Resolution of the St. Petersburg Paradox Using Von Mises’ Axiom of Randomness

6 Pages Posted: 14 Jun 2019

Date Written: June 3, 2019

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 method used derives from the study of non-ergodic systems. This circumstance may create a dependency between results that are often extremely difficult to detect and quantify, such as in the field of finance. Consequently, the expected gain obtained from data that may be correlated has a statistical value that is difficult to determine, thus it cannot be used for decision-making purposes. Therefore, in this scenario, an alternative parameter to be use during the decision-making process must be found. 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. In conclusion, the infinite behaviour in this paradox may be seen as an element capable of rendering the expected gain unusable for decision-making purposes. As a result, we are forced to face the problem by employing a different point of view. In order to do this we shift the focus from the result to the strategy’s ability to operate in a cognitive way by exploiting useful information about the system. 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.

Keywords: Game Theory, Non-Ergodicity

JEL Classification: C7

Suggested Citation

Berdondini, Andrea, Resolution of the St. Petersburg Paradox Using Von Mises’ Axiom of Randomness (June 3, 2019). Available at SSRN: https://ssrn.com/abstract=3398208 or http://dx.doi.org/10.2139/ssrn.3398208

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