A Counterpart to the St. Petersburg Paradox

Abstract A paradox of expected utility theory similar to the St. Petersburg paradox is presented, which arises with agents whose risk aversion decreases quickly enough as they gain wealth according to a uniform payoff scheme with positive but diminishing probability premium. It is shown that while both paradoxes require unbounded utility, this counterpart has a more satisfactory resolution through temporal dis- counting than the St. Petersburg paradox. Finally, it is shown that this is mirrored in more realistic settings with prospect theory agents. This indicates that the two paradoxes are distinct and that account- ing for time preference is important in models that allow unbounded utility.