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Ending the myth of the St Petersburg paradox

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  • Robert William, Vivian

Abstract

Nicolas Bernoulli suggested the St Petersburg game, nearly 300 years ago, which is widely believed to produce a paradox in decision theory. This belief stems from a long standing mathematical error in the original calculation of the expected value of the game. This article argues that, in addition to the mathematical error, there are also methodological considerations which gave rise to the paradox. This article explains these considerations and why because of the modern computer, the same considerations, when correctly applied, also demonstrate that no paradox exists. Because of the longstanding belief that a paradox exists it is unlikely the mere mathematical correction will end the myth. The article explains why it is the methodological correction which will dispel the myth.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 50515.

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Date of creation: Sep 2013
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Publication status: Published in South African Journal of Economic and Managment Sciences 3.NS 16(2013): pp. 347-362
Handle: RePEc:pra:mprapa:50515

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Related research

Keywords: Central Limit Theorem; deductive logic; inductive logic; Law of Large Numbers; simulation of games; economic paradoxes; St Petersburg game; St Petersburg Paradox;

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  1. James C. Cox & Vjollca Sadiraj & Bodo Vogt, 2008. "On the Empirical Relevance of St.Petersburg Lotteries," Experimental Economics Center Working Paper Series, Experimental Economics Center, Andrew Young School of Policy Studies, Georgia State University 2008-05, Experimental Economics Center, Andrew Young School of Policy Studies, Georgia State University, revised Jan 2009.
  2. 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.
  3. Milton Friedman & L. J. Savage, 1948. "The Utility Analysis of Choices Involving Risk," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 56, pages 279.
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