How Do Prior Outcomes Affect Risky Choice? Further Evidence on the House-Money Effect and Escalation of Commitment

Martin Weber and Heiko Zuchel ()
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Heiko Zuchel: Universität Mannheim, Graduiertenkolleg Allokation auf Finanz- und Gütermärkten, Postal: D-68131 Mannheim

No 01-48, Sonderforschungsbereich 504 Publications from Sonderforschungsbereich 504, Universität Mannheim, Sonderforschungsbereich 504, University of Mannheim

Abstract: In an experiment we study the influence of prior outcomes on risky choice. We document a strong framing effect. By manipulating the presentation format of the decision problem we can induce increased risk taking following a gain, i.e. the house-money effect (Thaler and Johnson 1990) or, alternatively, increased risk taking following a loss, i.e. escalation of commitment (Staw 1976). Maximization of a value function from prospect theory can explain some of our results. Escalation of commitment in our experiment does not appear to be driven by a need to justify or rationalize the initial decision.

Pages: 43 pages
Date: 2001-10-25
Note: We gratefully acknowledge financial support from the Deutsche Forschungsgemeinschaft, through SFB504 and the Graduiertenkolleg at Mannheim, and from the European Commission through the RTN
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