Bounded Rationality in Strategic Decisions: Undershooting in a Resource Pool-Choice Dilemma

Abstract

This research studies a resource pool-choice dilemma, in which a group of resource seekers independently choose between a larger pool containing more resources and a smaller pool containing fewer resources, knowing that the resources in each pool will be divided equally among its choosers, so that the more (fewer) people choose a certain pool, the fewer (more) resources each of them will get. This setting corresponds to many real-world situations, ranging from students choosing majors as a function of job opportunities to entrepreneurs choosing markets as a function of customer bases. Ten studies reveal a systematic undershooting bias: fewer people choose the larger pool relative to both the normative equilibrium benchmark and chance (random choice), thus advantaging those who choose the larger pool and disadvantaging those who choose the smaller pool. We present evidence showing that the undershooting bias is driven by bounded rationality in strategic thinking and discuss the relationship between our paradigm and other coordination games. This paper was accepted by Yuval Rottenstreich, decision analysis.