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Ergodicity in Economics: a Decision theoretic evaluation

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  • Andreozzi, Luciano

Abstract

Peters (2019) presents a new version of the St. Petersburg paradox that allegedly reveals a weakness of orthodox decision theory under uncertainty. I use a variant of Rabin (2000) calibration theorem to show that the new paradox only arises because the author implicitly assumes an unbounded utility function for money. I also assess the author's claim that orthodox decision theory is wrong in insisting on utility functions to be bounded and find it unconvincing.

Suggested Citation

  • Andreozzi, Luciano, 2021. "Ergodicity in Economics: a Decision theoretic evaluation," SocArXiv axkfg, Center for Open Science.
    • Handle: RePEc:osf:socarx:axkfg
    DOI: 10.31219/osf.io/axkfg
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    References listed on IDEAS

    as
    1. Ole Peters & Murray Gell-Mann, 2014. "Evaluating gambles using dynamics," Papers 1405.0585, arXiv.org, revised Jun 2015.
    2. Matthew Rabin, 2000. "Risk Aversion and Expected-Utility Theory: A Calibration Theorem," Econometrica, Econometric Society, vol. 68(5), pages 1281-1292, September.
    3. Matthew Rabin & Richard H. Thaler, 2013. "Anomalies: Risk aversion," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 27, pages 467-480, World Scientific Publishing Co. Pte. Ltd..
    4. Matthew Rabin., 2000. "Diminishing Marginal Utility of Wealth Cannot Explain Risk Aversion," Economics Working Papers E00-287, University of California at Berkeley.
    5. 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.
    6. Kenneth Arrow, 2009. "A note on uncertainty and discounting in models of economic growth," Journal of Risk and Uncertainty, Springer, vol. 38(2), pages 87-94, April.
    7. Ole Peters & Alexander Adamou, 2018. "The time interpretation of expected utility theory," Papers 1801.03680, arXiv.org, revised Feb 2021.
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