Utility theory and participation in unfair lotteries
Abstract
Since the development of the expected utility maxim by von Neumann and
Morgenstern [2], attempts have been made to provide a rational explanation
for the observed behavior of individuals under uncertainty. One aspect of
such behavior which will concern us in the paper is the willingness of an
individual to purchase insurance and lottery tickets. In this connection it has
been pointed out that there is an inconsistency between the usual assumption
of risk aversion by individuals and their participation in fair and even unfair
lotteries. A fair lottery will never be undertaken by an individual with a
concave utility function for wealth which implies risk aversion. However, the
purchase of insurance is consistent with such a utility function.
Collections
- Journal Articles [3698]