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A Resource‐Rational, Process‐Level Account of the St. Petersburg Paradox
Author(s) -
Nobandegani Ardavan S.,
Shultz Thomas R.
Publication year - 2020
Publication title -
topics in cognitive science
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.191
H-Index - 56
eISSN - 1756-8765
pISSN - 1756-8757
DOI - 10.1111/tops.12486
Subject(s) - lottery , expected utility hypothesis , normative , valuation (finance) , subjective expected utility , economics , decision theory , probabilistic logic , positive economics , rational planning model , rational expectations , sample (material) , stochastic game , rationality , decision process , actuarial science , epistemology , econometrics , microeconomics , mathematical economics , management science , philosophy , chemistry , finance , chromatography , management
The St. Petersburg paradox is a centuries‐old philosophical puzzle concerning a lottery with infinite expected payoff for which people are only willing to pay a small amount to play. Despite many attempts and several proposals, no generally accepted resolution is yet at hand. In this work, we present the first resource‐rational, process‐level explanation of this paradox, demonstrating that it can be accounted for by a variant of normative expected utility valuation which acknowledges cognitive limitations. Specifically, we show that Nobandegani et al.'s (2018) metacognitively rational model, sample‐based expected utility (SbEU), can account for major experimental findings on this paradox. Crucially, our resolution is consistent with two empirically well‐supported assumptions: (a) People use only a few samples in probabilistic judgments and decision‐making, and (b) people tend to overestimate the probability of extreme events in their judgment. Our work seeks to understand the St. Petersburg gamble as a particularly risky gamble whose process‐level explanation is consistent with a broader process‐level model of human decision‐making under risk.