The Utility of Gambling Reconsidered
The utility of gambling, which entails an intrinsic utility or disutility of risk, has been alluded to in the economics literature for over a century. This paper demonstrates that any utility of gambling almost unavoidably implies a violation of fundamental rationality properties, such as transitivity or stochastic dominance, for static choices between gambles. This result may explain why the utility of gambling, a phenomenon so widely discussed, has never been formalized in the economics literature. The model of this paper accommodates well-known deviations from expected utility, such as the Allais paradox and the coexistence of gambling and insurance, while minimally deviating from expected utility.
|Keywords||certainty effect, nonexpected utility, risk aversion, utility of gambling|
|Persistent URL||dx.doi.org/RISK.0000046145.25793.37, hdl.handle.net/1765/22984|
Diecidue, E., Schmidt, U., & Wakker, P.P.. (2004). The Utility of Gambling Reconsidered. Journal of Risk and Uncertainty, 29(3), 241–259. doi:RISK.0000046145.25793.37