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

Abstract

The St. Petersburg paradox is a centuries-old philosophicalpuzzle concerning a lottery with infinite expected payoff,on which people are, nevertheless, willing to place only asmall bid. Despite many attempts and several proposals, nogenerally-accepted resolution is yet at hand. In this work, wepresent the first resource-rational process-level explanation ofthis paradox, demonstrating that it can be accounted for by avariant of normative expected-utility-maximization which ac-knowledges cognitive limitations. Specifically, we show thatNobandegani et al.’s (2018) metacognitively-rational model,sample-based expected utility (SbEU), can account for majorexperimental findings on this paradox. Crucially, our resolu-tion is consistent with two empirically well-supported assump-tions: (1) people use only a few samples in probabilistic judg-ments and decision-making, and (2) people tend to overesti-mate the probability of extreme events in their judgment.

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