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Explaining the harmonic sequence paradox

Author

Listed:
  • Schmidt, Ulrich
  • Zimper, Alexander

Abstract

According to the harmonic sequence paradox (Blavatskyy 2006), an expected utility decision maker's willingness-to-pay for a gamble whose expected payoffs evolve according to the harmonic series is finite if and only if his marginal utility of additional income becomes zero for rather low payoff levels. Since the assumption of zero marginal utility is implausible for finite payoffs levels, expected utility theory - as well as its standard generalizations such as cumulative prospect theory - are apparently unable to explain a finite willingness-to-pay. The present paper presents first an experimental study of the harmonic sequence paradox. Additionally, it demonstrates that the theoretical argument of the harmonic sequence paradox only applies to time-patient decision makers whereas the paradox is easily avoided if time-impatience is introduced.

Suggested Citation

  • Schmidt, Ulrich & Zimper, Alexander, 2011. "Explaining the harmonic sequence paradox," Kiel Working Papers 1724, Kiel Institute for the World Economy.
    • Handle: RePEc:zbw:ifwkwp:1724
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    References listed on IDEAS

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    1. Tversky, Amos & Kahneman, Daniel, 1992. "Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
    2. Pavlo Blavatskyy, 2006. "Harmonic sequence paradox," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 28(1), pages 221-226, May.
    3. Charalambos D. Aliprantis & Kim C. Border, 2006. "Infinite Dimensional Analysis," Springer Books, Springer, edition 0, number 978-3-540-29587-7, March.
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    Keywords

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    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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