Gambling with the House Money and Trying to Break Even: The Effects of Prior Outcomes on Risky Choice

Richard Thaler and Eric J. Johnson
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Eric J. Johnson: The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104-6371

Management Science, 1990, vol. 36, issue 6, 643-660

Abstract: How is risk-taking affected by prior gains and losses? While normative theory implores decision makers to only consider incremental outcomes, real decision makers are influenced by prior outcomes. We first consider how prior outcomes are combined with the potential payoffs offered by current choices. We propose an editing rule to describe how decision makers frame such problems. We also present data from real money experiments supporting a "house money effect" (increased risk seeking in the presence of a prior gain) and "break-even effects" (in the presence of prior losses, outcomes which offer a chance to break even are especially attractive).

Keywords: decision making; prospect theory; sunk costs; mental accounting (search for similar items in EconPapers)
Date: 1990
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:36:y:1990:i:6:p:643-660

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