Skewness as an explanation of gambling by locally risk averse agents

Abstract

Within the expected utility framework skewness of return has been suggested as a rationale for why risk averse gamblers might choose to gamble when expected returns are negative. The argument is that risk-averse agents desire positive skewness, ceteris paribus, and are prepared to trade off a lower mean return for more skewness. This article demonstrates with a counter example that this argument is, in general, erroneous.