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A mathematically fair bet: Is gambling irrational

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A mathematically fair bet is one in which the amount won will on average equal the amount bet,for example, when a gambler bets say, $100 for a 10 percent chance to win $1000 ($100=.10x$1000). Assuming diminishing marginal utility of dollars, explain why this is not a fair bet in terms of utility. Why is it even a less fair bet when the house takes a cut of each dollar bet? So is gambling irrational?

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Solution Summary

This solution discusses why a certain bet may not be fair in terms of utility, and discusses the irrationality of gambling in this case.

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The first dollar that we get is worth more to us than the last dollar. This is called the diminishing marginal utility for money. A very poor person values a dollar highly, while to the rich a ...

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