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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.

Suggested Citation

  • Robert William, Vivian, 2013. "Ending the myth of the St Petersburg paradox," MPRA Paper 50515, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:50515
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    File URL: https://mpra.ub.uni-muenchen.de/50515/1/MPRA_paper_50515.pdf
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    References listed on IDEAS

    as
    1. 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.
    2. Milton Friedman & L. J. Savage, 1948. "The Utility Analysis of Choices Involving Risk," Journal of Political Economy, University of Chicago Press, vol. 56, pages 279-279.
    3. 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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    Cited by:

    1. Ruggero Paladini, 2017. "Il paradosso di S. Pietroburgo, una rassegna," Public Finance Research Papers 29, Istituto di Economia e Finanza, DIGEF, Sapienza University of Rome.

    More about this item

    Keywords

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

    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

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