The Utility of Gambling Reconsidered

Enrico Diecidue, Ulrich Schmidt and Peter Wakker

Journal of Risk and Uncertainty, 2004, vol. 29, issue 3, 259 pages

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.

Date: 2004
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