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Pre-Decision Side-Bet Sequences

Research output: Contribution to Journal/Magazine › Journal article › peer-review

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Pre-Decision Side-Bet Sequences. / Kaivanto, Kim Kaleva; Peel, David Alan.
In: Economics Bulletin, Vol. 39, No. 1, 16.03.2019, p. 533-539.

Research output: Contribution to Journal/Magazine › Journal article › peer-review

Harvard

Kaivanto, KK & Peel, DA 2019, 'Pre-Decision Side-Bet Sequences', Economics Bulletin, vol. 39, no. 1, pp. 533-539. <http://www.accessecon.com/Pubs/EB/2019/Volume39/EB-19-V39-I1-P53.pdf>

APA

Kaivanto, K. K., & Peel, D. A. (2019). Pre-Decision Side-Bet Sequences. Economics Bulletin, 39(1), 533-539. http://www.accessecon.com/Pubs/EB/2019/Volume39/EB-19-V39-I1-P53.pdf

Vancouver

Kaivanto KK, Peel DA. Pre-Decision Side-Bet Sequences. Economics Bulletin. 2019 Mar 16;39(1):533-539.

Author

Kaivanto, Kim Kaleva ; Peel, David Alan. / Pre-Decision Side-Bet Sequences. In: Economics Bulletin. 2019 ; Vol. 39, No. 1. pp. 533-539.

Bibtex

@article{6f1ded0ec9924a829b95a8e64272e3b9,
title = "Pre-Decision Side-Bet Sequences",
abstract = "Risk-averse Expected Utility (EU) decision makers with wealth-dependent utility functions may find themselves indifferent between accepting and rejecting an indivisible risky prospect. Bell (1988) showed that under these circumstances it may be EU-enhancing for the decision maker to engage in an actuarially fair pre-decision side bet, accepting the indivisible risky prospect conditional upon winning the side bet. In this letter we show that decision makers restricted to actuarially unfair side bets may optimally engage in a sequence of individually EU-enhancing side bets. This contrasts with the case of actuarially fair side bets where only one such bet will be undertaken. The actuarially unfair side bet's optimal stake size can be a significant proportion of the individual's initial wealth. Nevertheless after losing the side bet wealth may still remain within the interval of interim (utility) convexity, whereupon it is optimal to place another side bet.",
keywords = "expected utility, risk aversion, side bets, rationality, indivisibility, discreteness, actuarial fairness",
author = "Kaivanto, {Kim Kaleva} and Peel, {David Alan}",
year = "2019",
month = mar,
day = "16",
language = "English",
volume = "39",
pages = "533--539",
journal = "Economics Bulletin",
issn = "1545-2921",
publisher = "Economics Bulletin",
number = "1",

}

RIS

TY - JOUR

T1 - Pre-Decision Side-Bet Sequences

AU - Kaivanto, Kim Kaleva

AU - Peel, David Alan

PY - 2019/3/16

Y1 - 2019/3/16

N2 - Risk-averse Expected Utility (EU) decision makers with wealth-dependent utility functions may find themselves indifferent between accepting and rejecting an indivisible risky prospect. Bell (1988) showed that under these circumstances it may be EU-enhancing for the decision maker to engage in an actuarially fair pre-decision side bet, accepting the indivisible risky prospect conditional upon winning the side bet. In this letter we show that decision makers restricted to actuarially unfair side bets may optimally engage in a sequence of individually EU-enhancing side bets. This contrasts with the case of actuarially fair side bets where only one such bet will be undertaken. The actuarially unfair side bet's optimal stake size can be a significant proportion of the individual's initial wealth. Nevertheless after losing the side bet wealth may still remain within the interval of interim (utility) convexity, whereupon it is optimal to place another side bet.

AB - Risk-averse Expected Utility (EU) decision makers with wealth-dependent utility functions may find themselves indifferent between accepting and rejecting an indivisible risky prospect. Bell (1988) showed that under these circumstances it may be EU-enhancing for the decision maker to engage in an actuarially fair pre-decision side bet, accepting the indivisible risky prospect conditional upon winning the side bet. In this letter we show that decision makers restricted to actuarially unfair side bets may optimally engage in a sequence of individually EU-enhancing side bets. This contrasts with the case of actuarially fair side bets where only one such bet will be undertaken. The actuarially unfair side bet's optimal stake size can be a significant proportion of the individual's initial wealth. Nevertheless after losing the side bet wealth may still remain within the interval of interim (utility) convexity, whereupon it is optimal to place another side bet.

KW - expected utility

KW - risk aversion

KW - side bets

KW - rationality

KW - indivisibility

KW - discreteness

KW - actuarial fairness

M3 - Journal article

VL - 39

SP - 533

EP - 539

JO - Economics Bulletin

JF - Economics Bulletin

SN - 1545-2921

IS - 1

ER -