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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. Matthew Rabin., 2000. "Diminishing Marginal Utility of Wealth Cannot Explain Risk Aversion," Economics Working Papers E00-287, University of California at Berkeley.
    2. Ole Peters & Murray Gell-Mann, 2014. "Evaluating gambles using dynamics," Papers 1405.0585, arXiv.org, revised Jun 2015.
    3. Rabin, Matthew, 2000. "Risk Aversion and Expected-Utility Theory: A Calibration Theorem," Department of Economics, Working Paper Series qt731230f8, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    4. 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.
    5. Matthew Rabin, 2000. "Risk Aversion and Expected-Utility Theory: A Calibration Theorem," Econometrica, Econometric Society, vol. 68(5), pages 1281-1292, September.
    6. 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..
    7. 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.
    8. Ole Peters & Alexander Adamou, 2018. "The time interpretation of expected utility theory," Papers 1801.03680, arXiv.org, revised Feb 2021.
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