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    How Do You Behave Under Risk? St. Petersberg Game: Dr. Teng, J

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    Jimmy Teng
    The St. Petersburg paradox describes a gambling game where the potential payout grows exponentially based on the number of coin tosses, leading to an infinite expected value. However, people generally would not pay large finite amounts to play this game once. The resolution is that expectation values assume an infinite number of trials, but any real game is played a finite number of times, so the expected value calculation does not reflect actual outcomes.

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    How Do You Behave Under Risk? St. Petersberg Game: Dr. Teng, J

    Uploaded by

    Jimmy Teng
    32 views14 pages
    The St. Petersburg paradox describes a gambling game where the potential payout grows exponentially based on the number of coin tosses, leading to an infinite expected value. However, people generally would not pay large finite amounts to play this game once. The resolution is that expectation values assume an infinite number of trials, but any real game is played a finite number of times, so the expected value calculation does not reflect actual outcomes.

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    StPetersbergGame

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    The St. Petersburg paradox describes a gambling game where the potential payout grows exponentially based on the number of coin tosses, leading to an infinite expected value. However, people generally would not pay large finite amounts to play this game once. The resolution is that expectation values assume an infinite number of trials, but any real game is played a finite number of times, so the expected value calculation does not reflect actual outcomes.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    32 views14 pages

    How Do You Behave Under Risk? St. Petersberg Game: Dr. Teng, J

    Uploaded by

    Jimmy Teng
    The St. Petersburg paradox describes a gambling game where the potential payout grows exponentially based on the number of coin tosses, leading to an infinite expected value. However, people generally would not pay large finite amounts to play this game once. The resolution is that expectation values assume an infinite number of trials, but any real game is played a finite number of times, so the expected value calculation does not reflect actual outcomes.

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    © All Rights Reserved
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    How do you behave under

    Risk?
    St. Petersberg Game

    Dr. Teng, J
    How Much Would You (Should You) Pay For A
    Gamble?
    St. Petersburg Paradox

    You pay a fixed fee to enter the game. Then a fair coin is
    tossed repeatedly until a tail appears, ending the game.

    The pot starts at 1 dollar and is doubled every time a


    head appears. You win whatever is in the pot after the
    game ends.

    The paradox is named from Daniel Bernoulli's


    presentation of the problem and his solution, published in
    1738.
    How Much Would You (Should You) Pay For A
    Gamble?

    For a historical perspective, tracing the roots of


    value judgements to the Swiss mathematician
    Nikolaus Bernoulli (September 1713)
    How Much Would You (Should You) Pay For A
    Gamble?

    St. Petersburg Paradox

    Thus you win:


    1 dollar if a tail appears on the first toss,
    2 dollars if a head appears on the first toss and a tail
    on the second,
    4 dollars if a head appears on the first two tosses and
    a tail on the third,
    8 dollars if a head appears on the first three tosses
    and a tail on the fourth, etc.
    2k−1 dollars if the coin is tossed k times until the first
    tail appears.
    How Much Would You (Should You) Pay For A
    Gamble?

    St. Petersburg Paradox

    What would be a fair price to pay for entering the


    game?
    To answer this we need to consider what would be the
    average payout:
    With probability 1/2, you win 1 dollar;
    with probability 1/4 you win 2 dollars;
    with probability 1/8 you win 4 dollars etc.
    Of course the probability of gaining a head on the kth.
    play is 1/2k.
    How Much Would You (Should You) Pay For A
    Gamble?
    0.5
    Head
    0.5 ...
    Head

    0.5
    0.5 Tail
    Head 8

    0.5 0.5
    Head Tail
    4

    0.5
    Tail
    2

    0.5
    Tail
    1

    But how much should you pay?


    How Much Would You (Should You) Pay For A
    Gamble?

    The expected value (E) is thus

    1 1 1 1
    E  1   2   4   8  ...
    2 4 8 16
    1 1 1 1
         ...
    2 2 2 2
    
    How Much Would You (Should You) Pay For A
    Gamble?

    The expected value (E) is thus, or notationally


    1
    E 
    k 1 2 k
     2 k 1


    1
     
    k 1
    2
    

    where k counts the number of tosses.


    How Much Would You (Should You) Pay For A
    Gamble?

    This sum diverges to infinity, and so the expected win


    for the player of this game, at least in its idealized
    form, in which the casino has unlimited resources, is an
    infinite amount of money.

    This means that the player should almost surely come


    out ahead in the long run, no matter how much he pays
    to enter.
    How Much Would You (Should You) Pay For A
    Gamble?

    While a large payoff comes along very rarely, when it


    eventually does it will typically be far more than the
    amount of money that he has already paid to play.

    According to the usual treatment of deciding when it is


    advantageous and therefore rational to play, one
    should therefore play the game at any price if offered
    the opportunity.
    How Much Would You (Should You) Pay For A
    Gamble?

    Yet, in published descriptions of the paradox, e.g.,


    (Martin 2004), many people expressed disbelief in the
    result. Martin quotes Ian Hacking as saying “few of us
    would pay even $25 to enter such a game” and says
    most commentators would agree. This is the paradox!

    Martin, Robert (2004) “The St. Petersburg Paradox”


    In Edward N. Zalta. The Stanford Encyclopedia of
    Philosophy (Fall 2004 ed.).
    How Much Would You (Should You) Pay For A
    Gamble?

    You will quickly discover, however, that you will not win
    an infinite amount of money playing this game.

    We seem to have a paradox.

    The expectation value is infinite, but certainly no one


    is going to put up an infinite amount of money, or even
    a million dollars, for the opportunity to play this game
    once. What is the solution to this paradox?
    How Much Would You (Should You) Pay For A
    Gamble?

    The answer is that an expectation value is defined to


    be an average over an infinite number of trials (or the
    limit towards an infinite number).

    But you are simply not going to play an infinite number


    of games. In other words, the calculated expectation
    value doesn’t agree with your experiment, because your
    experiment has nothing whatsoever to do with the
    precise definition of an expectation value.
    How Much Would You (Should You) Pay For A
    Gamble?

    To be sure, if you did somehow play an infinite number


    of games, then you would indeed have an infinite
    average for your winnings.

    The whole paradox arises from trying to make


    “expectation value” mean something it doesn’t.

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