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Attitudes to Risk and Roulette

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  • Adi Schnytzer

    ()
    (Bar-Ilan University)

  • Sara Westreich
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    Abstract

    We present an empirical framework for determining whether or not customers at the roulette wheel are risk averse or risk loving. Thus, we present a summary of the Aumann-Serrano (2007) risk index as generalized to allow for the presence of risk lovers by Schnytzer and Westreich (2010). We show that, for any gamble, whereas riskiness increases for gambles with positive expected return as the amount placed on a given gamble is increased, the opposite is the case for gambles with negative expected return. Since roulette involves binary gambles, we restrict our attention to such gambles exclusively and derive empirically testable hypotheses. In particular, we show that, all other things being equal, for gambles with a negative expected return, riskiness decreases as the size of the contingent payout increases. On the other hand, riskiness increases if the gamble has a positive expected return. We also prove that, for positive return gambles, riskiness increases, ceteris paribus, in the variance of the gamble while the reverse is true for gambles with negative expected returns. Finally, we apply these results to the specific gambles involved in American roulette and discuss how we might distinguish between casino visitors who are risk averse and those who are risk loving as well as those who may suffer from gambling addictions of one form or another.

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    File URL: http://www.biu.ac.il/soc/ec/wp/2011-06.pdf
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    Bibliographic Info

    Paper provided by Department of Economics, Bar-Ilan University in its series Working Papers with number 2011-06.

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    Date of creation: Mar 2011
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    Handle: RePEc:biu:wpaper:2011-06

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    Postal: Faculty of Social Sciences, Bar Ilan University 52900 Ramat-Gan
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    Web page: http://econ.biu.ac.il
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    References

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    1. Roberto Serrano & Robert J. Aumann, 2007. "An Economic Index Of Riskiness," Working Papers wp2007_0706, CEMFI.
    2. Gary S. Becker & Michael Grossman & Kevin M. Murphy, 1990. "An Empirical Analysis of Cigarette Addiction," NBER Working Papers 3322, National Bureau of Economic Research, Inc.
    3. Becker, Gary S & Murphy, Kevin M, 1988. "A Theory of Rational Addiction," Journal of Political Economy, University of Chicago Press, vol. 96(4), pages 675-700, August.
    4. Frank J. Chaloupka, 1990. "Men, Women, and Addiction: The Case of Cigarette Smoking," NBER Working Papers 3267, National Bureau of Economic Research, Inc.
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