A violation of dominance and the consumption value of gambling

Johnson, Johnnie E.V., O'Brien, Raymond and Shin, Hyun Song (1999) A violation of dominance and the consumption value of gambling. The Journal of Behavioural Decision Making, 12 (1), 19-36. (doi:10.1002/(SICI)1099-0771(199903)12:1<19::AID-BDM307>3.0.CO;2-B).

Abstract

We document an apparently widespread violation of dominance in the horse-racing 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.

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