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Resolution of the St. Petersburg paradox using Von Mises axiom of randomness

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  • Andrea Berdondini

Abstract

In this article we will propose a completely new point of view for solving one of the most important paradoxes concerning game theory. The solution develop shifts the focus from the result to the strategy s ability to operate in a cognitive way by exploiting useful information about the system. In order to determine from a mathematical point of view if a strategy is cognitive, we use Von Mises' axiom of randomness. Based on this axiom, the knowledge of useful information consequently generates results that cannot be reproduced randomly. Useful information in this case may be seen as a significant datum for the recipient, for their present or future decision-making process. Finally, by resolving the paradox from this new point of view, we will demonstrate that an expected gain that tends toward infinity is not always a consequence of a cognitive and non-random strategy. Therefore, this result leads us to define a hierarchy of values in decision-making, where the cognitive aspect, whose statistical consequence is a divergence from random behaviour, turns out to be more important than the expected gain.

Suggested Citation

  • Andrea Berdondini, 2019. "Resolution of the St. Petersburg paradox using Von Mises axiom of randomness," Papers 1907.11054, arXiv.org.
  • Handle: RePEc:arx:papers:1907.11054
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    1. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    2. Andrea Berdondini, 2019. "The professional trader's paradox," Papers 1905.06722, arXiv.org.
    3. Samuelson, Paul A, 1977. "St. Petersburg Paradoxes: Defanged, Dissected, and Historically Described," Journal of Economic Literature, American Economic Association, vol. 15(1), pages 24-55, March.
    4. Aumann, Robert J., 1977. "The St. Petersburg paradox: A discussion of some recent comments," Journal of Economic Theory, Elsevier, vol. 14(2), pages 443-445, April.
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