Abstract
There is evidence that risk-taking behavior is influenced by prior monetary gains and losses. When endowed with house money, people become more risk taking. This paper is the first to report a house money effect in a dynamic, financial setting. Using an experimental method, we compare market outcomes across sessions that differ in the level of cash endowment (low and high). Our experimental results provide support for a house money effect. Traders’ bids, price predictions, and market prices are influenced by the amount of money that is provided prior to trading. However, dynamic behavior is difficult to interpret due to conflicting influences.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
References
Barberis, N., & Huang, M. (2001). Mental accounting, loss aversion, and individual stock returns. Journal of Finance, 56(4), 1247–1292.
Barberis, N., Huang, M., & Santos, T. (2001). Prospect theory and asset prices. Quarterly Journal of Economics, 116(1), 1–54.
Barberis, N., Huang, M., & Thaler, R. (2002). Individual preferences, monetary gambles and the equity premium, working paper, University of Chicago and Stanford University.
Battalio, R. C., Kagel, J. H., & Jiranyakul, K. (1990). Testing between alternative models of choice under uncertainty: some initial results. Journal of Risk and Uncertainty, 3(1), 25–50.
Bekaert, G., Hodrick, R. J., & Marshall, D. A. (1997). The implications of first-order risk aversion for asset market risk premiums. Journal of Monetary Economics, 40(1), 3–39.
Benartzi, S., & Thaler, R. (1995). Myopic loss aversion and the equity premium puzzle. Quarterly Journal of Economics, 110(1), 73–92.
Clark, J. (2002). House money effects in public goods experiments. Experimental Economics, 5, 223–231.
Davis, D. D., & Holt, C. A. (1993). Experimental economics. Princeton, New Jersey, Princeton University Press.
Edwards, K. D. (1996). Prospect theory: A literature review. International Review of Financial Analysis, 5(1), 19–38.
Gertner, R. (1993). Game shows and economic behavior: Risk-taking on “card sharks. Quarterly Journal of Economics, 108(2), 507–521.
Hirshleifer, D. (2001). Investor psychology and asset pricing. Journal of Finance, 56(4), 1533–1597.
Isen, A. M., & Patrick, R. E. (1983). The effect of positive feelings on risk-taking: When the Chips are Down. Organizational Behavior and Human Decision Performance, 31, 194–202.
Isen, A. M., & Geva N. (1987). The influence of positive affect on acceptable level of risk: The person with the large canoe has a large worry. Organizational Behavior and Human Decision Processes, 39, 145–154.
Kahneman, D., & Tversky, A. (1979). Prospect theory: An analysis of decision-making under risk. Econometrica, 47(2), 263–291.
Knetsch, J. L., & Sinden, J. A. (1987). The persistence of evaluation disparities. Quarterly Journal of Economics, 102(3), 691–695.
Knetsch, J. L., Tang, F.-F., & Thaler, R. H. (2001). The endowment effect and repeated market trials: Is the Vickrey Auction Demand Revealing? Experimental Economics, 4(3), 257–269.
Levy, H., & Levy, M. (2002). Experimental test of the prospect theory value function: A stochastic dominance approach. Organizational Behavior and Human Decision Processes, 89, 1058–1081.
Myagkov, M., & Plott, C. R. (1997). Exchange economies and loss exposure: Experiments exploring prospect theory and competitive equilibria in market environments. American Economic Review, 87(5), 801–828.
Rabin, M., & Thaler, R. H. (2001). Anomalies: Risk aversion.” Journal of Economic Perspectives, 15(1), 219–232.
Smith, V. (1994). Economics in the laboratory. Journal of Economic Perspectives, 8(1), 113–131.
Thaler, R., & Johnston, E. J. (1990). Gambling with the house money and trying to break even: The effects of prior outcomes on risky choice. Management Science, 36, 643–660.
Tversky, A., & Kahneman, D. (1981). The framing of decisions and the psychology of choice. Science, 211, 453–458.
Tversky, A., & Kahneman, D. (1992). Advances in prospect theory: Cumulative representation of uncertainty. Journal of Risk and Uncertainty, 5(4), 297–323.
Vickrey, W. (1961). Conterspecualtion, auctions, and competitive sealed tenders. Journal of Finance, 16, 8–37.
Wakker, P. P. (2003). The data of levy and levy (2002). ‘prospect theory: Much ado about nothing?’ Actually support prospect theory. Management Science, 49(7), 979–981.
Author information
Authors and Affiliations
Corresponding author
Additional information
JEL Classification C91 · C92 · D80
The views expressed here are those of the authors and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System.
Rights and permissions
About this article
Cite this article
Ackert, L.F., Charupat, N., Church, B.K. et al. An experimental examination of the house money effect in a multi-period setting. Exp Econ 9, 5–16 (2006). https://doi.org/10.1007/s10683-006-1467-1
Received:
Revised:
Accepted:
Issue Date:
DOI: https://doi.org/10.1007/s10683-006-1467-1