Can Expected Utility Theory Explain Gambling

The place is good for an out of London experience. You can just go eat, or drink, or dance if you don't want to gamble. G casino luton poker room.



We 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.

We 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 removes the demand for gambles, we show expected utility theory with nonconcave utility functions can explain gambling. When the rates of interest and time preference are equal, agents seek to gamble unless income falls in a finite set of values. When they differ, there is a range of incomes where gambles are desired. Different borrowing and lending rates can account for persistent gambling provided the rates span the rate of time preference.

Can Expected Utility Theory Explain Gambling Table


Expected Utility Theory Formula

  1. Applebaum, Elie, and Eliakim Katz. (1981). “Market Constraints as a Rationale for the Friedman-Savage Utility Function,”Journal of Political Economy 89, 819–825.Google Scholar
  2. Arrow, Kenneth J. (1951). “Alternative Approaches to the Theory of Choice in Risk-Taking Situations,”Econometrica 19, 404–437. Reprinted in Arrow (1974).Google Scholar
  3. Arrow, Kenneth J. (1974).Essays in the Theory of Risk-Bearing. Amsterdam: North-Holland.Google Scholar
  4. Brenner, Reuven, with Gabrielle A. Brenner. (1990).Gambling and Speculation. Cambridge: Cambridge University Press.Google Scholar
  5. Battalio, Raymond C., John H. Kagel, and Komain Jiranyakul. (1990). “Testing Between Alternative Models of Choice Under Uncertainty: Some Initial Results,”Journal of Risk and Uncertainty 3, 25–50.Google Scholar
  6. Camerer, Colin. (1989a). “An Experimental Test of Several Generalized Utility Theories,”Journal of Risk and Uncertainty 2, 61–104.Google Scholar
  7. Camerer, Colin. (1989b). “Recent Tests of Generalizations of Expected Utility Theory,” manuscript.Google Scholar
  8. Clotfelter, Charles T., and Philip J. Cook. (1989).Selling Hope: State Lotteries in America. Cambridge: Harvard University Press.Google Scholar
  9. Clotfelter, Charles T., and Philip J. Cook. (1990). “On the Economics of State Lotteries,”Journal of Economic Perspectives 4, 105–119.Google Scholar
  10. Clotfelter, Charles T., and Philip J. Cook. (1991). “Lotteries in the Real World,”Journal of Risk and Uncertainty 4, 227–232.Google Scholar
  11. Eden, Benjamin. (1977). “The Role of Insurance and Gambling in Allocating Risk Over Time,”Journal of Economic Theory 16, 228–246.Google Scholar
  12. Eden, Benjamin. (1979). “An Expected Utility for the Insurance Buying Gambler,”Review of Economic Studies 46, 741–742.Google Scholar
  13. Eden, Benjamin. (1980). “The Insurance-Buying Gambler,”Economic Inquiry 18, 504–508.Google Scholar
  14. Fishburn, Peter C. (1980). “A Simple Model for the Utility of Gambling,”Psychometrika 45, 435–448.Google Scholar
  15. Flemming, J.S. (1969). “The Utility of Wealth and the Utility of Windfalls,”Review of Economic Studies 36, 55–66.Google Scholar
  16. Friedman, Milton, and Leonard J. Savage. (1948). “The Utility Analysis of Choices Involving Risk,”Journal of Political Economy 56, 279–304.Google Scholar
  17. Hakannson, Nils H. (1970). “Friedman-Savage Utility Functions Consistent with Risk Aversion,”Quarterly Journal of Economics 84, 472–487.Google Scholar
  18. Heath, Chip, and Amos Tversky. (1991). “Preference and Belief: Ambiguity and Competence in Choice under Uncertainty,”Journal of Risk and Uncertainty 4, 5–28.Google Scholar
  19. Hershey, John C., and Paul J. H. Schoemaker. (1980a). “Risk-Taking and Problem Context in the Domain of Losses: An Expected Utility Analysis,”Journal of Risk and Insurance 47, 111–132.Google Scholar
  20. Hershey, John C., and Paul J. H. Schoemaker. (1980b). “Prospect Theory's Reflection Hypothesis: A Critical Examination,”Organizational Behavior and Human Performance 25, 395–418.Google Scholar
  21. Hershey, John C., and Paul J. H. Schoemaker. (1985). “Probability Versus Certainty Equivalence Methods in Utility Measurement: Are They Equivalent?”Management Science 31, 1213–1231.Google Scholar
  22. Hershey, John C., Howard C. Kunreuther, and Paul J. H. Schoemaker. (1982). “Sources of Bias in Assessment Procedures for Utility Functions,”Management Science 28, 936–954.Google Scholar
  23. Hirshleifer, Jack. (1966). “Investment Decision Under Uncertainty: Applications of the State-Preference Approach,”Quarterly Journal of Economics 80, 252–277.Google Scholar
  24. Kahneman, Daniel, and Amos Tversky. (1979). “Prospect Theory: An Analysis of Decisions Under Risk,”Econometrica 47, 263–291.Google Scholar
  25. Kahneman, Daniel, and Amos Tversky. (1986). “Rational Choice and the Framing of Decisions,”Journal of Business 59, S251-S278.Google Scholar
  26. Kallick, Maureen, Daniel Suits, Ted Dielman, and Judith Hybels. (1979).A Survey of American Gambling Attitudes and Behavior. Ann Arbor: Institute for Social Research. Originally published as Appendix 2 ofGambling in America, Commission on the Review of the National Policy Toward Gambling. Washington: U.S. Government Printing Office.Google Scholar
  27. Kim, Young Chin. (1973). “Choice in the Lottery-Insurance Situation: Augmented-Income Approach,”Quarterly Journal of Economics 87, 148–156.Google Scholar
  28. Landesberger, Michael, and Isaac Meilijson. (1990). “Lotteries, Insurance, and Star-Shaped Utility Functions,”Journal of Economic Theory 52, 1–17.Google Scholar
  29. Loewenstein, George. (1987). “Anticipation and the Valuation of Delayed Consumption,”Economic Theory 97, 666–684.Google Scholar
  30. Luce, R. Duncan. (1980). “Several Possible Measures of Risk,”Theory and Decision 12, 217–228.Google Scholar
  31. Luce, R. Duncan. (1981). “Correction to “Several Possible Measures of Risk,“Theory and Decision 13, 381.Google Scholar
  32. Luce, R. Duncan, and Elke U. Weber. (1986). “An Axiomatic Theory of Conjoint, Expected Risk,”Journal of Mathematical Psychology 30, 188–205.Google Scholar
  33. Machina, Mark J. (1982). “Expected Utility” Analysis Without the Independence Axiom,”Econometrica 50, 277–323.Google Scholar
  34. Machina, Mark J. (1987). “Choice Under Uncertainty: Problems Solved and Unsolved,”Journal of Economic Perspectives 1, 121–154.Google Scholar
  35. Markowitz, Harry. (1952). “The Utility of Wealth,”Journal of Political Economy 60, 151–158.Google Scholar
  36. Ng, Yew Kwang. (1965). “Why Do People Buy Lottery Tickets? Choices Involving Risk and the Indivisibility of Expenditure,”Journal of Political Economy 73, 530–535.Google Scholar
  37. Pollatsek, Alexander, and Amos Tversky. (1970). “A Theory of Risk,”Journal of Mathematical Psychology 7, 540–553.Google Scholar
  38. Pope, Robin. (1983). “The Pre-Outcome Period and the Utility of Gambling.” In B. Stigum and F. Wenstop (eds.),Foundations of Utility and Risk Theory with Applications. Dordrecht: D. Reidel.Google Scholar
  39. Samuelson, Paul. (1952). “Probability, Utility, and the Independence Axiom,”Econometrica 20, 670–678.Google Scholar
  40. Schoemaker, Paul J. H. (1982). “The Expected Utility Model: Its Variants, Purposes, Evidence and Limitations,”Journal of Economic Literature 20, 529–563.Google Scholar
  41. Tversky, Amos, and Daniel Kahneman. (1991). “Loss Aversion in Riskless Choice: A Reference-Dependent Model,”Quarterly Journal of Economics 106, 1039–1061.Google Scholar