Why do People Buy Lottery Tickets? Choices Involving Risk and the Indivisibility of Expenditure

UNDER the assumptions that, first, the pleasures of gambling may be neglected and, second, the marginal utility of income is diminishing, it can easily be shown that fair gambling is an economic blunder.2 Thus, the fact that people engage in unfair as well as fair gambles is clearly inconsistent either with utility maximization or with the assumption of diminishing marginal utility. Marshall resolved this contradiction by rejecting utility maximization as an explanation of choices involving risk. Milton Friedman and L. J. Savage pointed out that Marshall need not have done so, and suggested the hypothesis that marginal utility successively decreases, increases, and decreases; the total utility-curve being concave from above in the neighborhood of actual income and convex from above for higher and lower incomes.' While not challenging the validity of their analysis, this note suggests an alternative resolution of the problem, which rests on the indivisibility of expenditure and its influence on the utility function of the consumer unit.