Meaning #2 is correct. “Interest” in this phrase always means “to a character’s advantage.” As I’m applying it to role-playing, I am strictly staying with the in-fiction character. Players’ desires or sense of advantage in the real world are completely irrelevant. I am especially not talking about what the player or anyone else wants to see happen to the character.
The concept is quite flexible for certain variables, however, and different games permit different ranges within the flexibility. For instance:
1. The character’s perceived advantage may be real or mistaken, which means there are three subset possibilities: he accurately perceives an advantage, he perceives an advantage but there is none, he does not perceive an advantage (and therefore is trying to do something else entirely), but one does exist. Some games permit the conflict to occur in all three cases, some in only the first two. An example of a game mechanic which plays this distinction for comedy is the Dumb Luck score in my game Elfs.
2. A character’s action relative to the advantage may be knowledgeable or ignorant. In some games, the character may only participate effectively in the conflict if he is aware of it, whereas others permit both. For an example of the latter case, a character might oppose being shot from ambush by stooping to pick up an interesting rock, despite being unaware of the impending attack. In some games which allow the latter, the distinction is absent in the mechanics; in others, it is represented by two different mechanics. An example of this last type of game is Extreme Vengeance, which includes two scores, one for Guts and one for Coincidence … either of which can harm the opponent.
The simplest version is obviously that an advantage exists (not being eaten by the ghoul), that the character is aware of this advantage (the ghoul is attacking him), and the character takes action to prevent it (he tries to smash the ghoul’s head with his hammer). However, this simplicity can be a trap because it seems so obvious that you solve the conflict through completing one or more tasks as necessary … but that “obvious” perception is grossly mistaken. Many games break down mechanically as soon as the situation becomes more complex than this utterly simple situation. When this happens, understanding that the conflict of interest is what needs to be resolved, no matter what the task or tasks being undertaken, is crucial. Otherwise you instantly enter the Murk.
Best, Ron