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The harmonic sequence paradox reconsidered

According to the harmonic sequence paradox (Blavatskyy 2006), an expected utility decision maker’s 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 eventually zero. Since the assumption of zero marginal utility is implausible, expected utility theory (as well as cumulative prospect theory) does apparently do a bad job in describing this decision behaviour. The present note demonstrates that the harmonic sequence paradox only applies to time-patient
but not to time-impatient (risk-neutral) expected utility decision makers.

Working Paper 161
1 December 2009
SHARE THIS Working Paper PUBLICATION:
22 September 2012
Publication Type: Working Paper
JEL Code: C91, D89

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