TY  - JOUR
AU  - Barberis,Nicholas C.
TI  - A Model of Casino Gambling
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 14947
PY  - 2009
Y2  - May 2009
UR  - http://www.nber.org/papers/w14947
L1  - http://www.nber.org/papers/w14947.pdf
N1  - Author contact info:
Nicholas C. Barberis
Yale School of Management
135 Prospect Street
P O Box 208200
New Haven, CT 06520-8200
Tel: 203/436-0777
Fax: 203/432-6970
E-Mail: nick.barberis@yale.edu
AB  - 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.
ER  -