Solving Daniel Bernoulli's St Petersburg Paradox: The Paradox which is not and never was
It has been accepted for over 270 years that the expected monetary value (EMV)of the St Petersburg game is infinite. Accepting this leads to a paradox; no reasonable person is prepared to pay the predicted large sum to play the game but will only pay, comparatively speaking, a very moderate amount. This paradox was 'solved' using cardinal utility. This article demonstrates that the EMV of the St Petersburg game is a function of the number ofgames played and is infmite only when an infinite number of games is played. Generally, the EMV is a very moderate amount, even when a large number of games is played. It is of the same order as people are prepared to offer to play the game. There is thus no paradox. Cardinal utility is not required to explain the behaviour of the reasonable person offering to play the game.
|Date of creation:||2003|
|Date of revision:||2003|
|Publication status:||Published in South African Journal of Economic & Management Sciences NS6.2(2003): pp. 331-345|
|Contact details of provider:|| Postal: Ludwigstraße 33, D-80539 Munich, Germany|
Web page: https://mpra.ub.uni-muenchen.de
More information through EDIRC
References listed on IDEAS
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.:
- Machina, Mark J, 1987. "Choice under Uncertainty: Problems Solved and Unsolved," Journal of Economic Perspectives, American Economic Association, vol. 1(1), pages 121-154, Summer.
- Epps, Thomas W, 1978. "Financial Risk and the St. Petersburg Paradox: Comment," Journal of Finance, American Finance Association, vol. 33(5), pages 1455-1456, December.
- Chris Starmer, 2000. "Developments in Non-expected Utility Theory: The Hunt for a Descriptive Theory of Choice under Risk," Journal of Economic Literature, American Economic Association, vol. 38(2), pages 332-382, June.
- 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.
- Shapley, Lloyd S., 1977. "The St. Petersburg paradox: A con games?," Journal of Economic Theory, Elsevier, vol. 14(2), pages 439-442, April.
- Brito, D. L., 1975. "Becker's theory of the allocation of time and the St. Petersburg Paradox," Journal of Economic Theory, Elsevier, vol. 10(1), pages 123-126, February.
- Matthew Rabin & Richard H. Thaler, 2001. "Anomalies: Risk Aversion," Journal of Economic Perspectives, American Economic Association, vol. 15(1), pages 219-232, Winter.
When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:5233. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Joachim Winter)
If references are entirely missing, you can add them using this form.