C&B Notes

St. Petersburg Paradox

Probability and statistics were not necessary to evolution, and we find the human shortcut answer to many questions can vary widely from the correct mathematical answer.  This difference can lead to a variety of bad decisions and inefficiencies in the market.  So we try to focus on and be very aware of these problems in the hopes of doing a little better than average when they arise in real world investing.

Even though the expected value of the St. Petersburg Paradox is infinity if the payout is unlimited, the expected value is shockingly small even with very large maximum payouts.  The following table places the classic St. Petersburg paradox in a whole different light and frames it closer to our natural instinct:

* Image taken from Wikipedia