A Resource-Rational, Process-Level Account of the St. Petersburg Paradox

Area of Science:

• Cognitive Science
• Behavioral Economics
• Decision Theory

Background:

• The St. Petersburg paradox presents a lottery with infinite expected payoff, yet people offer minimal payment to play.
• Existing resolutions for this paradox remain widely debated and lack general acceptance.

Purpose of the Study:

• To provide the first resource-rational, process-level explanation for the St. Petersburg paradox.
• To demonstrate how cognitive limitations can account for observed behavior in this paradox.

Main Methods:

• Utilized a variant of normative expected utility valuation that incorporates cognitive constraints.
• Applied the sample-based expected utility (SbEU) model, a metacognitively rational framework.

Main Results:

• The SbEU model successfully accounts for major experimental findings related to the St. Petersburg paradox.
• The explanation aligns with empirical evidence of limited sample usage in probabilistic judgments.
• The model is consistent with the tendency to overestimate the probability of extreme events.

Conclusions:

• The St. Petersburg paradox can be explained by cognitive limitations in decision-making under risk.
• Human decision-making in risky gambles, like the St. Petersburg game, can be modeled through resource-rational processes.