Attitudes to Risk and Roulette
AbstractWe 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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Date of creation: Mar 2011
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