A short clip talking about how to understand the concepts of outcomes, payoffs and preferences used in game theory (decision theory too).

In game theory we typically use numbers like 1,2 3….4 to represent preferences – the *numbers* aren’t the *preferences* they just “*represent*” the preferences. But what does this mean, and why is it important?

Well it IS important because whenever numbers are used people like to add , subtract, multiply, compare…not thinking (too much) about what this means (or doesn’t mean) about the underlying attributes the numbers are representing. Think of it like this: you have 6 bananas and 4 textbooks , add ’em up, makes 10 ….something? ?and because 6 is greater than 4, well 50% more, 2 units more, is there more or less “value” in bananas than in textbooks? Duh?

This clip steps through some common issues associated with the preference concept as we meet it in games of complete information. Once we bring in uncertainty and attitudes towards risk or ambiguity……understanding what payoff numbers mean gets even trickier! There is a good (but “challenging” discussion of key issues in measurement theory – issues that most people aren’t aware of an even more simply neglect – here. Frequently asked questions about measurement theory