Solving Daniel Bernoulli's St Petersburg Paradox: The Paradox which is not and never was

Vivian, Robert William (2003): Solving Daniel Bernoulli's St Petersburg Paradox: The Paradox which is not and never was. Published in: South African Journal of Economic & Management Sciences , Vol. 2, No. NS6 (2003): pp. 331-345.

Abstract

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.

• Item Type: MPRA Paper
• Institution: University of the Witwatersrand
• Language: English
• Keywords: St Petersburg paradox; St Petersburg game; expected utility; decision theory
• Subjects: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D81 - Criteria for Decision-Making under Risk and Uncertainty

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