Ending the myth of the St Petersburg paradox
AbstractNicolas 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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 50515.
Date of creation: Sep 2013
Date of revision:
Publication status: Published in South African Journal of Economic and Managment Sciences 3.NS 16(2013): pp. 347-362
Central Limit Theorem; deductive logic; inductive logic; Law of Large Numbers; simulation of games; economic paradoxes; St Petersburg game; St Petersburg Paradox;
Find related papers by JEL classification:
- C44 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Operations Research; Statistical Decision Theory
- C9 - Mathematical and Quantitative Methods - - Design of Experiments
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- N00 - Economic History - - General - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-10-18 (All new papers)
- NEP-HPE-2013-10-18 (History & Philosophy of Economics)
- NEP-MIC-2013-10-18 (Microeconomics)
- NEP-UPT-2013-10-18 (Utility Models & Prospect Theory)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- 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.
- 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.
- 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.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht).
If references are entirely missing, you can add them using this form.