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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Department of Economics, University of Leicester in its series Discussion Papers in Public Sector Economics with number 00/8.
Date of creation:
Date of revision:
Contact details of provider:
Postal: Department of Economics University of Leicester, University Road. Leicester. LE1 7RH. UK
Phone: +44 (0)116 252 2887
Fax: +44 (0)116 252 2908
Web page: http://www2.le.ac.uk/departments/economics
More information through EDIRC
Other versions of this item:
- Roger Hartley & Lisa Farrell, 1998. "Can Expected Utility Theory Explain Gambling?," Keele Department of Economics Discussion Papers (1995-2001) 98/02, Department of Economics, Keele University.
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- D91 - Microeconomics - - Intertemporal Choice - - - Intertemporal Household Choice; Life Cycle Models and Saving
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-11-22 (All new papers)
- NEP-EVO-2004-11-22 (Evolutionary Economics)
- NEP-FIN-2004-11-22 (Finance)
- NEP-IAS-2001-01-21 (Insurance Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- Bruno Jullien & Bernard Salanié, 1997.
"Estimating Preferences under Risk : The Case of Racetrack Bettors,"
97-39, Centre de Recherche en Economie et Statistique.
- 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.
- 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.
- 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.
- Milton Friedman & L. J. Savage, 1948. "The Utility Analysis of Choices Involving Risk," Journal of Political Economy, University of Chicago Press, vol. 56, pages 279.
- Quiggin, John, 1991. "On the Optimal Design of Lotteries," Economica, London School of Economics and Political Science, vol. 58(229), pages 1-16, February.
- 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.
- 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.
- Dowell, Richard S & McLaren, Keith R, 1986. "An Intertemporal Analysis of the Interdependence between Risk Preference, Retirement, and Work Rate Decisions," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 667-82, June.
- Conlisk, John, 1993. " The Utility of Gambling," Journal of Risk and Uncertainty, Springer, vol. 6(3), pages 255-75, June.
- 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.
- Thomas F. Crossley & Hamish Low & Sarah Smith, 2013.
"Do Consumers Gamble to Convexify?,"
KoÃ§ University-TUSIAD Economic Research Forum Working Papers
1314, Koc University-TUSIAD Economic Research Forum.
- Barnett, Richard C. & Bhattacharya, Joydeep & Bunzel, Helle, 2008.
"Choosing to Keep Up with the Joneses and Income Inequality,"
Staff General Research Papers
12862, Iowa State University, Department of Economics.
- 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.
- Il-Horn Hann & Kai-Lung Hui & Tom S. Lee & I.P.L. Png, 2003.
"The Value of Online Information Privacy: An Empirical Investigation,"
0304001, EconWPA, revised 01 Apr 2003.
- 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.
- Thomas A. Garrett & Nalinaksha Bhattacharyya, 2006.
"Why people choose negative expected return assets - an empirical examination of a utility theoretic explanation,"
2006-014, Federal Reserve Bank of St. Louis.
- 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.
- 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.
- Raj Chetty & Adam Szeidl, 2007.
"Consumption Commitments and Risk Preferences,"
The Quarterly Journal of Economics,
MIT Press, vol. 122(2), pages 831-877, 05.
- Atalay, Kadir & Bakhtiar, Fayzan & Cheung, Stephen L. & Slonim, Robert, 2013.
"Savings and Prize-Linked Savings Accounts,"
2013-12, University of Sydney, School of Economics.
- Nyman, John A. & Welte, John W. & Dowd, Bryan E., 2008. "Something for nothing: A model of gambling behavior," The Journal of Socio-Economics, Elsevier, vol. 37(6), pages 2492-2504, December.
- Raj Chetty, 2004. "Consumption Commitments, Unemployment Durations, and Local Risk Aversion," NBER Working Papers 10211, National Bureau of Economic Research, Inc.
- 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.
- 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.
- Kent Grote & Victor Matheson, 2011. "The Economics of Lotteries: An Annotated Bibliography," Working Papers 1110, College of the Holy Cross, Department of Economics.
- 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.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mrs. Alexandra Mazzuoccolo).
If references are entirely missing, you can add them using this form.