Extreme Events and the Cumulative Distribution of Net Gains in Gambling and Structured Products

Abstract

We argue that ethical principles in advertising and market communication cannot be properly discovered and applied to gambling without a deep understanding of its probabilistic implications, in particular when extreme events are influential. We carry out a probabilistic analysis of lottery games with lifetime prizes in order to derive sound recommendations about the pertinent information that should be communicated to nudge gamblers. We propose to focus on the cumulative distribution of net gains, for which there is currently no information available to gamblers. This holds true for structured products in which extreme events matter as well.

Keywords: Extreme events, ethical communication, distribution of gains, simulations, gambling, lotteries, structured products

JEL Classification: G00