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Title:Explaining the harmonic sequence paradox PDF Logo
Authors:Schmidt, Ulrich
Zimper, Alexander
Issue Date:2011
Series/Report no.:Kiel Working Papers 1724
Abstract:According to the harmonic sequence paradox (Blavatskyy 2006), an expected utility decision maker's willingness-to-pay for a gamble whose expected payoffs evolve according to the harmonic series is finite if and only if his marginal utility of additional income becomes zero for rather low payoff levels. Since the assumption of zero marginal utility is implausible for finite payoffs levels, expected utility theory - as well as its standard generalizations such as cumulative prospect theory - are apparently unable to explain a finite willingness-to-pay. The present paper presents first an experimental study of the harmonic sequence paradox. Additionally, it demonstrates that the theoretical argument of the harmonic sequence paradox only applies to time-patient decision makers whereas the paradox is easily avoided if time-impatience is introduced.
Subjects:St. Petersburg Paradox
Expected Utility
Time-Preferences
JEL:C91
D81
Document Type:Working Paper
Appears in Collections:Publikationen von Forscherinnen und Forschern des IfW
Kieler Arbeitspapiere, IfW

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