Can expected utility theory explain gambling?
Roger Hartley and
Lisa Farrell (lisa.farrell@rmit.edu.au)
Open Access publications from School of Economics, University College Dublin
Abstract:
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.
Keywords: Expected utility theory; Gambling; Time preference; Utility theory; Time and economic reactions; Gambling (search for similar items in EconPapers)
Pages: 12 pages
Date: 2002-06
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Citations: View citations in EconPapers (37)
Published in: American Economic Review, 92(3) 2002-06
Downloads: (external link)
http://hdl.handle.net/10197/539 Open Access version, 2002 (application/pdf)
Related works:
Journal Article: Can Expected Utility Theory Explain Gambling? (2002)
Working Paper: Can Expected Utility Theory Explain Gambling? (1998)
Working Paper: Can Expected Utility Theory Explain Gambling?
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