Can Expected Utility Theory Explain Gambling?
AbstractWe 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 rules out a demand for gambles, we show that expected utility theory with non-concave utility functions can still explain gambling. When the rates of interest and time preference are equal, agents will seek to gamble unless income falls in a finite set of exceptional values. When these rates differ, there will be a range of incomes for which gambles are desired. In both cases repeated gambling is not explained but market imperfections such as different borrowing and lending rates can account for persistent gambling provided the rates span the rate of time preference.
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Bibliographic InfoPaper provided by Department of Economics, Keele University in its series Keele Department of Economics Discussion Papers (1995-2001) with number 98/02.
Date of creation: 1998
Date of revision:
Publication status: Published in American Economic Review, June 2002, Vol. 92(3), pages 613-624.
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Postal: Department of Economics, Keele University, Keele, Staffordshire ST5 5BG - United Kingdom
Other versions of this item:
- Farrell, Lisa & Hartley, Roger, 2002. "Can expected utility theory explain gambling?," Open Access publications from University College Dublin urn:hdl:10197/539, University College Dublin.
- Lisa Farrell & Roger Hartley, . "Can Expected Utility Theory Explain Gambling?," Discussion Papers in Public Sector Economics 00/8, Department of Economics, University of Leicester.
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving
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