A Model of Casino Gambling

45 Pages Posted: 13 May 2009 Last revised: 5 Nov 2022

See all articles by Nicholas Barberis

Nicholas Barberis

National Bureau of Economic Research (NBER); Yale School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: May 2009

Abstract

We show that prospect theory offers a rich theory of casino gambling, one that captures several features of actual gambling behavior. First, we demonstrate that, for a wide range of preference parameter values, a prospect theory agent would be willing to gamble in a casino even if the casino only offers bets with no skewness and with zero or negative expected value. Second, we show that the probability weighting embedded in prospect theory leads to a plausible time inconsistency: at the moment he enters a casino, the agent plans to follow one particular gambling strategy; but after he starts playing, he wants to switch to a different strategy. The model therefore predicts heterogeneity in gambling behavior: how a gambler behaves depends on whether he is aware of the time inconsistency; and, if he is aware of it, on whether he can commit in advance to his initial plan of action.

Suggested Citation

Barberis, Nicholas and Barberis, Nicholas, A Model of Casino Gambling (May 2009). NBER Working Paper No. w14947, Available at SSRN: https://ssrn.com/abstract=1401792

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