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A Context-Dependent Model of the Gambling Effect

Author

Listed:
  • Han Bleichrodt

    (Erasmus University, iMTA/iBMG, P.O. Box 1738, 3000 DR Rotterdam, The Netherlands)

  • Ulrich Schmidt

    (University of Southern Denmark, Department of Economics, Campusvej 55, 5230 Odense M, Denmark, and Christian Albrechts Universität, Kiel, Germany)

Abstract

This paper presents a context-dependent theory of decision under risk. The relevant contextual factor is the presence of a riskless lottery in a preference comparison. The theory only deviates from expected utility if the set of options contains both riskless and risky lotteries. The main motivation for the theory is to explain the gambling effect. Contrary to previous theories of the gambling effect, the present theory is consistent with stochastic dominance. It can, however, violate transitivity. The theory allows for a decomposition of the interaction between risk aversion and gambling aversion and thereby extends the classical Arrow-Pratt measure of risk aversion.

Suggested Citation

  • Han Bleichrodt & Ulrich Schmidt, 2002. "A Context-Dependent Model of the Gambling Effect," Management Science, INFORMS, vol. 48(6), pages 802-812, June.
  • Handle: RePEc:inm:ormnsc:v:48:y:2002:i:6:p:802-812
    DOI: 10.1287/mnsc.48.6.802.190
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Birnbaum, Michael H. & Gutierrez, Roman J., 2007. "Testing for intransitivity of preferences predicted by a lexicographic semi-order," Organizational Behavior and Human Decision Processes, Elsevier, vol. 104(1), pages 96-112, September.
    2. Han Bleichrodt & Jose Maria Abellan-Perpiñan & Jose Luis Pinto-Prades & Ildefonso Mendez-Martinez, 2007. "Resolving Inconsistencies in Utility Measurement Under Risk: Tests of Generalizations of Expected Utility," Management Science, INFORMS, vol. 53(3), pages 469-482, March.
    3. Sebastian Lehmann, 2014. "Toward an Understanding of the BDM: Predictive Validity, Gambling Effects, and Risk Attitude," FEMM Working Papers 150001, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.
    4. Michael Birnbaum & Ulrich Schmidt, 2010. "Testing transitivity in choice under risk," Theory and Decision, Springer, vol. 69(4), pages 599-614, October.
    5. Jose Mª Abellán Perpiñán & Fernando Ignacio Sánchez Martínez & Jorge Eduardo Martínez Pérez & Ildefonso Méndez Martínez, 2009. "The QALY model wich came in from a general population survey: roughly multiplicative, broadly nonlinear and sometimes contex-dependt," Economic Working Papers at Centro de Estudios Andaluces E2009/04, Centro de Estudios Andaluces.
    6. Michael Birnbaum & Ulrich Schmidt, 2008. "An experimental investigation of violations of transitivity in choice under uncertainty," Journal of Risk and Uncertainty, Springer, vol. 37(1), pages 77-91, August.
    7. Coussement, Kristof & De Bock, Koen W., 2013. "Customer churn prediction in the online gambling industry: The beneficial effect of ensemble learning," Journal of Business Research, Elsevier, vol. 66(9), pages 1629-1636.
    8. Birnbaum, Michael H. & Schmidt, Ulrich, 2006. "Empirical Tests of Intransitivity Predicted by Models of Risky Choice," Economics Working Papers 2006-10, Christian-Albrechts-University of Kiel, Department of Economics.
    9. Ulrich Schmidt & Stefan Traub, 2009. "An Experimental Investigation of the Disparity Between WTA and WTP for Lotteries," Theory and Decision, Springer, vol. 66(3), pages 229-262, March.
    10. Neilson, William S., 2009. "A theory of kindness, reluctance, and shame for social preferences," Games and Economic Behavior, Elsevier, vol. 66(1), pages 394-403, May.
    11. Alessandro Innocenti & Tommaso Nannicini & Roberto Ricciuti, 2021. "The Importance of Betting Early," Risks, MDPI, Open Access Journal, vol. 9(4), pages 1-15, April.
    12. José María Abellán Perpiñán & Fernando Ignacio Sánchez Martínez & Jorge Eduardo Martínez Pérez & Ildefonso Méndez, 2012. "Lowering The ‘Floor’ Of The Sf‐6d Scoring Algorithm Using A Lottery Equivalent Method," Health Economics, John Wiley & Sons, Ltd., vol. 21(11), pages 1271-1285, November.
    13. Xi Zhi Lim, 2021. "Ordered Reference Dependent Choice," Papers 2105.12915, arXiv.org, revised Sep 2021.
    14. Castillo, Marco & Jordan, Jeffrey L. & Petrie, Ragan, 2018. "Children’s rationality, risk attitudes and field behavior," European Economic Review, Elsevier, vol. 102(C), pages 62-81.

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