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Optimal Expectations and Casino Gambling

Presented by Dr. Roland Eisenhuth

Friday, April 26, 2013 3:45 PM - 5:00 PM

 OSU's School of Public Policy invites you to attend an SPP Research Colloquium seminar entitled "Optimal Expectations and Casino Gambling" to be presented by Dr. Roland Eisenhuth, who will be joining OSU's Economics Faculty next fall.

ABSTRACT: Employing a version of the model of optimal expectations introduced by Brunnermeier and Parker (2005), we explain the persistent phenomenon of risk averse agents accepting gambles with negative expected pay offs. We assume a preference structure in which an agent is divided into and receives utility from two sub agents: the advisor and executor. The executor believes, with a higher-than true probability, that the expected pay off will be positive. The advisor, who is rational, optimally sets this probability so that the agent extracts utility from both sub agents. Implications are discussed in the context of supply and demand of casino gambling and transactions costs charged by brokers in financial markets. Finally, we solve a mechanism design problem in which agents with high (low) executor weight self select into gambles that have a lower (higher) probability of a positive pay off, rationalizing why different games with different odds are offered in the same casino.

  

Fairbanks Hall (campus map)
304
Corvallis
OR
Free
Megan Chambers
1 541 737 1467
megan.chambers at oregonstate.edu
Economics Department
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