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

Benjamin Y. Hayden, Michael L. Platt

Research output: Contribution to journalArticle

22 Scopus citations

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 median 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.

Original languageEnglish (US)
Pages (from-to)256-272
Number of pages17
JournalJudgment and Decision Making
Volume4
Issue number4
StatePublished - Jun 1 2009

Keywords

  • Expectation heuristic
  • Heuristics
  • Median heuristic
  • Risk
  • Risk aversion
  • St. petersburg paradox

Fingerprint Dive into the research topics of 'The mean, the median, and the St. Petersburg paradox'. Together they form a unique fingerprint.

  • Cite this