A Theory of Insurance and Gambling

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. 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. Nyman seeks to reorient how economists think about insurance and gambling by moving away from uncertainty as a negative motivating factor to simply a mechanical feature that allows for the augmentation of income and consumption, by moving away from biased models that ignore income effects and state dependency in evaluating the benefits from insurance and gambling, and by moving away from preferences regarding risk toward the desire to obtain additional future income.