On the Impossibility of Protecting Risk‐takers

Hinnosaar, Toomas

Abstract

Risk‐neutral sellers can extract high profits from risk‐loving buyers using lotteries. To limit risk‐taking, gambling is heavily regulated in most countries. In this article, I show that protecting risk‐loving buyers is essentially impossible. Even if sellers are restricted from using mechanisms that resemble lotteries, they can still construct selling mechanisms that ensure unbounded profits as long as buyers are risk‐loving, at least asymptotically. Asymptotically risk‐loving preferences are both sufficient and necessary for unbounded profits. Buyers are asymptotically risk‐loving, for example, when they are globally risk‐loving, when they have cumulative prospect theory preferences, or when their utility is bounded from below.

Citation

Hinnosaar, T. (2018). On the Impossibility of Protecting Risk‐takers. Economic Journal, 128(611), 1531-1544. https://doi.org/10.1111/ecoj.12446

• Journal Article Type: Article
• Acceptance Date: Sep 20, 2016
• Online Publication Date: Jun 9, 2017
• Publication Date: Jun 1, 2018
• Deposit Date: Jun 22, 2020
• Publicly Available Date: Jun 22, 2020
• Journal: Economic Journal
• Print ISSN: 0013-0133
• Electronic ISSN: 1468-0297
• Publisher: Wiley
• Peer Reviewed: Peer Reviewed
• Volume: 128
• Issue: 611
• Pages: 1531-1544
• DOI: https://doi.org/10.1111/ecoj.12446
• Public URL: https://nottingham-repository.worktribe.com/output/4700094
• Publisher URL: https://academic.oup.com/ej/article-abstract/128/611/1531/5088353?redirectedFrom=fulltext
• Additional Information: This is a pre-copyedited, author-produced version of an article accepted for publication in The Econoimc Journal following peer review. The version of record Toomas Hinnosaar, On the Impossibility of Protecting Risk‐takers, The Economic Journal, Volume 128, Issue 611, 1 June 2018, Pages 1531–1544 is available online at: https://doi.org/10.1111/ecoj.12446.