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Petrohradský paradox a kardinální funkce užitku
[St Petersburg paradox and cardinal utility function]

Author

Listed:
  • Jiří Hlaváček
  • Michal Hlaváček

Abstract

The St Petersburg paradox could be used as an extreme demonstration of the utility function cardinalisation in case of stochastic utility. In this article we reassume the von Neumann and Mongernstern explanation to this paradox based on the risk aversion expressed by the strict concavity of the expected utility function. We suggest the utility function derived from the Pareto distribution of the probability of downfall of the subject in danger. Our cardinal utility function is based on the economically reasonable economic assumption. In contrast to the other often used cardinal utility functions it does not need the specification of its parameters ad hoc. Other advantage of our utility function is its explanation of the difference in decision making of different "players" in the St Petersburg casino, based on their wealth (including the explanation of the situational risk seeking behaviour of players under the boundary of survival).

Suggested Citation

  • Jiří Hlaváček & Michal Hlaváček, 2004. "Petrohradský paradox a kardinální funkce užitku [St Petersburg paradox and cardinal utility function]," Politická ekonomie, Prague University of Economics and Business, vol. 2004(1), pages 48-60.
    • Handle: RePEc:prg:jnlpol:v:2004:y:2004:i:1:id:449:p:48-60
    DOI: 10.18267/j.polek.449
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    References listed on IDEAS

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    1. Meyer, Jack, 1987. "Two-moment Decision Models and Expected Utility Maximization," American Economic Review, American Economic Association, vol. 77(3), pages 421-430, June.
    2. Frederick Mosteller & Philip Nogee, 1951. "An Experimental Measurement of Utility," Journal of Political Economy, University of Chicago Press, vol. 59(5), pages 371-371.
    3. Tversky, Amos & Kahneman, Daniel, 1986. "Rational Choice and the Framing of Decisions," The Journal of Business, University of Chicago Press, vol. 59(4), pages 251-278, October.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    St Petersburg paradox; risk aversion; utility function cardinalisation; decisions under uncertainty;
    All these keywords.

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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