The St. Petersburg Paradox

The St. Petersburg Paradox is a thought experiment that questions how people value a game with theoretically unlimited payouts but very low chances of winning large sums. In the game, a fair coin is flipped repeatedly until it lands on heads; the payoff doubles each time, so the potential winnings grow exponentially. While the expected monetary value (average payout) is infinite, most individuals wouldn't pay a huge amount to play because the chance of winning a large sum is extremely small. The paradox highlights the difference between mathematical expectation and actual human willingness to pay, exposing limitations in classical expected value as a model for real-world decision-making.