Explaining the harmonic sequence paradox

Schmidt, Ulrich and Zimper, A. (2012) Explaining the harmonic sequence paradox British Journal of Mathematical & Statistical Psychology, 65 (2). pp. 322-333.

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Abstract

According to the harmonic sequence paradox, an expected utility decision makers 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 payoff 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. This 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.

Document Type: Article
Additional Information: Univ Pretoria, Dept Econ, ZA-0028 Hatfield, South Africa. Univ Kiel, Dept Econ, D-24098 Kiel, Germany. Univ Kiel, Kiel Inst World Econ, D-24098 Kiel, Germany. Zimper, A (reprint author), Univ Pretoria, Dept Econ, Private Bag X20, ZA-0028 Hatfield, South Africa. alexander.zimper@up.ac.za
Keywords: uncertainty
Research affiliation: Kiel University
OceanRep > The Future Ocean - Cluster of Excellence
Refereed: Yes
ISSN: 0007-1102
Projects: Future Ocean
Date Deposited: 14 May 2014 09:37
Last Modified: 01 Mar 2018 11:05
URI: http://eprints.uni-kiel.de/id/eprint/24243

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