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A violation of dominance and the consumption value of gambling

A violation of dominance and the consumption value of gambling
A violation of dominance and the consumption value of gambling
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.
violation of dominance, gambling, probit estimation
0894-3257
19-36
Johnson, Johnnie E.V.
6d9f1a51-38a8-4011-a792-bfc82040fac4
O'Brien, Raymond
eb900f99-c6d4-4ee6-99aa-d490729caa0e
Shin, Hyun Song
0cc1074f-2fda-42b0-a662-821686e259d2
Johnson, Johnnie E.V.
6d9f1a51-38a8-4011-a792-bfc82040fac4
O'Brien, Raymond
eb900f99-c6d4-4ee6-99aa-d490729caa0e
Shin, Hyun Song
0cc1074f-2fda-42b0-a662-821686e259d2

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

Record type: Article

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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More information

Published date: 1999
Keywords: violation of dominance, gambling, probit estimation
Organisations: Management

Identifiers

Local EPrints ID: 36428
URI: http://eprints.soton.ac.uk/id/eprint/36428
ISSN: 0894-3257
PURE UUID: 4b10d57f-6109-4c6c-b581-64e1e7110199

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Date deposited: 01 Aug 2006
Last modified: 15 Jul 2019 19:04

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