The Evaluation problem

The problem of evaluating things or actions seems central - How else would one decide between alternatives or possible courses of action? Only there seems to be barely any good theory about that - most works come from the other side and try to extract the value information from observations of actions and markets.

Back when I started learning about game theory I was massively surprised to learn that the evaluation function is assumed to be known to the actors. I was interested in games and wanted to know how to formalize those structures and maybe find some nice heuristics and algorithms to the evaluation function - surprisingly to my past self Game theory does not provide that.

Basic Game theory makes only statements about games with a known payout matrix. In that case the standard statements are valid: There exists a Nash equilibrium in mixed strategies, deviations from which reduce the payout. This equilibrium can then be found by comparatively simple linear optimization.

I think this reduces the complexity of the true problem significantly and creates several other issues reducing the applicability of game theory to many real world situations:

  • It gives no hint on how to model a real situation in game theory, because one need the payout functions for that.
  • It leads directly to the prisoner's dilemma and the tragedy of the commons without providing a way out.
  • The assumption of perfect knowledge of the own payout function places a massive onus on economic actors - They are non-rational or "stupid", if they do not know something or cannot calculate all the effects.

So game theory assumes the evaluation problem as solved and the heuristic it provides is guessing the valuation from the actions of the actors: If this actor did this instead of that, which reduces their payout by that much, then "this" is worth to him at least the difference more than "that".

And we got marginalism again in one of its many forms and in the modern approach markets as determiner of value - and the fundamental confusion of cause and effect, value and price in "modern" economics.

Well, "modern" because Oscar Wilde published "The Picture of Doran Gray" in 1890 with the quote

Nowadays people know the price of everything and the value of nothing. 1

And the only difference in the last 130 years seems to have been, that people actually started believing the price and value are the same. And somehow the real economic principle that no economic transaction happens without a value creation, that in short:

price < value

Seems to have been marginalized in the common consciousness.


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