A violation of dominance and the consumption value of gambling

✍ Scribed by Johnnie E. V. Johnson; Raymond O'Brien; Hyun Song Shin

• Publisher: John Wiley and Sons
• Year: 1999
• Tongue: English
• Weight: 385 KB
• Volume: 12
• Category: Article
• ISSN: 0894-3257
• DOI: 10.1002/(sici)1099-0771(199903)12:1<19::aid-bdm307>3.0.co;2-b

✦ Synopsis

We document an apparently widespread violation of dominance in the horseracing betting market in the UK, and use the systematic variation in the incidence of this violation to estimate the consumption value of gambling. Betting-shop gamblers in the UK face a tax on gambling of 10%, but have the choice of paying the tax either at the time of wager or on any return on a successful bet. It can be shown, however, that the latter act is strictly dominated by another action in which tax is paid on the wager. Despite this, more than 18% of bets appear to be placed by gamblers who choose to pay tax on the return. We explore the hypothesis that this apparent violation of rationality may be explained by a component of utility which represents the consumption value of gambling, which in turn varies with the amount wagered. We then estimate this component from a dataset consisting of a record of 25,000 individual bets using probit analysis of the tax decision.