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Adding Risks: Samuelson's Fallacy of Large Numbers Revisited

Published online by Cambridge University Press:  06 April 2009

Stephen A. Ross
Stephen A. Ross
Affiliation:
Sloan School of Management, Massachusetts Institute of Technology, 50 Memorial Drive, Cambridge, MA 02142.
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Abstract

Samuelson called accepting a sequence of independent positive mean bets that are individually unacceptable a fallacy of large numbers, and subsequent researchers have extended Samuelson's condition on utility functions to assure that they would not allow this fallacy. By contrast, some behavioralists, arguing the merits of diversification, believe that it is simply wrong headed to refuse a long series of independent “good” bets out of a misguided faith in expected utility theory. Contrary to what one might infer from the literature, this paper shows that accepting sequences of good bets is both consistent with expected utility theory and quite usual.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 34 , Issue 3 , September 1999 , pp. 323 - 339
Copyright
Copyright © School of Business Administration, University of Washington 1999

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