Explanation Of St. Petersburg Paradox And Other Paradoxes Based On Narrow Framing

Expected utility theory once was the dominant theory in economic decision making, and its theoretical basis is assumption of people with "perfect rationality", specifically in some basic assumptions. However, with the prospect theory put forward and then more and more decision making theory, these basic assumptions are broken. Then narrow framing is the decision making theory that violate these basic assumptions. This paper introduces its definition, psychological origin, experimental performance and impact on decision makers when facing risk decisions in daily life and shows narrow framing is a prevalent behavioral bias in actual decision-making. Then, this paper introduces St. Petersburg paradox, its history and classical explanations, and shows these explanations have a variety of defects. Based on these discussions, this paper proposes that the paradox arises because decision-makers are affected by narrow framing, and on this basis proposes a new explanation. Through mathematical derivation, this paper discusses collection of explanations based on narrow framing and expected utility theory. Furthermore, this paper confirms validity of the explanation of St. Petersburg paradox based on narrow framing, and then discusses some of the similarities and differences of extant explanations, giving decision makers some inspirations in practice. Finally, this paper tries to explain other paradoxes or unexplained phenomena based on narrow framing, and achieves good results. These efforts give a new idea to research of these paradox or phenomena, and shows wide applications of narrow framing.