The Theory of Insurance and Gambling: Replacing Risk Preferences with Quid pro Quo
45 Pages Posted: 21 Apr 2021
Date Written: April 19, 2021
This paper suggests insurance represents a quid pro quo transaction across states of the world and is purchased to transfer income to a state where it is more valued. It also suggests that gambling represent a similar quid pro quo transaction across states but that consumers gamble to transfer income to a state where it is less costly to obtain. In both cases, preferences regarding uncertainty do not motivate demand, but uncertainty allows for the augmentation of the payout compared to the premium or wager. These motivations do not conflict with evidence supporting prospect theory and accommodate the insurance-purchasing gambler. The implications are that insurance is far more valuable than conventional theory suggests, and that recreational gambling may also be more valuable.
Keywords: insurance, gambling, quid pro quo, risk preferences, insurance buying gambler
JEL Classification: D11, D81, G22
Suggested Citation: Suggested Citation