A Model of Casino Gambling

Nicholas C. Barberis

No 14947, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We show that prospect theory offers a rich theory of casino gambling, one that captures several features of actual gambling behavior. First, we demonstrate that, for a wide range of preference parameter values, a prospect theory agent would be willing to gamble in a casino even if the casino only offers bets with no skewness and with zero or negative expected value. Second, we show that the probability weighting embedded in prospect theory leads to a plausible time inconsistency: at the moment he enters a casino, the agent plans to follow one particular gambling strategy; but after he starts playing, he wants to switch to a different strategy. The model therefore predicts heterogeneity in gambling behavior: how a gambler behaves depends on whether he is aware of the time inconsistency; and, if he is aware of it, on whether he can commit in advance to his initial plan of action.

JEL-codes: D03 D81 (search for similar items in EconPapers)
Date: 2009-05
New Economics Papers: this item is included in nep-evo
Note: AP
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Citations: View citations in EconPapers (3)

Published as "A Model of Casino Gambling", Management Science 58, 35-51, January 2012 (Special Issue on Behavioral Economics).

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