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Can Expected Utility Theory Explain Gambling?

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  • Roger Hartley
  • Lisa Farrell

Abstract

We investigate the ability of expected utility theory to account for simultaneous gambling and insurance. Contrary to a previous claim that borrowing and lending in perfect capital markets removes the demand for gambles, we show expected utility theory with nonconcave utility functions can explain gambling. When the rates of interest and time preference are equal, agents seek to gamble unless income falls in a finite set of values. When they differ, there is a range of incomes where gambles are desired. Different borrowing and lending rates can account for persistent gambling provided the rates span the rate of time preference. (JEL D81, D91)

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/00028280260136426
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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 92 (2002)
Issue (Month): 3 (June)
Pages: 613-624

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Handle: RePEc:aea:aecrev:v:92:y:2002:i:3:p:613-624

Note: DOI: 10.1257/00028280260136426
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References

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  1. Gary S. Becker & Kevin M. Murphy, 1986. "A Theory of Rational Addiction," University of Chicago - George G. Stigler Center for Study of Economy and State 41, Chicago - Center for Study of Economy and State.
  2. Machina, Mark J, 1989. "Dynamic Consistency and Non-expected Utility Models of Choice under Uncertainty," Journal of Economic Literature, American Economic Association, vol. 27(4), pages 1622-68, December.
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  4. Ng Yew Kwang, 1965. "Why do People Buy Lottery Tickets? Choices Involving Risk and the Indivisibility of Expenditure," Journal of Political Economy, University of Chicago Press, vol. 73, pages 530.
  5. Farrell, Lisa & Morgenroth, Edgar & Walker, Ian, 1999. " A Time Series Analysis of U.K. Lottery Sales: Long and Short Run Price Elasticities," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(4), pages 513-26, November.
  6. Bruno Jullien & Bernard Salanie, 2000. "Estimating Preferences under Risk: The Case of Racetrack Bettors," Journal of Political Economy, University of Chicago Press, vol. 108(3), pages 503-530, June.
  7. Conlisk, John, 1993. " The Utility of Gambling," Journal of Risk and Uncertainty, Springer, vol. 6(3), pages 255-75, June.
  8. Kim, Young Chin, 1973. "Choice in the Lottery-Insurance Situation Augmented-Income Approach," The Quarterly Journal of Economics, MIT Press, vol. 87(1), pages 148-56, February.
  9. Dobbs, Ian M, 1988. "Risk Aversion, Gambling and the Labour-Leisure Choice," Scottish Journal of Political Economy, Scottish Economic Society, vol. 35(2), pages 171-75, May.
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Citations

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Cited by:
  1. Hann, Il-Horn & Hui, Kai-Lung & Lee, Tom S. & Png, Ivan P. L., 2003. "The Value of Online Information Privacy: An Empirical Investigation," Working paper 85, Regulation2point0.
  2. Fong, Wai Mun & Lean, Hooi Hooi & Wong, Wing Keung, 2008. "Stochastic dominance and behavior towards risk: The market for Internet stocks," Journal of Economic Behavior & Organization, Elsevier, vol. 68(1), pages 194-208, October.
  3. Atalay, Kadir & Bakhtiar, Fayzan & Cheung, Stephen L. & Slonim, Robert, 2013. "Savings and Prize-Linked Savings Accounts," Working Papers 2013-12, University of Sydney, School of Economics.
  4. Richard Barnett & Joydeep Bhattacharya & Helle Bunzel, 2010. "Choosing to keep up with the Joneses and income inequality," Economic Theory, Springer, vol. 45(3), pages 469-496, December.
  5. Douglas L. Miller & Anna Paulson, 2007. "Risk taking and the quality of informal insurance: gambling and remittances in Thailand," Working Paper Series WP-07-01, Federal Reserve Bank of Chicago.
  6. Nyman, John A. & Welte, John W. & Dowd, Bryan E., 2008. "Something for nothing: A model of gambling behavior," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 37(6), pages 2492-2504, December.
  7. Kent Grote & Victor Matheson, 2011. "The Economics of Lotteries: An Annotated Bibliography," Working Papers 1110, College of the Holy Cross, Department of Economics.
  8. Raj Chetty & Adam Szeidl, 2006. "Consumption Commitments and Risk Preferences," NBER Working Papers 12467, National Bureau of Economic Research, Inc.
  9. Raj Chetty, 2004. "Consumption Commitments, Unemployment Durations, and Local Risk Aversion," NBER Working Papers 10211, National Bureau of Economic Research, Inc.
  10. Thomas Crossley & Hamish Low & Sarah Smith, 2011. "Do consumers gamble to convexify?," IFS Working Papers W11/07, Institute for Fiscal Studies.
  11. Chen, Shu-Heng & Chie, Bin-Tzong, 2008. "Lottery markets design, micro-structure, and macro-behavior: An ACE approach," Journal of Economic Behavior & Organization, Elsevier, vol. 67(2), pages 463-480, August.
  12. Barnett, Richard C. & Bhattacharya, Joydeep & Bunzel, Helle, 2008. "Are the Joneses Making You Financially Vulnerable?," Staff General Research Papers 12909, Iowa State University, Department of Economics.
  13. N. Bhattacharya & T. A. Garrett, 2008. "Why people choose negative expected return assets - an empirical examination of a utility theoretic explanation," Applied Economics, Taylor & Francis Journals, vol. 40(1), pages 27-34.

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