The mean, the median, and the St. Petersburg paradox

Benjamin Y. Hayden and Michael L. Platt

Judgment and Decision Making, 2009, vol. 4, issue 4, pages 256-272

Abstract: The St.~Petersburg Paradox is a famous economic and philosophical puzzle that has generated numerous conflicting explanations. To shed empirical light on this phenomenon, we examined subjects' bids for one St.~Petersburg gamble with a real monetary payment. We found that bids were typically lower than twice the smallest payoff, and thus much lower than is generally supposed. We also examined bids offered for several hypothetical variants of the St.~Petersburg Paradox. We found that bids were weakly affected by truncating the gamble, were strongly affected by repeats of the gamble, and depended linearly on the initial ``seed'' value of the gamble. One explanation, which we call the \textit{median} \textit{heuristic}, strongly predicts these data. Subjects following this strategy evaluate a gamble as if they were taking the median rather than the mean of the payoff distribution. Finally, we argue that the distribution of outcomes embodied in the St.~Petersburg paradox is so divergent from the Gaussian form that the statistical mean is a poor estimator of expected value, so that the expected value of the St.~Petersburg gamble is undefined. These results suggest that this classic paradox has a straightforward explanation rooted in the use of a statistical heuristic.

Keywords: St.~Petersburg paradox; risk; risk aversion; heuristics; median heuristic; expectation heuristic. (search for similar items in EconPapers)
Date: 2009
View list of references

Downloads: (external link)
http://journal.sjdm.org/9226/jdm9226.pdf (application/pdf)
http://journal.sjdm.org/9226/jdm9226.html (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:jdm:journl:v:4:y:2009:i:4:p:256-272

Access Statistics for this article

Judgment and Decision Making is edited by Jonathan Baron

More articles in Judgment and Decision Making from Society for Judgment and Decision Making
Series data maintained by Jonathan Baron ().