The St. Petersburg Paradox and Cardinal Utility Function
|Author(s):|| prof. RNDr. Jiří Hlaváček CSc., |
PhDr. Michal Hlaváček Ph.D.,
|Type:||IES Working Papers|
|ISSN / ISBN:|
|Published in:||IES WP 2002/23|
|Abstract:||The St. Petersburg paradox was explained by Von-Neumann a Morgenstern with help of risk aversion of decision-maker. This explanation was based on assumption of concave utility function. This paper provides the explanation based on the probability of downfall of the decision maker, utilizing the Pareto distribution of probability. It corresponds with the proposal, that the dependence between probability of downfall and the relative reserve to existential minimum is linear.
Keywords : St. Petersburg paradox, risk aversion, utility function cardinalization, decision under uncertainty