Small economic gambles are insignificant when large background uncertainty is considered

The decision to buy a lottery ticket, gamble on a stock, or buy an insurance policy often comes down to an assessment of risk. How much do I have to lose or gain? For centuries, economists have debated about when somebody should take or walk away from a bet. Now, in new research from Caltech and Yale University, economists are weighing in on the conversation with new mathematical arguments that take a person’s overall uncertainty in life into account. The results show that when somebody’s overall uncertainty—or “background uncertainty”—is large enough compared to a particular small gamble, then the risk of the gamble becomes less significant.

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