Decisions under uncertainty / Decision criteria 44Expected value criterionSt. Petersburg Paradox(DanielBernoulli, 1738): Consider thefollowing game. A fair coin will be tossed repeatedly until heads comes up. If thishappens in the i-th toss, the lottery yields a money prize of 2iEuros.The probability of this outcome is 1/2i.How much will an expected value maximizer be willing to pay toplay this game?.
Since one would not suppose, at least intuitively, that real-worldpeople would be willing to pay aninfinite amount of money to playthis game, the expected value criterion seems to be not appropriate to determine the price to play this game!Single-period random cash
flows: Utility theory