On the impossibility of protecting risk-takers

Toomas Hinnosaar

No 404, Carlo Alberto Notebooks from Collegio Carlo Alberto

Abstract: Risk-neutral sellers can extract high profits from risk-loving buyers by selling them lotteries. To limit this problem, gambling is heavily regulated in most countries. I show that protecting risk-loving buyers against profit-maximizing sellers is essentially impossible. Even if buyers are risk-loving in the weakest sense, the seller can construct a nonrandom winner-pays auction that ensures unbounded profits. The result holds even if the seller cannot use any mechanism that resembles a lottery and only requires that buyers are asymptotically risk loving. This condition is satisfied, for example, when preferences satisfy Savage’s axioms or with prospect theory preferences.

Keywords: risk-loving agents; auctions; gambling; prospect theory (search for similar items in EconPapers)
JEL-codes: C72 D44 D81 D82 (search for similar items in EconPapers)
Pages: 11 pages
Date: 2015
New Economics Papers: this item is included in nep-cta, nep-gth, nep-mic and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:cca:wpaper:404

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