The Insurance-Purchasing Gambler

Abstract

Abstract This chapter reviews some of the standard explanations of the insurance-purchasing gambler. These explanations, and others that are less well-known, are all versions of the conventional theory because they all accept the assumption that consumers are generally averse to risk, as captured by a utility function that is increasing at a decreasing rate. Because of that, consumers should purchase insurance but not gamble. Accepting risk aversion as a premise for their models, authors of these explanations then propose various reasons why consumers might overcome this natural tendency to avoid risk, and gamble. In contrast, the quid pro quo theory suggests that those who purchase insurance and gamble simultaneously have different goals, unrelated to risk preferences. Thus, there is no puzzle to explain with the quid pro quo theory.

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