Economics and Gambling

The subject of gambling is much discussed in the contemporary popular press and literature. The level of interest is especially keen because of the apparent worldwide trend toward the legalization of various heretofore illegal forms of wagering.

Social scientists offer various explanations for this trend, related primarily to the individual’s desire for entertainment, excitement, and risk or to the growing acceptance of the libertarian advocacy of personal as well as economic freedom. While this trend certainly has implications for the social, psychological, and economic fabric of society, it is the latter consideration that has been the major force behind legalization. State and local governments in the United States and abroad are attracted to legalization by the lure of revenues that the relaxation of existing prohibitions against gambling will allow.

The major counterforce against legalization centers on fears of increased crime and the corresponding increased need for law enforcement that would inevitably result. Although some would argue against legalization on purely moral grounds (not all religious leaders are agreed on this point, there will be no attempt to deal with this latter position here. Rather, this article considers some of the economic aspects of gambling, both from a micro- and macroeconomic perspective.

We can look at gambling from the point of view of the individual. Who is the typical gambler? Why do individuals undertake high risk wagers? These two questions are useful in addressing the related issue of the regressive effects of gambling. We look at various forms of gambling and consider each as a potential source of revenue. Brief attention is given to the relation between illegal and legal forms of gambling.

Both of these areas serve as background for assessment of the validity of current arguments promoting gambling legalization. The more theoretical arguments for and against this move then are compared to available data from legalized operations. Finally, the current experience of Atlantic City, New Jersey, is used to weigh the costs and benefits of legalized gambling and to consider the potential of the legalization trend.

The questions of who is the typical gambler and why individuals gamble are actually related issues. Gambling can be viewed as a form of risk preference and treated as an aspect of economic decision making under a situation of uncertainty. The economic literature suggests two primary explanations for individual involvement in wagers that have less than favorable odds.

The first position can be traced to the eighteenth century, as postulated by economist Adam Smith. Simply stated, it is that, influenced somewhat by conceit, a risk-averse individual will incorrectly compute the true probability of winning by underestimating the chance of a loss and overestimating the chance of winning. The second argument involves the concept of the increasing marginal utility of money. While this position may be traced to William Vickery in 1945, the first formal and now much cited development of the idea is credited to Friedman and Savage.

The notion that the gambler could be a utility maximizer had previously not been feasible, because with the decreasing marginal utility of money, the utility lost as a result of an unsuccessful wager would be greater than the possible utility gained from a gambling payoff.

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