Overview

"In 1948, Milton Friedman and L. J. Savage suggested that risk preferences explain the demand for insurance and gambling--a theory that is still almost universally accepted by economists today. If you were to ask almost any economist why people purchase insurance, they would say it is because most people are ""risk averse,"" or equivalently, ""prefer certainty of losses."" If asked to explain why people gamble, they would say it is because some people are ""risk seekers."" In A Theory of Insurance and Gambling, John A. Nyman critiques this approach and proposes a new theory of the motivations for insurance and gambling. He argues that demand for insurance and gambling is best understood by focusing not on risk preferences, but on the income transfer, the states of the world that trigger the income transfer, and the value of the income in those states. In other words, insurance is motivated by a preference to transfer income to future states of the world where income is more valuable. Gambling, on the other hand, is motivated by a preference to transfer income to future states of the world where additional income is less costly to obtain. Nyman ultimately seeks to reorient how economists think about insurance and gambling by moving away from seeing uncertainty as a negative motivating factor to simply a mechanical feature that allows for the augmentation of income and consumption. He moves away from biased models that ignore income effects and state dependency when evaluating the benefits from insurance and gambling, and away from preferences regarding risk toward the desire to obtain additional future income. Presenting the case that risk preferences do not motivate demand for insurance or gambling, A Theory of Insurance and Gambling calls into question a fundamental tenet of economic thinking."

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9780197687925

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Reviews

Why do we insure...and gamble? John Nyman has a novel and compelling perspective. Forget risk; think about what influences the value of income. The implications are wider and deeper than you might expect. This is an important contribution. * David de Meza, Eric Sosnow Professor of Management, London School of Economics * Nyman's A Theory of Insurance and Gambling builds on his groundbreaking analysis of the demand for and welfare effects of health insurance, extending it to insurance in general and to unidentified parallels between the demand for insurance and the demand for gambling. In each area he provides a compelling critique of conventional theories, grounded in empirical evidence, while offering alternative models and insights that align with both intuition and evidence. This is an important book for anyone interested in insurance and gambling. * Jeremiah Hurley, Professor of Economics, McMaster University *

Author Information

John A. Nyman is Professor Emeritus of Health Policy and Management in the School of Public Health at the University of Minnesota. His over 150 research articles include important analyses of topics as diverse as: the effect of excess demand on the quality of nursing home care, the need for consistency in cost-effectiveness analyses, the effectiveness of health promotion programs in the workplace, the impact of attrition bias in the RAND Health Insurance Experiment, and alternative explanations for the St. Petersburg paradox and the gambler's fallacy. In addition to these, he is the author of a number of research articles on insurance and gambling, and the book, The Theory of Demand for Health Insurance (Stanford University Press, 2003).

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