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My Utility vs. Your Utility

There was an Operations Research seminar at Columbia recently about how to set up additional contracts between individual traders in a firm so as to make their utility functions match the utility function of the firm itself.

This reminded me of when my kids were in high school in Manhattan, preparing to apply to college, and I began to realize something about the relative utilities of the group and the individual.

Your kid might think that he (or she) wants to go to (say) Yale, and that irrespective of where he ranks in the class (say it’s in the middle) it’ s his right to apply. He wants to optimize his college admission record. The high school he attends, however, wants to optimize their college admission record, and so they try to push your kid towards the best school that is likely to accept him as opposed to the best school in general. You might think you can apply wherever you like, but eventually, you realize, the high school college advisor will not write you a strong recommendation to Yale. They will save their strongest words for the student most likely to get in there, and will have to discourage a weaker student from applying there. College advisors are trying to reconcile all these conflicts to suit the school

This came to mind when I met with my publisher the other day, and I suddenly realized that it is likely that similar constraints apply there. They publish perhaps 100 books per year, or ten per month. In any given month, they can get only so much press for their books. Logically enough, they will throw their resources to the books they judge most likely to pay off. If they have the clout to make one person visible, they will try for the person with the best payoff to the firm. Their utility function is quite different from yours, and rationally so.

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