Utility depends on context

My boring life

Once upon a time, I used to play poker with a group of friends. The day after one particular poker night, I was driving somewhere with my friend Chris (who had also been in the game the night before). I mentioned that during at one point, I was pretty sure i couldn't win, but rather than fold, I decided to stay in, even at the cost of some small bets. (If the bets had gotten big, I would have folded.) Chris smugly pointed out that the logical way to play is that on every hand you should either raise or fold. You either think you're going to win or not. And this makes sense from a certain narrow viewpoint. I couldn't think of an answer for Chris that day, but now, years later, I can. The answer is that I was willing to pay a small amount of money just to stay in that hand. Value is very subjective. No one can tell you what a particular experience is worth to you.

Later I thought of another way to put this: there's always a meta-game. Chris was looking at the game of poker, but the poker game was embedded in a larger game. I came to believe that for whatever game we're currently playing, there's almost always a meta-game. When is that not true? What game includes all the other games? I believe this question is equivalent to the frame problem.

The basics

So you know the Prisoner's Dilemma, right? It's a standard tool of behavioral economics. If you're not familiar with it, click here and read about it, it's pretty fascinating.


You can tweak the payoff matrix to tell you things about human nature. But what never seems to be mentioned is that different people value things differently, including amounts of money. Imagine Alice, who is behind on her rent, and who will be thrown out on the street (along with her kids) unless she comes up with a hundred bucks by tomorrow. Suppose you offer Alice the choice between a sure hundred dollars one the one had, and a 50% chance of a thousand dollars (and a 50% chance of nothing) on the other. Just looking at it mathematically, the 50% chance of the thousand is worth five times as much as the hundred. But Alice can't afford to gamble. She'll almost certainly take the sure thing. Pretty much everybody who is not in Alice's position will take the gamble. What the Prisoner's Dilemma seems to ignore is that when we're comparing sums of money, we don't always think it terms of their magnitude relative to each other. Many many people in the world are poor, or so close to it, that they have to take into account their absolute magnitude.

Unless otherwise stated, the content of this page is licensed under Creative Commons Attribution-ShareAlike 3.0 License