Growth Stocks Paradox

David Durand, "Growh Stocks and the Petersburg Paradox," The Journal of Finance, vol. XII, no. 3, September, 1957, pp. 348-363.

This classic article compares investing in high-priced growth stocks to betting on a series of coin flips in which the payoff escalates with each flip of the coin.

Durand points out that if a growth stock could continue to grow at a high rate for an indefinite period of time, an investor should (in theory) be willing to pay an infinite price for its shares.

Why, then, has no stock ever sold for a price of infinity dollars per share?

Because the higher the assumed future growth rate, and the longer the time period over which it is expected, the wider the margin for error grows, and the higher the cost of even a tiny miscalculation becomes.