Kiel Working Papers, Kiel Institute for World Economics
No 1724:
Explaining the harmonic sequence paradox
Ulrich Schmidt and Alexander Zimper
Abstract: According to the harmonic sequence paradox (Blavatskyy
2006), an expected utility decision maker's willingness-to-pay for a gamble
whose expected payoffs evolve according to the harmonic series is finite if
and only if his marginal utility of additional income becomes zero for
rather low payoff levels. Since the assumption of zero marginal utility is
implausible for finite payoffs levels, expected utility theory—as well as
its standard generalizations such as cumulative prospect theory—are
apparently unable to explain a finite willingness-to-pay. The present paper
presents first an experimental study of the harmonic sequence paradox.
Additionally, it demonstrates that the theoretical argument of the harmonic
sequence paradox only applies to time-patient decision makers whereas the
paradox is easily avoided if time-impatience is introduced
Keywords: St. Petersburg Paradox, Expected Utility, Time-Preferences; (follow links to similar papers)
JEL-Codes: C91,; D81; (follow links to similar papers)
18 pages, August 2011
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