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First page of Quantifying Bounded Rationality: Formal Verification of Simon's Satisficing Through Flexible Stochastic Dominance

Quantifying Bounded Rationality: Formal Verification of Simon's Satisficing Through Flexible Stochastic Dominance

Jingyuan Li, Zhou Lin

q-fin.MF Jul 2, 2025 · v1
Formalizes Flexible First-Order Stochastic Dominance and Simon's bounded rationality with machine-checked proofs in Lean 4.
This paper introduces Flexible First-Order Stochastic Dominance (FFSD), a mathematically rigorous framework that formalizes Herbert Simon's concept of bounded rationality using the Lean 4 theorem prover. We develop machine-verified proofs demonstrating that FFSD bridges classical expected utility theory with Simon's satisficing behavior through parameterized tolerance thresholds. Our approach yields several key results: (1) a critical threshold $\varepsilon < 1/2$ that guarantees uniqueness of reference points, (2) an equivalence theorem linking FFSD to expected utility maximization for approximate indicator functions, and (3) extensions to multi-dimensional decision settings. By encoding these concepts in Lean 4's dependent type theory, we provide the first machine-checked formalization of Simon's bounded rationality, creating a foundation for mechanized reasoning about economic decision-making under uncertainty with cognitive limitations. This work contributes to the growing intersection between formal mathematics and economic theory, demonstrating how interactive theorem proving can advance our understanding of behavioral economics concepts that have traditionally been expressed only qualitatively.

Herbert Simon's concept of bounded rationality and satisficing behavior lacks a mathematically rigorous formalization that bridges it with classical expected utility theory. No machine-verified proof exists connecting these frameworks.

The authors introduce Flexible First-Order Stochastic Dominance (FFSD), formalized in Lean 4, which parameterizes the gap between full rationality and satisficing through tolerance thresholds epsilon. They develop machine-verified proofs of key properties including a critical threshold, equivalence theorems, and multi-dimensional extensions.

Key verified results include: a critical threshold epsilon < 1/2 guaranteeing uniqueness of reference points, an equivalence theorem linking FFSD to expected utility maximization for approximately rational agents, and a Rational Satisficing Index that quantifies departures from full rationality.