Gambling presents an interesting challenge for economic theory. If, as we assume, most people are risk averse then gambling for the sake of gambling contradicts our theory of utility maximization. If, however, gambling provides some form of entertainment then it may not contradict our theory.
When visiting a casino, purely for research purposes, we witness people engaged in social activity while playing blackjack, roulette and the slots. This may lead us to believe that the money spent at a casino is really no different than money spent at a movie theater. It is a form of entertainment.
It has been argued that rational, risk-averse individuals purchase lottery tickets, knowing full well that the chances of winning are less than one in 14 million, because it provides them the opportunity to dream of what they could do with a multimillion dollar prize.(For us that would be a house near Mile 0 in the Conch Republic)
There is yet another form of gambling which we typically call insurance. There is a positive probability that I will become sick or injured when I visit the United States and I place a bet that that will happen. The amount of the wager is the premium on my travel insurance policy. If I am wrong then I lose my wager and stay healthy. If I am correct I win the bet and the insurance company has to cover my costs.
Which is why Canucks fans should bet on Chicago in game seven. If the Canucks win they move on to the next round and fans will be ecstatic and won't care that they lost the bet. If Chicago wins Canuck fans will be devastated, but the pain will be partially offset by the winnings they receive from betting on Chicago. In this case a sports wager is an insurance policy.
Go Canucks go!!!
Monday, April 25, 2011
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