Towards a Rational Foundation of Some Puzzles of Bounded Rationality

Instructors: Reinhard Blutner
If you are interested in this project, please contact me by e-mail.

Project Area. This is a logic and cognition project. It applies the instruments of logic and formal semantics to empirical research in the area of reasoning with uncertainty.

Scientific background. More than a half century again, Herbert Simon (e.g. Simon, 1955) claimed that we have to replace the "global rationality of the economic man" with a kind of behaviour that is compatible with the boundedness of the Human decision maker and the particular kinds of environments in which such organisms exist. Boundedly rational agents experience limits in formulating and solving complex problems and in processing (receiving, storing, retrieving, transmitting) information. There is a number of dimensions along which "classical" models of rationality can be made more realistic without giving up rigorous formalization. Looking at the huge literature of recent approaches to bounded rationality (e.g. Gigerenzer & Selten, 2001) suggest an adaptive toolbox of different approaches and models to handle the list of phenomena headed under the same title. From an explanatory point of view such an approach is not really encouraging, and a more systematic approach would be highly welcome. The aim of the present project is to explore the possibilities for a more systematic, explanatory approach.

Description of the project. The MoL project consists of three parts. In the first part the basic empirical findings will be discussed that are studied in the relevant literature (e.g. Tversky, 2004). The second part of the project involves getting familiar with prospect theory and other theoretical approaches to the phenomenon of bounded rationality (e.g. Gigerenzer & Selten, 2001). The third parts consists of different subparts encouraging the student to come with their own ideas and (a) to discuss the relevance of theoretical proposals in the light of recent empirical data, (b) critically to compare existing approaches to bounded rationality, (c) to develop an improved proposal based on existing "solutions". An open list of possible topics includes:

  • Probability judgements versus Prototypicality judgements
  • Cue validity as a model of typicality?
  • 'Prospect theory': toolbox or theory?
  • Ortho-algebraic semantics as a new toolbox for solving puzzles of bounded rationality
  • Comparing prospect theory with the ortho-algebraic approach (e.g. Franco, 2007; Khrennikov, 2006)

Assessment method. Grading on the basis of presentations and a final paper.

Available Books

  • Gigerenzer, G., & Selten, R. (2001). Bounded Rationality: The Adaptive Toolbox. Cambridge, MA MIT Press.
  • Tversky, A. (2004). Preference, Belief, and Similarity: Selected Writings edited by Eldar Shafir. Cambridge, MA: MIT Press. Chapter 1-40

Online resources

Part 1

Part 2

Part 3

Remark concerning the discussion of prospect theory

The formula that Kahneman and Tversky assume for the evaluation phase is U = w(p1)v(x1) +  w(p2)v(x2) + ...   by  where xi are the potential outcomes and pi  their respective probabilities.  v is a so-called value function that assigns a value to an outcome. The function w is called a probability weighting function and expresses that people tend to overreact or to underreact certain probability events. The suggestion is to be concentrated on either (1) the role of overweighting and underweighting of probabilities and the role of the function w in discussing and modifying prospect theory, (2) aspects of the value function v, (3) potential interactions between w and v. Is there a rational foundation of these aspects of prospect theory?