A Theory of the Gambling Effect

This paper presents a model for the "gambling effect," i.e., the effect that risky gambles are evaluated differently than riskless outcomes due to an intrinsic utility (or disutility) of gambling. The model turns out to violate stochastic dominance and therefore its primary applications will be descriptive. It sheds new light on empirical observations of risk attitudes and provides new insights into the distinction between risky and riskless utility