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

AbstractThe St. Petersburg paradox is a centuries-old philosophical puzzle concerning a lottery with infinite expected payoff, on which people are, nevertheless, willing to place only a small bid. 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-maximization 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: (1) people use only a few samples in probabilistic judgments and decision-making, and (2) people tend to overestimate the probability of extreme events in their judgment.

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