Ending the myth of the St Petersburg paradox

Robert William, Vivian (2013): Ending the myth of the St Petersburg paradox. Published in: South African Journal of Economic and Managment Sciences , Vol. NS 16, No. 3 (September 2013): pp. 347-362.

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Central Limit Theorem, deductive logic, inductive logic, Law of Large Numbers, simulation of games; economic paradoxes; St Petersburg game; St Petersburg Paradox
• Subjects: C - Mathematical and Quantitative Methods > C4 - Econometric and Statistical Methods: Special Topics > C44 - Operations Research ; Statistical Decision Theory; C - Mathematical and Quantitative Methods > C9 - Design of Experiments; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D81 - Criteria for Decision-Making under Risk and Uncertainty; N - Economic History > N0 - General > N00 - General

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