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Paying to Improve Your Chances: Gambling or Insurance?

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Author Info

  • McGuire, Martin C
  • Pratt, John
  • Zeckhauser, Richard

Abstract

Will a more risk-averse individual spend more or less to improve probabilities, say on marketing efforts that enhance the chance of a sale? For any two payoffs and starting probabilities, the answer is unfortunately indeterminate. However, interpreting gambling as increasing small chances of good outcomes and insurance as reducing small chances of bad outcomes, the more risk-averse individual will pay less (more) to gamble (insure). The authors find a critical "switching probability that depends on the individuals and outcomes involved. If the good outcome is less (more) likely than this critical value, the expenditures represent gambling (insurance). Copyright 1991 by Kluwer Academic Publishers

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Bibliographic Info

Article provided by Springer in its journal Journal of Risk and Uncertainty.

Volume (Year): 4 (1991)
Issue (Month): 4 (December)
Pages: 329-38

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Handle: RePEc:kap:jrisku:v:4:y:1991:i:4:p:329-38

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Web page: http://www.springerlink.com/link.asp?id=100299

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Citations

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Cited by:
  1. TOSHIHIRO IHORI & MARTIN C. McGUIRE, 2007. "Collective Risk Control and Group Security: The Unexpected Consequences of Differential Risk Aversion," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 9(2), pages 231-263, 04.
  2. F. McElroy, 2007. "“Probability of risk aversion” and other applications of derivatives of the certainty equivalent," International Review of Economics, Springer, vol. 54(4), pages 429-444, December.
  3. Jindapon, Paan, 2013. "Do risk lovers invest in self-protection?," Economics Letters, Elsevier, vol. 121(2), pages 290-293.
  4. Schmidt, Ulrich & Robledo, Julio R. & Lohse, Tim, 2007. "Self-Insurance and Self-Protection as Public Goods," Economics Working Papers 2007,16, Christian-Albrechts-University of Kiel, Department of Economics.
  5. Liqun Liu & Andrew Rettenmaier & Thomas Saving, 2009. "Conditional payments and self-protection," Journal of Risk and Uncertainty, Springer, vol. 38(2), pages 159-172, April.
  6. Martin McGuire, 2006. "Uncertainty, Risk Aversion, And Optimal Defense Against Interruptions In Supply," Defence and Peace Economics, Taylor & Francis Journals, vol. 17(4), pages 287-309.
  7. Benoît Sévi & Fabrice Yafil, 2005. "A special case of self-protection: The choice of a lawyer," Economics Bulletin, AccessEcon, vol. 4(6), pages 1-8.
  8. Louis Eeckhoudt & Philippe Godfroid, 1998. "The market value of preventive activities: A contingent-claims approach," Journal of Economics, Springer, vol. 68(1), pages 27-38, February.
  9. Chuang, O-Chia & Eeckhoudt, Louis & Huang, Rachel J. & Tzeng, Larry Y., 2013. "Risky targets and effort," Insurance: Mathematics and Economics, Elsevier, vol. 52(3), pages 465-468.
  10. Martin McGuire & Gary Becker, 2006. "Reversal Of Misfortune When Providing For Adversity," Defence and Peace Economics, Taylor & Francis Journals, vol. 17(6), pages 619-643.
  11. Jinkwon Lee, 2008. "The effect of the background risk in a simple chance improving decision model," Journal of Risk and Uncertainty, Springer, vol. 36(1), pages 19-41, February.
  12. Toshihiro Ihori & Martin McGuire, 2010. "National self-insurance and self-protection against adversity: bureaucratic management of security and moral hazard," Economics of Governance, Springer, vol. 11(2), pages 103-122, April.
  13. Chiu, W.Henry, 2005. "Degree of downside risk aversion and self-protection," Insurance: Mathematics and Economics, Elsevier, vol. 36(1), pages 93-101, February.
  14. Toshihiro Ihori & Martin McGuire, 2006. "Group Provision Against Adversity: Security By Insurance vs. Protection," CARF F-Series CARF-F-086, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
  15. Eeckhoudt, L. & Godfroid, Ph. & Gollier, C., 1997. "Willingness to pay, the risk premium and risk aversion," Economics Letters, Elsevier, vol. 55(3), pages 355-360, September.
  16. repec:ebl:ecbull:v:4:y:2005:i:6:p:1-8 is not listed on IDEAS
  17. Liu, Liqun & Neilson, William S., 2006. "Endogenous private safety investment and the willingness to pay for mortality risk reductions," European Economic Review, Elsevier, vol. 50(8), pages 2063-2074, November.
  18. Loïc Berger, 2011. "Does Ambiguity Aversion Raise the Optimal Level of Effort? A Two-Period Model," Working Papers ECARES ECARES 2011-021, ULB -- Universite Libre de Bruxelles.

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