The Utility of Gambling Reconsidered
- Cite this article as:
- Diecidue, E., Schmidt, U. & Wakker, P.P. Journal of Risk and Uncertainty (2004) 29: 241. doi:10.1023/B:RISK.0000046145.25793.37
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.