1.1. Cognitive Science and its Correspondence with Normative Theory
There are many misunderstandings between researchers that work in the realm of psychological theories and empirical research, versus those who work on normative theories. On one hand, psychologists often argue that fallacies, biases, and other non-normative behaviors in reasoning and decision-making excludes the need for normative theories such as logic or decision theory. On the other hand, logicians, when constructing logical systems, typically focus solely on the formal structure of reasoning without considering how individuals actually reason. Similar situations arise between psychologists and theorists in the fields of decision-making and the psychology of competition. These methodological issues in higher cognition research need to be clarified. Several of these are now addressed.
First, the psychology of reasoning studies how people reason, while logic informs us about what constitutes that reasoning. Without logic, it would be impossible to determine whether individuals are engaged in reasoning. An experimental task is classified as a reasoning task precisely because it possesses a specific logical structure, and completing that task requires reasoning. It is this structure that is provided by the field of logic.
Second, experiments that aim to probe into higher cognition typically employ evaluation tasks. For instance, in a reasoning task, participants are presented with several premises and must determine the validity of a conclusion (that is, whether it is true or false). The correctness of this conclusion is, in fact, dictated by the principles of logic.
Third, a systematic design of experiments requires normative theories. Given a specific experimental task, the participants’ assessments of the conclusion as either true or false represent the only raw data obtainable. We may identify these data points as eigenvalues, and their associated cognitive states as cognitive eigenstates. Observation causes the cognitive process to transition to a particular eigenstate. However, we cannot directly observe the mental processes underlying participants’ reasoning. For instance, mental logic theory posits that individuals reason by following reasoning schema and predicts that, for a certain class of reasoning problems, participants will achieve a high accuracy. Yet, even if the experiment yields a high correctness rate, we remain uncertain as to whether a reasoning pattern was actually present among the participants. In such cases, self-reported data can be utilized to extract information: participants report their perceived relative difficulty after each task, and linear regression can then be applied to generate weights for each reasoning schema [
8]. However, to rigorously assess the relative difficulty of the tasks necessitates the test items to be designed to encompass all possible difficulty levels, which can only be achieved through the framework of normative theories.
Fourth, cognitive science regards human thinking as organized into different cognitive pathways. Normative theories enable us to distinguish three distinct cognitive modes and delineate their boundaries in rigorous terms. Logic defines reasoning, axiomatic decision theory defines decision-making, and game theory defines competitive behavior. The establishment of normative theories is a hallmark of a mature field of research, one that empirical research is insufficient to support alone; normative theories provide a theoretical framework to conceptualize and model a specific field. Unified theories build on this foundation, amalgamating conceptual structures and modeling methods from different fields.
Finally, it is important to note that psychological theories already rely significantly on normative theories. In the field of reasoning psychology, there are two main competing schools of thought: mental logic theory [
8] and mental model theory [
13,
14]. The former emphasizes the role of reasoning patterns, which are expressed through the formal syntactic structures provided by logic. The latter posits that individuals reason by understanding the meanings of premises and constructing mental models. These mental models depend on the formal semantics of logic. Thus, the reason mental logic theory and mental models theory have emerged as the primary competing paradigms in reasoning psychology is in their mutual compatibility to normative theories in logic. Similarly, within the framework of prospect theory in the psychology of decision-making, the identification of irrational biases is defined in relation to normative decision theory and rationality. In other words, without normative theories, we would struggle to define what constitutes a bias.
1.2. Unified Theories Combining Reasoning, Decision-Making, and Behavioral Game Theory
It need not be stated that a scientific field possesses its own body of knowledge and domain-specific formalism that permit a rigorous description of the field. Unified theories across different fields do not seek to merge their respective bodies of knowledge, but rather to unify their formalisms into a common framework. For instance, the formalism of higher cognition plays an indispensable role in describing economics, particularly in market psychology. Indeed, decision-making theory and game theory have long been part of the common language of economics.
In the following sections, we will explain, within the context of market psychology, why it is essential to integrate the psychology of competition, decision-making theory, and reasoning theory, as well as their respective formalisms, into one unified whole. We find that the multiple descriptions of market participants in terms of game theory, decision-making theory, and reasoning theory captures the cognitive fluctuations of their minds and behaviors that reflect changes in cognitive capacity and cognitive state, one that cannot be adequately described by existing models.
Let us first review the representation of the Nash equilibrium in non-cooperative game theory. The basic syntactic structure of non-cooperative games is quite simple. Consider
players, where each player
has a set of possible actions
. Each player establishes a total preference relation, denoted as
. It is important to note that, in individual decision theory, a decision maker’s preference relation is based on their own set of possible actions. In contrast, in game theory, the preference relation of any player can only be established based on what is referred to as the set of action profiles. Considering the possible action sets of all players
, the Cartesian product can be expressed as:
In this context, each
-tuple
is referred to as a situation. In other words, a specified game constitutes a set of situations, and each player must establish their own total preference relation over this set of situations. That is to say, for all players
, each must establish their own
on
. Once the syntactic structure of non-cooperative games is understood, it is not difficult to grasp its key meta-property, namely the well-known Nash equilibrium. It is important to note that the language of Nash equilibrium requires a separate characterization for each player. Therefore, to reformulate the expression for the
-tuple, we have:
Here,
. The Nash equilibrium is a specific scenario
, namely that of
such that for each player
, and for any
,
, it holds that:
The concept of the Nash equilibrium requires some thoughtful interpretation in mathematical terms. In simple terms, it suggests that in a non-cooperative game, each player loses, but all lose equally. It is important to note that the language used to characterize the definition of the Nash equilibrium captures the actions of any individual and the set of actions of all other individuals in the same situation. It is representative of the separation approach, a typical technique in mathematics for characterizing fixed-point problems.
The foundational theoretical framework of the theory of competition in cognitive science remains the Nash framework. Within this framework, a strict mathematical distinction is made between non-cooperative and cooperative games, and the overarching meta-properties of both, namely the Nash equilibrium and the Nash solution. However, a significant body of behavioral game theory research highlights a phenomenon where players oscillate between non-cooperative and cooperative games, which can be termed as
fluctuations [
2]. For instance, the classic prisoner’s dilemma, presented in nearly all game theory textbooks, is originally designed as a non-cooperative game. However, altering the game’s conditions—such as increasing the duration of rewards and penalties or allowing repeated play—can lead players to shift from a non-cooperative state to a cooperative one. These behavioral fluctuations are directly observable and as such are classic examples of fluctuations. The fluctuations identified by behavioral game theory in empirical studies cannot be adequately explained within the standard Nash framework of game theory. The underlying causes and corresponding theoretical explanations must be sought in the realm of individual decision-making theory.
To construct a unified theory that decomposes a game problem into decision-making problems for each player, it is essential to translate the formalism of game theory into the formalism of decision-making theory. This requires some technical adjustments. When game theory is cast to address a specific player , a situation can be rewritten as . We will now make a further revision, transforming into . The rewritten resembles a function, which is not conventionally within the scope of game theory; however, this is a critical step in bridging the gap between the formalism of game theory and the formalism of decision theory. We will see why this is the case shortly.
The book by Leonard Savage [
7] is recognized as the seminal work in contemporary axiomatic decision-making theory. Below, we will use Savage’s formalism to characterize the structure of decision-making problems. A decision-making problem is represented as a triplet
, where
is a set of action functions,
is a set of states, and
is a set of outcomes. For a given action function
and an environmental state
, we have
,
. It is important to note that for a specific state
, the value of
is unique. Therefore, in any non-ambiguous context,
can be omitted. For any two action functions
, we define a preference relation
, indicating the preference of
over
. Now, note by comparison that
from the previous paragraph and
here are structurally similar. We can treat
in the former as the action function
in the latter,
as the state variable
, and thus transform
into
.
Market fluctuations originate, in the strictest sense, from the reasoning processes of market participants. These reasoning processes are purely within the mind, difficult to observe directly, and are subject to various individual differences. These details fall within the domain of mental decision logic, and what follows is a brief explanation.
Let us first examine language conversion and predicate relationships. Previously, we translated in the formalism of game theory into in the formalism of decision-making theory. Next, we will convert the formalism of decision-making theory into that of reasoning theory. This involves treating action functions as predicates and state variables as logical variables. That is to say, we transform into . At this stage, it is no longer necessary to reference the indices that originate from game theory and traverse across the individual players. Reasoning is a purely mental process, and the mind is embodied in individuals. Predicates can represent certain unary properties or binary and even multivariate relationships.
The first advantage of this predicate technique is that it allows the editing of an option set for a classic decision problem or an action function set for a Savage decision problem. A decision maker may be disinterested in a particular option or unwilling to pursue a certain action function, leading them to abandon that option or action. In other words, the decision maker can establish predicate relationships between options of interest or actions they are willing to take. This represents the most direct logical step in editing a decision problem, carrying significant psychological and cognitive implications.