The St. Petersburg Paradox
An economic problem posed over 250 years ago still causes angst for economists, investors and actuaries today; largely because it’s never been satisfactorily solved, probably because it can't be. Despite this, the resolution posed all those years ago has travelled down the ages, insinuating itself into every nook, cranny and other archaic crevice of finance you care to mention, like an elasticated thong on an overweight man.
The problem, posed by Nicholas Bernoulli, is known as the St. Petersburg Paradox after the city of residence of his cousin, Daniel Bernoulli, who was the first person to propose an answer to it. Daniel’s great idea – and it was a truly great idea – is known as utility. Without the concept of utility it’s doubtful that any of us would be here to debate this issue, yet the findings of behavioural finance show that it’s almost certainly wrong. The Paradox of St. Petersburg has plenty of life left in it yet.
An economic problem posed over 250 years ago still causes angst for economists, investors and actuaries today; largely because it’s never been satisfactorily solved, probably because it can't be. Despite this, the resolution posed all those years ago has travelled down the ages, insinuating itself into every nook, cranny and other archaic crevice of finance you care to mention, like an elasticated thong on an overweight man.
The problem, posed by Nicholas Bernoulli, is known as the St. Petersburg Paradox after the city of residence of his cousin, Daniel Bernoulli, who was the first person to propose an answer to it. Daniel’s great idea – and it was a truly great idea – is known as utility. Without the concept of utility it’s doubtful that any of us would be here to debate this issue, yet the findings of behavioural finance show that it’s almost certainly wrong. The Paradox of St. Petersburg has plenty of life left in it yet.
