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Investor Presentaiton

Why was the St. Petersburg Paradox so important? Jacob Bernoulli discovered the Law of Large Numbers (posth. 1713) ▷ He showed that in large samples, sample frequencies are close to their expectations with high probability. i.e. Given enough experience, one can learn the "degree of certainty" with which future events occur. ▷ Many assumed knowing the expected outcome was sufficient for decision making-that it always supported reasonable conclusions. Nicholas Bernoulli presented paradox to Pierre de Montmort (1713). ▷ It was controversial because it suggested that the expected outcome is not always a reasonable basis for decision making. Daniel Bernoulli published his resolution in the annals of the Academy of St. Petersburg (1738, hence "St. Petersburg Paradox"). ▷ He argued a "fair" price should take into account the diminishing value of money-that money increases utility at a decreasing rate. ▷ In this lecture, we use tree diagrams to demonstrate the paradox and D. Bernoulli's resolution.
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