More on the St. Petersburg Paradox…

During last Thursday’s class meeting, we discussed (among other things) the famous St. Petersburg Paradox. The source for this is Daniel Bernoulli’s famous article entitled “Exposition of a new theory on the measurement of risk”. As was the standard academic practice in academia at the time, Bernoulli’s article was originally published in Latin in 1738. It was subsequently translated into English in 1954 and published a second time that same year in Econometrica (Volume 22, No. 1): pp. 22–36. Considering that this article was published 277 years ago in an obscure (presumably peer reviewed) academic journal, it is fairly succinct and surprisingly easy to read. The direct link to the PDF of this article is here: http://www.jstor.org/stable/1909829 (P.S.: the article is gated but you can access it from anywhere on campus when connected to Airbear).

Also, the Wikipedia article about Bernoulli’s article is worth reading. It provides the mathematics for determining the price at which the apostle Paul would have been indifferent about taking the apostle Peter up on this bet. Specifically, if Paul were a millionaire, he should be willing to pay up to $20.88, On the other hand, if Paul were a thousandaire (total wealth = $1000), he should be willing to pay up to $10.95. Finally, if Paul was quite poor (e.g., total wealth = $2), then he might consider borrowing $1.35 and paying up to $3.35 to place this bet…

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