theory. Kahneman & Tversky pointed out that it’s wrong to think of preferences as being read off of a master list. But not only are they constructed in the elicitation process, they’re constructed before as well. You’re looking at experimental proof.

I tried to write about this before in the context of the famous Pepsi/Coke fMRI experiment, but it’s too hard. I want to tie in sardonic Don Draper quips, the invention of diamonds, and my own experiences of my desires and wants and dreams being formed by outside (and therefore, sinister?) forces rather than from truly “within me”  — whatever that might mean. Why do I want what I (think I) want? Even Doug Hofstadter treads tenderly around the topics of free will and one’s own true desires and self-determination and such.

I have no idea what my subconscious wants
— Cameron Guthire (@thiscameron)
June 27, 2013

Even though I feel that these things all belong together, I don’t understand it all well enough to put forward a thesis explaining the inchoatia. But even with just the few experimental examples we have, it’s clear that desires can be manufactured, and that there’s a lot of money to be made in doing so. So just with that basic knowledge the Lagrangian model of utility that underlies all of the Edgeworth boxes, welfare theorems, and so on is missing a crucial quality.  Namely, &sym;1% of the global economy is spent on making people want things. That doesn’t bear on “utilitarian” products like oil, shipping, … but it definitely bears on aspiration and retail. I’m talking about circularity in the definition of value. If you can logic that one out, let us know.

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Perception is reality. Any beer drinker who is surprised that Guinness has a unique and excellent taste and PBR tastes exactly like Budweiser needs to switch to Guinness because your taste is objectively awful.

That’s why Guinness’ branding is a seal with a ball and Budweiser needs to use bikini babes.

http://farm5.static.flickr.com/4050/4434090263_b8d52dcc74_o.jpg

There’s something much deeper going on here, though: a fundamental problem with utility theory and hence, with economic theory. Kahneman & Tversky pointed out that it’s wrong to think of preferences as being read off of a master list. But not only are they constructed in the elicitation process, they’re constructed before as well. You’re looking at experimental proof.

image

I tried to write about this before in the context of the famous Pepsi/Coke fMRI experiment, but it’s too hard. I want to tie in sardonic Don Draper quips, the invention of diamonds, and my own experiences of my desires and wants and dreams being formed by outside (and therefore, sinister?) forces rather than from truly “within me”  — whatever that might mean. Why do I want what I (think I) want? Even Doug Hofstadter treads tenderly around the topics of free will and one’s own true desires and self-determination and such.

Even though I feel that these things all belong together, I don’t understand it all well enough to put forward a thesis explaining the inchoatia. But even with just the few experimental examples we have, it’s clear that desires can be manufactured, and that there’s a lot of money to be made in doing so. So just with that basic knowledge the Lagrangian model of utility that underlies all of the Edgeworth boxes, welfare theorems, and so on is missing a crucial quality.  Namely, &sym;1% of the global economy is spent on making people want things. That doesn’t bear on “utilitarian” products like oil, shipping, … but it definitely bears on aspiration and retail. I’m talking about circularity in the definition of value. If you can logic that one out, let us know.

http://2.bp.blogspot.com/-grpfwNrz4dc/T_doHNKdxHI/AAAAAAAAFH8/QbIK0HTkiQU/s1600/Perception+is+Reality....jpg

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(Source: ocw.mit.edu)


hi-res




This was a rhetorical question our chess teacher used to ask us. It’s a reminder that even though materiel, position, and tempo are worthwhile achievements that advance your interests, the goal is to check-mate the King.

For example the Blitzkrieg or “Scholar’s Mate” doesn’t capture materiel or obtain an advantageous position. It just goes directly for the kill.

It’s worth asking this question whether you’re just out the gate or mid-game. Is there a way within a few moves that you could mate early? Never forget to look for that in the quest for materiel or position.

  

I use the question now in my life as a shorthand for

  • why am I doing this?

. Getting money, obeying authority, learning things, obtaining credentials (résumé builders”), maintaining a low weight—all are “good” goals which advance my interests. But why? What is it aiming towards? What am I really trying to do?

In chess the goal is well-defined, whereas in life one can choose one’s own goals. In particular they can be

  • continual (“Go for walks”)
  • or circular (“Raise kids, so they can raise kids, so they can raise kids, …”)
  • rather than once-and-done (“Get thin”, “Mate the King”).
  • (And they needn’t be zero-sum.)

I think that makes the question What is the object of the game of chess? even more important.

That’s something that helps me and I hope it helps you. I’m going to pause now for some quiet reflection.




The logic of Marshallian S&D curves are wonderful in several respects:

  1. resolves the “diamonds and water paradox” (why does unnecessary jewelry cost more than necessary water?)
  2. sounds reasonable across a variety of real-world scenarios (FCOJ futures, corporate bond issuance, grocery stores, machine parts, olive oil exports, Tyler Cowen’s umbrella term “markets in everything”)
  3. actually works in experiments! The legend is that Vernon Smith used to say in class that Marshallian S&D was “just a theory” — and then was shocked that prices actually converged to the predicted P*

File:Supply-and-demand.svg

Here’s a great way to misapply the Marshallian logic and arouse my ire:

  • Say "Markets make sure that people who want things more are the ones who get them."

That’s not what the theory says. We use the jargon willingness to pay or reserve price to talk theoretically about the maximum someone would counterfactually give up for something—and equate this (by rational consistency hypotheses) to how much utility they derive from obtaining it. (The experiments I mentioned above literally created a reserve price—a redeemable coupon for $13 if you get the paper at P*, so we as non-omniscient lab-gods know that you actually assign a personal dollar value on the good—and know what it is. So the fact that those experiments worked doesn’t prove the extra assumptions about the way people’s consent, pleasure, engagement, and desires interface with an opportunity for economic exchange.) Laura’s measured willingness to pay does not say how badly she wants something relative to Gemma. Why? Because maybe Gemma is poor and Laura is rich.

In the real world, rich people engage in retail therapy at prices that would pay for a poor person’s housing and food for months.

Maybe it makes them feel good, or they do it as a way to socialise (if you don’t consider yourself rich but you’re reading this on a computer: do you socialise at bars or restaurants or just outside on the street? Why?), or maybe they’re bored. Whatever.

brooklyn

Tip Top Bar

Clearly we can’t give Gemma £100 and give Laura £100,000 and conclude that Laura wanted the dress more because she paid more for it. It might be reasonable if both were in the same place with the same financial resources.

The mathematics behind the S&D graph aren’t that complicated. (It does require thought—but not years’ worth of thought—to understand the Marshallian model.) But still, I think because of the transition from English → maths → English, and the jargon words interposed with normal words, the overall rhetorical effect is to cover the obvious fact of inequality whilst redirecting attention to “optimal” (another jargon word budging in on the default namespace!) allocation.

The hypothesis of logarithmic utility per individual has been around since the 1700’s at least. (Implying €1000 means more to a poor person than to a rich person.) And yet people still use this fallacious reasoning that markets allocate goods to those who “want it the most”.

Sorry: willingness to pay is a function of both desire and of ability to pay.




Several years ago I sat (after yoga class) with some Zaa Zen practitioners. As I understood the practice from doing it once, Zaa Zen basically consists of sitting in good posture, staring at a blank wall, and clearing your mind.

It wasn’t my favourite meditation I’ve ever tried. (So far my favourite was something that into the continuum introduced me to: Vipassana meditation. The way I did it was to sit outdoors in nice weather and listen to the sounds and stop thinking about my own anxiety or problems. Something much like the John Cage lecture that until a single soliton survives posted. Being aware of the world around you and “listening” or “taking in” rather than “forcing” or “pushing out”.)

But I definitely remember the conversation I had with one of the practitioners (Tony) afterwards. Tony was maybe 20 or 30 years older than me but I felt we instantly connected on some mental level. He told me he had been a failure at pretty much everything he had tried in life. How he was a black sheep of his family; how he tried to be a biologist; there were a few other things he tried and he hadn’t been very good at any of them. But in some sense it didn’t matter (remember, this is the wisdom of years talking. According to economic research people tend to mellow, their aspirations and hopes drop to a realistic level, and they become intimately familiar with the passing of time—whatever you optimise, whatever you read, however much you drink, whatever you earn, however you train, however many relationships you destroy—that passing of time always clicks, click, click, tick, steady.)  and he could always come back to his practice. A different meaning of “return to the breath”.

Anyway, we were talking about various I guess spiritual things. More like a mixture of the mental-ethereal and the sense-grounded. He was telling me how Zaa Zen was so great and I would really like it and I should read this book and so on. You know how people always do that—they’ve read a book and then they say you would love it. Well, no, I think just you liked it and I have my own stack of stuff that’s my to-read list already. So normally I would just keep that kind of thought to myself but since Tony and I had an unusual level of honesty and directness for perfect strangers who just met, I brought up what I see as the circular-logic problem of picking up any book.

  • When deciding whether I want to read a book or not, I am acting on incomplete information—and not just random incomplete information, marketing and Ising-spin-ish hubbub. I have a hazy idea of what the book is going to be like.
  • As I read the book it is going to change me.
  • "Be very, very careful what you put into that head, because you will never, ever get it out." —Thomas Cardinal Wolsey (c.1475-1530)
  • I can’t unread the book and I can’t unthink or unknow whatever ideas it gives me.
  • So even before I know what it is I have already consented to be changed.

This is why, I said, I won’t read the book you’re telling me I will like so well. From my outsider’s perspective I don’t trust enough in the Zaa Zen idea. Not to say that it is some hokey New Age crystals or whatever, but I don’t sense—from standing on the threshold—that this is a house I want to get comfortable in.

(This is also why I started reading so much mathematics. From an outsiders’ perspective it seemed like “This is where the truth is. Following Wolsey’s idea, with a hungry reification of Plato’s philosopher-kings, if I put in only veracity and earnest labour, the result should be something good.)

Tony told me this attitude was actually quite Buddhistic or Zen of me. So I felt very proud that in avoiding looking at the Zaa Zen I had apparently picked up something of it—and it’s a nice geometric shape now that I reflect on it.

 

So it’s a logical circular logic and a higher modal order than the standard model of choice—and it relates to two other themes I want to talk more about later:

  1. So many economic decisions are just like this. Beyond just knowing my edge, I need to decide whether quantitative finance is actually a thing (and not just the subject of a book by Emanuel Derman) before enrolling in an MFE. (There are various signals on the interwebs that suggest MFE’s are not a good idea. I wrote out my reasoning more fully when I was making this decision, google “DIY MFE”.) And say I spend half a decade training to be a lawyer or engineer or doctor. Then what if I don’t like it? Since young people don’t intern or work in hospitals / law firms / alongside engineers before choosing their course of study, their decision is based on folderol, disinformation, heresay, and outer appearances. If I would have loved a career in X I’ll never know it because I couldn’t possibly sample.

    On the hypothesis that most people don’t know what they want most of the time (nor do most corporations know what they’re doing or why it works, except by accident), I’d rather look at economic agents as operating at some higher order level, away from all the information. The most I feel I can do as a rational maximiser is try a lifestyle and sample how it makes me feel (although…again, I am changing both with time and changed by my own choices as I do this). Sampling from my own utility function rather than knowing it beforehand. (Or with a corp sampling from revenue & other responses.)
  2. "Dug like a river" / "Hebbian history". One of the famous models of brain development is “Neurons that fire together, wire together”. Yogis (need a link, sorry) draw the analogy to a river—as water flows from tributaries to deltas, the act of doing so cuts a deeper and deeper channel along the same course.

    These are the same idea and I think juxtaposing habit (in mathematical terms, bien sûr!) alongside personality, mood, preference, desire, intent, pleasure, happiness, goals, rank, and free will is going to lead somewhere interesting. I’ll write more about how I can exercise “second order” free will more easily than first-order.

    For example if I close this laptop and hide it from myself I will waste less time on the internet than if I leave it open and tempt myself. (On the other hand—back when I had much better time discipline from running my business I was quite better at focussing whilst at the computer. But from doing more computer stuff since then the “edges of the water” “eroded” the “sides of the channel”—and now my computer time management is spilled out like a floodplain. So very Hebbian in that story itself.) Some people pay a personal trainer so that they’re committed to work out (but couldn’t they have saved money and just worked out?). And a married man may stay away from strip clubs, red light districts, and too many drinks with attractive coworkers—and would we consider his desire to steer clear of temptation a form of infidelity?

    The jazz educator David Baker described the progression of jazz improvisational creativity this way: first you learn to copy long licks, scales, pre-formed patterns. Second you start playing with these, so that you have a coarse level of control (free will, in my “interpretation”)—splicing together the known parts. As you progress to higher levels of mastery, your control, focus, creativity become ever more atomic. A true improvisational master is present—deciding, thinking—in every millisecond of the notes, rests, articulation, and consciously chooses every aspect of what s/he’s doing and why.

    I’ve found this pattern to hold for me in areas besides jazz improv (and it even holds a lesson for maths explanations—to remember that your audience is probably not at such a fine-grained level) and I want to juxtapose as well whatever this view of personal development is pointing to, against the Lagrangian utility concept.




Paul Bloom disproves the idea that sexual pleasure se logra by merely the proper stimulation of various genitalia with the following Gedankenexperiment:
Imagine you find out that the person you had sex with last night is not who you thought they were.
Maybe you learn that the charming gentleman is the author of white-supremacist hate literature.Maybe you find out that the beautiful woman was your long-lost sister. The feeling of wanting to crawl out of your own skin and leave the ugly husk of your body behind wouldn’t be out of place.
That such tropes appear in literature we’ve found from millennia ago suggests people have long felt this way: sexual pleasure must be tied in with not only the body of your partner, but with their spirit and inherent nature as well.
  
Pleasure is complicated. Economists know this but usually choose to forget the fact. The study of where individual demand curves come from would be a new discipline, although ink has been spilled on the topic.
However, the questions of pleasure and satisfaction are relevant to the engineering of society. If the objective function is set to: maximise output, but people derive pleasure from achieving increasingly difficult goals and receiving even artificial rewards, then the world of work is not optimised for happiness but the world of school is.
Getting more practical than grand critiques of “society”, anyone who manages more employees than herself would benefit from knowing which free-or-cheap buttons she can push to motivate and reward the people “under” her. Even more pedestrian: I know that sitting down feels better after a physical labour or constitutional, but I haven’t a quantitative knowledge of how to engineer my habits and routines to take fullest advantage of that fact.
Sound the trumpet again for a department of happiness studies.

Paul Bloom disproves the idea that sexual pleasure se logra by merely the proper stimulation of various genitalia with the following Gedankenexperiment:

  • Imagine you find out that the person you had sex with last night is not who you thought they were.

Maybe you learn that the charming gentleman is the author of white-supremacist hate literature.
Dave Chappelle playing a (blind) black white supremacist
Maybe you find out that the beautiful woman was your long-lost sister. The feeling of wanting to crawl out of your own skin and leave the ugly husk of your body behind wouldn’t be out of place.

That such tropes appear in literature we’ve found from millennia ago suggests people have long felt this way: sexual pleasure must be tied in with not only the body of your partner, but with their spirit and inherent nature as well.

  

Pleasure is complicated. Economists know this but usually choose to forget the fact. The study of where individual demand curves come from would be a new discipline, although ink has been spilled on the topic.

However, the questions of pleasure and satisfaction are relevant to the engineering of society. If the objective function is set to: maximise output, but people derive pleasure from achieving increasingly difficult goals and receiving even artificial rewards, then the world of work is not optimised for happiness but the world of school is.

Getting more practical than grand critiques of “society”, anyone who manages more employees than herself would benefit from knowing which free-or-cheap buttons she can push to motivate and reward the people “under” her. Even more pedestrian: I know that sitting down feels better after a physical labour or constitutional, but I haven’t a quantitative knowledge of how to engineer my habits and routines to take fullest advantage of that fact.

Sound the trumpet again for a department of happiness studies.


hi-res




I had nothing but ideas.

O.K., they weren’t strictly mine, in the sense that these ideas were acquired, arranged, styled, photographed, published and distributed by entities bearing no relation to me whatsoever.




Matt Ridley has written an entertaining book: The Rational Optimist, detailing all the ways in which life is great for rich people. (By rich people I mean the fraction of humans who make ≥5 figure salaries in $.)

For example Louis XIV had a hundred chefs make him 100 meals and throw away the 99 he didn’t want, but nowadays a New York City “peasant” has even more choice of dinner consumption, without needing to be king. (I’m not sure if this applies to the poorest person in NYC or the poor ones who can’t make it in … which is why I’m restricting the statement to ≥$10000 earners. Although maybe Mr Ridley would argue that even a subsistence farmer today has it better than Les Hommes de Cro-Magnon.)

But so, uh, why is this an interesting book? Nobody writes a book called Hey, did you know the sky is blue? Except at sunset when it’s pink or when it rains it’s grey. Isn’t that interesting?! Because everybody already knows that. The fact that Mr Ridley can sell a "provocative" book full of amazing facts and viewpoints about how prosperous we are sends a grave message the opposite way.

Why is it that we need a book from Mr Ridley to remind us how good we’ve got it?




What I sensed was that while the laws of supply and demand governed everything on earth, the easy money was in demand—manufacturing it, manipulating it, sending it forth to multiply, etc. As a rule of thumb (and with some notable exceptions), the profit margins you could achieve selling a good or service were directly correlated to the total idiocy and/or moral bankruptcy of the demand you drummed up for it.


This was easier to grasp if you were in the business of peddling heroin, Internet stocks, or celebrity gossip; journalists, on the other hand, [did not] understand … their role in this [charade].


In the past, newspapers had made respectable margins selling a non-inane product largely because people had little choice but to herald their sublets and white sales alongside the journalists’ tales of human suffering/corporate corruption/government ineptitude.


The times were prosperous enough that much of the print media even chose to abstain from taking a share of the demand-creation campaigns of liquor and tobacco brands…. Indeed, journalism … was about delivering important information about the world—information … democracy … needed, whether [people] knew it or not.


That journalism’s ability to deliver that information—to fill that need—ultimately depended, to an unsettling degree, on the ability to create artificial demand for a lot of stuff that people didn’t actually need—luxury condos, ergonomically correct airplane seats, the latest celebrity-endorsed scent—was an afterthought at best, at least in the newsroom.

Maureen Tkacik

(Source: cjr.org)




The Equation of Life
s/rent/mortgage/ or
s/rent/landowner's share of tenant's crops/
et cetera, et cetera, mutatis mutandi, et ceteraaaa, et ceteraaa

The Equation of Life

  • s/rent/mortgage/ or
  • s/rent/landowner's share of tenant's crops/
  • et cetera, et cetera, mutatis mutandi, et ceteraaaa, et ceteraaa

hi-res




I can afford to consume each of

  1. chocolate
  2. cheese
  3. tea/coffee
  4. fruit

multiple times per week. I think that qualifies me as Pretty Goddam Lucky.