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The Utility of Gambling Reconsidered

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Abstract

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.

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Author information

Authors and Affiliations

  1. INSEAD, Decision Sciences, CRDM, Fontainebleau, France

    Enrico Diecidue

  2. Institut für Finanzmarkttheorie, Universität Hannover, Germany

    Ulrich Schmidt

  3. Department of Economics, University of Amsterdam, The Netherlands

    Peter P. Wakker

Authors
  1. Enrico Diecidue
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  2. Ulrich Schmidt
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  3. Peter P. Wakker
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Correspondence to Peter P. Wakker.

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Diecidue, E., Schmidt, U. & Wakker, P.P. The Utility of Gambling Reconsidered. Journal of Risk and Uncertainty 29, 241–259 (2004). https://doi.org/10.1023/B:RISK.0000046145.25793.37

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  • DOI: https://doi.org/10.1023/B:RISK.0000046145.25793.37

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