The house money effect and local traders on the Sydney Futures Exchange

Abstract

The “house money effect” describes the psychological tendency of investors to become increasingly risk-seeking immediately following monetary gains. We observe evidence consistent with this behavioral bias in the trades executed by professional futures traders (“locals”) on the Sydney Futures Exchange (SFE). Previous research demonstrates the house money effect among participants in laboratory settings but not among actual traders. By distinguishing qualitatively between gains and losses, rather than treating these as merely positive and negative values of a single psychological driver, we test for loss aversion and the house money effect simultaneously. Contrary to previous studies, no significant evidence is found of loss aversion.