Windfall gains and house money: The effects of endowment history and prior outcomes on risky decision–making

Hauke Jelschen () and Ulrich Schmidt
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Hauke Jelschen: University of Kiel
Ulrich Schmidt: University of Kiel

Journal of Risk and Uncertainty, 2023, vol. 66, issue 3, No 1, 215-232

Abstract: Abstract 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.

Keywords: House money effect; Windfall gains; Risk aversion; Quasi-hedonic editing; Prospect theory; C91; D81 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s11166-023-09411-5

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