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GAMBLING IN CONTESTS WITH REGRET
Author(s) -
Feng Han,
Hobson David
Publication year - 2016
Publication title -
mathematical finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.98
H-Index - 81
eISSN - 1467-9965
pISSN - 0960-1627
DOI - 10.1111/mafi.12069
Subject(s) - contest , victory , regret , mathematical economics , context (archaeology) , economics , computer science , value (mathematics) , microeconomics , political science , paleontology , machine learning , politics , law , biology
This paper discusses the gambling contest introduced in Seel and Strack (2013, Gambling in Contests, Journal of Economic Theory , 148(5), 2033–2048) and considers the impact of adding a penalty associated with failure to follow a winning strategy. The Seel and Strack model consists of n ‐agents each of whom privately observes a transient diffusion process and chooses when to stop it. The player with the highest stopped value wins the contest, and each player's objective is to maximize her probability of winning the contest. We give a new derivation of the results of Seel and Strack based on a Lagrangian approach. Moreover, we consider an extension of the problem to a behavioral finance context in the sense of regret theory. In particular, an agent is penalized when her chosen strategy does not win the contest, but there existed an alternative strategy that would have resulted in victory.