The Theory of Insurance and Gambling: Replacing Risk Preferences with Quid pro Quo

45 Pages Posted: 21 Apr 2021

See all articles by John A. Nyman

John A. Nyman

University of Minnesota - Twin Cities - Division of Health Policy and Management

Date Written: April 19, 2021

Abstract

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

Nyman, John A., The Theory of Insurance and Gambling: Replacing Risk Preferences with Quid pro Quo (April 19, 2021). Available at SSRN: https://ssrn.com/abstract=3830874 or http://dx.doi.org/10.2139/ssrn.3830874

John A. Nyman (Contact Author)

University of Minnesota - Twin Cities - Division of Health Policy and Management ( email )

Division of Health Services Research
516 Delaware St SE
Minneapolis, MN 55455
United States
651 303 4932 (Phone)
612-624-2196 (Fax)

HOME PAGE: http://www.sph.umn.edu/Faculty/Nyman.htm

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