Bounded Rationality with Subjective Evaluations in Enlivened but Truncated Decision Trees

TL;DR

This paper introduces a framework for decision-making with bounded rationality using subjective evaluations in truncated, enlivened decision trees, extending Bayesian rationality to more realistic, limited decision models.

Contribution

It develops a novel model of enlivened decision trees incorporating subjective evaluations, capturing bounded rationality and unforeseen contingencies.

Findings

Extended Bayesian rationality with subjective evaluations is feasible in truncated decision trees.

The framework can model real-world decision processes like Monte Carlo tree search.

It offers insights into the precautionary principle in decision-making.

Abstract

In normative models a decision-maker is usually assumed to be Bayesian rational, and so to maximize subjective expected utility, within a complete and correctly specified decision model. Following the discussion in Hammond (2007) of Schumpeter's (1911, 1934) concept of entrepreneurship, as well as Shackle's (1953) concept of potential surprise, we consider enlivened decision trees whose growth over time cannot be accurately modelled in full detail. An enlivened decision tree involves more severe limitations than a mis-specified model, unforeseen contingencies, or unawareness, all of which are typically modelled with reference to a universal state space large enough to encompass any decision model that an agent may consider. We consider a motivating example based on Homer's classic tale of Odysseus and the Sirens. Though our novel framework transcends standard notions of risk or uncertainty, for finite decision trees that may be truncated because of bounded rationality, an extended and refined form of Bayesian rationality is still possible, with real-valued subjective evaluations instead of consequences attached to terminal nodes where truncations occur. Moreover, these subjective evaluations underlie, for example, the kind of Monte Carlo tree search algorithm used by recent chess-playing software packages. They may also help rationalize the contentious precautionary principle.