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Subtle price discrimination and surplus extraction under uncertainty

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  • Zambrano, Eduardo

Abstract

This paper provides a solution to Proebsting’s Paradox, an argument that appears to show that the investment rule known as the Kelly criterion can lead a decision maker to invest a higher fraction of his wealth the more unfavorable the odds he faces are and, as a consequence, risk an arbitrarily high proportion of his wealth on the outcome of a single event. The paper shows that a large class of investment criteria, including ‘fractional Kelly’, also suffer from the same shortcoming and adapts ideas from the literature on price discrimination and surplus extraction to explain why this is so. The paper also presents a new criterion, dubbed the doubly conservative criterion, that is immune to the problem identified above. Immunity stems from the investor’s attitudes toward capital preservation and from him becoming rapidly pessimistic about his chances of winning the better odds he is offered.

Suggested Citation

  • Zambrano, Eduardo, 2014. "Subtle price discrimination and surplus extraction under uncertainty," Journal of Mathematical Economics, Elsevier, vol. 52(C), pages 153-161.
    • Handle: RePEc:eee:mateco:v:52:y:2014:i:c:p:153-161
    DOI: 10.1016/j.jmateco.2013.08.004
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    References listed on IDEAS

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    1. Paul A. Samuelson, 2011. "Why We Should Not Make Mean Log of Wealth Big Though Years to Act Are Long," World Scientific Book Chapters, in: Leonard C MacLean & Edward O Thorp & William T Ziemba (ed.), THE KELLY CAPITAL GROWTH INVESTMENT CRITERION THEORY and PRACTICE, chapter 34, pages 491-493, World Scientific Publishing Co. Pte. Ltd..
    2. Varian, Hal R., 1989. "Price discrimination," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 10, pages 597-654, Elsevier.
    3. R. Schmalensee & R. Willig (ed.), 1989. "Handbook of Industrial Organization," Handbook of Industrial Organization, Elsevier, edition 1, volume 1, number 1.
    4. R. Schmalensee & R. Willig (ed.), 1989. "Handbook of Industrial Organization," Handbook of Industrial Organization, Elsevier, edition 1, volume 2, number 2.
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