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How much are you Willing to Pay to Play the Saint Petersburg Gamble?

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  • Samih Antoine Azar

Abstract

The Saint Petersburg gamble has an infinite expected payoff but few people would pay more than 32 dollars as an entrance fee to play it. In fact under reasonable conditions the maximum willingness to pay to play the game is much lower at around $ 4, and seems to always converge to a maximum price. This is what emerges from the analysis in this paper. The procedure adopted is by a simulation of 1000 tosses of an honest coin, calculating the expected utility, and solving for the entrance fee that equates this expected utility to the certainty-equivalent utility. As predictable this fee depends positively on initial wealth and negatively on risk aversion. There is evidence that this game is a poor man’s game as will be shown empirically. All these results vindicate the expected utility paradigm, and show that this framework can still be valuable to depict and explain behavior towards risk, and other issues related to risk tolerance.

Suggested Citation

  • Samih Antoine Azar, 2015. "How much are you Willing to Pay to Play the Saint Petersburg Gamble?," International Journal of Financial Economics, Research Academy of Social Sciences, vol. 4(2), pages 101-108.
    • Handle: RePEc:rss:jnljfe:v4i2p3
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    References listed on IDEAS

    as
    1. Raj Chetty, 2006. "A New Method of Estimating Risk Aversion," American Economic Review, American Economic Association, vol. 96(5), pages 1821-1834, December.
    2. Samih Antoine Azar, 2000. "Another look at the rationality of the stock market," Applied Economics Letters, Taylor & Francis Journals, vol. 7(2), pages 87-89.
    3. David Evans, 2004. "The elevated status of the elasticity of marginal utility of consumption," Applied Economics Letters, Taylor & Francis Journals, vol. 11(7), pages 443-447.
    4. repec:ebl:ecbull:v:30:y:2010:i:1:p:157-168 is not listed on IDEAS
    5. Samih Antoine Azar & Vera Karaguezian-Haddad, 2014. "Simulating the market coefficient of relative risk aversion," Cogent Economics & Finance, Taylor & Francis Journals, vol. 2(1), pages 1-7, December.
    6. Samih A Azar, 2010. "Random risk aversion and the cost of eliminating the foreign exchange risk of the Euro," Economics Bulletin, AccessEcon, vol. 30(1), pages 157-168.
    Full references (including those not matched with items on IDEAS)

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