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Ergodicity in Economics: a Decision theoretic evaluation

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  • Andreozzi, Luciano

Abstract

Peters (2019) presents a new version of the St. Petersburg paradox that allegedly reveals a weakness of orthodox decision theory under uncertainty. I use a variant of Rabin (2000) calibration theorem to show that the new paradox only arises because the author implicitly assumes an unbounded utility function for money. I also assess the author's claim that orthodox decision theory is wrong in insisting on utility functions to be bounded and find it unconvincing.

Suggested Citation

  • Andreozzi, Luciano, 2021. "Ergodicity in Economics: a Decision theoretic evaluation," SocArXiv axkfg, Center for Open Science.
    • Handle: RePEc:osf:socarx:axkfg
    DOI: 10.31219/osf.io/axkfg
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    References listed on IDEAS

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    1. Rabin, Matthew, 2000. "Diminishing Marginal Utility of Wealth Cannot Explain Risk Aversion," Department of Economics, Working Paper Series qt61d7b4pg, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    2. Matthew Rabin, 2000. "Risk Aversion and Expected-Utility Theory: A Calibration Theorem," Econometrica, Econometric Society, vol. 68(5), pages 1281-1292, September.
    3. Ole Peters & Murray Gell-Mann, 2014. "Evaluating gambles using dynamics," Papers 1405.0585, arXiv.org, revised Jun 2015.
    4. Samuelson, Paul A, 1977. "St. Petersburg Paradoxes: Defanged, Dissected, and Historically Described," Journal of Economic Literature, American Economic Association, vol. 15(1), pages 24-55, March.
    5. Kenneth Arrow, 2009. "A note on uncertainty and discounting in models of economic growth," Journal of Risk and Uncertainty, Springer, vol. 38(2), pages 87-94, April.
    6. Ole Peters & Alexander Adamou, 2018. "The time interpretation of expected utility theory," Papers 1801.03680, arXiv.org, revised Feb 2021.
    7. Matthew Rabin & Richard H. Thaler, 2013. "Anomalies: Risk aversion," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 27, pages 467-480, World Scientific Publishing Co. Pte. Ltd..
    8. Rabin, Matthew, 2000. "Diminishing Marginal Utility of Wealth Cannot Explain Risk Aversion," Department of Economics, Working Paper Series qt61d7b4pg, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
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