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Can expected utility theory explain gambling?

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  • Roger Hartley
  • Lisa Farrell

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.

Suggested Citation

  • Roger Hartley & Lisa Farrell, 2002. "Can expected utility theory explain gambling?," Open Access publications 10197/539, School of Economics, University College Dublin.
    • Handle: RePEc:ucn:oapubs:10197/539
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    File URL: http://hdl.handle.net/10197/539
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    References listed on IDEAS

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    More about this item

    Keywords

    Expected utility theory; Gambling; Time preference; Utility theory; Time and economic reactions; Gambling;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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