Page 404 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Unit-28: Economics of Risk and Uncertainty

Individual Attitudes to Gambling Notes

There are three types of behaviour of a person about gambling which depend on accept or reject of
favors gambling.

Risk Neutral

A risk neutral person is gambler of playing more and more and whose purpose is to maximize his
money by wining gambling. He only thinks about expected value of bet. It is so that when a coin keeps
jumping more then average return is its expected value.
It is shown in Fig. 28.4 in which points A and B are equal expected value and they are attracted equally
for gambling who play more and more. Suppose gambler has 100 to bet and it has 50% probability to
come head and 50% to tail then point A is expected price of gambling.

E = 0.50 ( 100) + 0.50 ( 100)
v
= 50 + 50 = 100

Expected value of gambling at point B

E = 0.50 ( 80) + 0.50 ( 120)
v
40 + 60 = 100

Fig. 28.4

`
120
100 A
B
80
Tail 60
40 C
20
0
20 40 60 80 100120 140160 `
Head

Therefore, on point C and on other points if he continues to jump the coin then the average will 100.
A risk neutral gambler is neutral on fair odds. It is because he can differentiate in risk of gambling
and in long run, he will win expected price. He will play on favourable odds and will not play on
unfavourable odds.

Risk Loving

A risk loving person is ready to play gambling even if probabilities are not in his favour. It will like high
risk alternatives of gambling of equal expected value. He will take risk even he looses, even when it is
not in his favour. It is shown in Fig. 28.5. Where concave neutral curve of gamblers are I , I , I which
2
3
1
show different alternatives of choices. For TH line (Budget line) it is its money.

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