The St. Petersburg Paradox and the Crash of High-Tech Stocks in 2000

Abstract

During the late 1990s high technology growth stock prices were raised to unprecedented levels by avid stock purchasers around the world. In early 2000, share prices subsequently underwent prolonged declines, leaving many purchasers with devastating losses. This article reviews some aspects of the history of the St. Petersburg paradox and some related games. We recount a remarkable article by Durand in which the valuation of growth stocks is related to the St. Petersburg paradox. Our conclusion is that the run-up in stock prices in the late 1990s and the subsequent declines in 2000 could have been avoided by an analysis and application of the St. Petersburg paradox.

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