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
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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
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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
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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
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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
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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
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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
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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
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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.