Journal Article

Windfall Gains and House Money: The Effects of Endowment History and Prior Outcomes on Risky Decision-making

Autoren

  • Hauke Jelschen
  • Ulrich Schmidt
Erscheinungsdatum

In a seminal contribution, Thaler and Johnson (1990) detected the existence of a house money effect which is defined as an increase in risk tolerance after previous gains resulting from a risky activity. Subsequent studies used the term house money effect also in case of windfall gains, i.e., easily acquired money like show-up fees or initial endowments in experiments which does not result from a risky investment. The present study is to the best of our knowledge the first that disentangles the house money effect and windfall gains. We find a clear and systematic pattern that windfall gains increase risk tolerance. In contrast, the house money effect is far less ubiquitous and seems to require skewed lotteries and/or a large number of rounds played. We, therefore, conclude that a careful distinction between windfall gains and the house money effect is warranted in future research.

Experte IfW Kiel

Info

JEL Classification
C91, D81
DOI
10.1007/s11166-023-09411-5

Schlagworte

  • House money effect
  • Windfall gains
  • Risk aversion
  • Quasi-hedonic editing
  • Prospect theory