L2
St. Petersburg Paradox
Senior Quant · Brainteasers & Logic
Game pays $2ⁿ when the first head appears on flip n. How much would you pay to play?
Question
A game pays if the first head appears on flip . Compute the expected winnings. Would a rational agent pay $1,000 to play? Resolve the St. Petersburg paradox using logarithmic utility. What does this imply about risk-neutral pricing of unbounded payoffs?