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Moral Impossibility in the Petersburg Paradox : A Literature Survey and Experimental Evidence

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  • Tibor Neugebauer

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    (Luxembourg School of Finance, University of Luxembourg)

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    Abstract

    The Petersburg paradox has led to much thought for three centuries. This paper describes the paradox, discusses its resolutions advanced in the literature while alluding to the historical context, and presents experimental data. In particular, Bernoulli’s search for the level of moral impossibility in the Petersburg problem is stressed; beyond this level small probabilities are considered too unlikely to be relevant for judgment and decision making. In the experiment, the level of moral impossibility is elicited through variations of the gamble-length in the Petersburg gamble. Bernoulli’s conjecture that people neglect small probability events is supported by a statistical power analysis.

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    Bibliographic Info

    Paper provided by Luxembourg School of Finance, University of Luxembourg in its series LSF Research Working Paper Series with number 10-14.

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    Date of creation: 2010
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    Handle: RePEc:crf:wpaper:10-14

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    Related research

    Keywords: Petersburg paradox; economic history; bounded rationality; significance level; experimental economics;

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    References

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    1. Schmidt, Ulrich & Traub, Stefan, 2002. " An Experimental Test of Loss Aversion," Journal of Risk and Uncertainty, Springer, vol. 25(3), pages 233-49, November.
    2. Schmidt, Ulrich & Traub, Stefan, 2009. "An experimental investigation of the disparity between WTA and WTP for lotteries," Open Access Publications from Kiel Institute for the World Economy 28786, Kiel Institute for the World Economy (IfW).
    3. James C. Cox & Vjollca Sadiraj, 2008. "Risky Decisions in the Large and in the Small: Theory and Experiment," Experimental Economics Center Working Paper Series 2008-01, Experimental Economics Center, Andrew Young School of Policy Studies, Georgia State University.
    4. Sinn, Hans-Werner, 1980. "Ökonomische Entscheidungen bei Ungewißheit," Monograph, Mohr Siebeck, Tübingen, edition 1, number urn:isbn:9783169427024, February.
    5. James C. Cox & Vjollca Sadiraj & Bodo Vogt, 2009. "On the empirical relevance of st. petersburg lotteries," Economics Bulletin, AccessEcon, vol. 29(1), pages 214-220.
    6. Kaivanto, Kim, 2008. "Alternation Bias and the Parameterization of Cumulative Prospect Theory," EconStor Open Access Articles, ZBW - German National Library of Economics, pages 91-107.
    7. Eike B. Kroll & Bodo Vogt, 2009. "The St. Petersburg Paradox despite risk-seeking preferences: An experimental study," FEMM Working Papers 09004, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.
    8. Tibor Neugebauer & John Hey & Carmen Pasca, 2010. "Georges-Louis Leclerc de Buffon’s‘Essays on Moral Arithmetic’," LSF Research Working Paper Series 10-06, Luxembourg School of Finance, University of Luxembourg.
    9. James C. Cox & Vjollca Sadiraj & Bodo Vogt & Utteeyo Dasgupta, 2007. "Is There A Plausible Theory for Risky Decisions?," Experimental Economics Center Working Paper Series 2007-05, Experimental Economics Center, Andrew Young School of Policy Studies, Georgia State University, revised Apr 2008.
    10. Quiggin, John, 1982. "A theory of anticipated utility," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 323-343, December.
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Ignoring Small Chances
      by Robin Hanson in Overcoming Bias on 2011-07-01 20:00:09
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    Cited by:
    1. Seidl, Christian, 2012. "The Petersburg Paradox at 300," Economics Working Papers 2012-10, Christian-Albrechts-University of Kiel, Department of Economics.
    2. Christian Seidl, 2013. "The St. Petersburg Paradox at 300," Journal of Risk and Uncertainty, Springer, vol. 46(3), pages 247-264, June.
    3. Riedl Arno, 2012. ": Experimental Economics: Economic and Game Theoretic Principles in Experimental Research in the Social Sciences," Research Memorandum 001, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
    4. Tibor Neugebauer & John Hey & Carmen Pasca, 2010. "Georges-Louis Leclerc de Buffon’s‘Essays on Moral Arithmetic’," LSF Research Working Paper Series 10-06, Luxembourg School of Finance, University of Luxembourg.

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