House Money Effect Research Articles

Cognitive ability and the house money effect in public goods games

I experimentally investigate the relation of endowment origin, cognitive abilities (as measured by the Cognitive Reflection Test, CRT), and co-operation in a one-shot linear public goods game. The results show that subjects’ contributions depend on an interplay of cognitive abilities and endowment origin. A house money effect exists only for subjects with low CRT scores. They contribute more when income was allocated to them and less when income was obtained by effort. In contrast, subjects with high CRT scores contribute the same amount independent of income type. The findings have implications for redistribution, team production, and experimental designs.

사과 실험경매에서 값싼 대화는 공돈 효과를 제거할 수 있는가?

In the experimental auction, participation fees can cause a house money effect that makes the value of the product higher than the actual value. The purpose of this study is to analyze whether the house money effect can be eliminated in experimental auctions by applying cheap talk used in contingent valuation and choice experiment to reduce hypothetical bias. For the analysis, an experimental auction is conducted by organizing five different auction products depending on whether or not to provide information on the taste of apples, method, color, and sugar content. The number of experimental groups is 8, and four groups provide a cheap talk, and four groups do not. The number of bidders per group is about 15, and the number of rounds is 9. The results show that it has been empirically verified that cheap talk can eliminate the house money effect. The results also indicate that as the auction round progresses, the younger the age or the lower the education level, the greater the effect of removing the house money effect of the cheap talk. Since cheap talk is easily applicable and effective, the use of cheap talk is recommended in studies using experimental auction.

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

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.

Gambling preference and entity corporate financialization: evidence from China

ABSTRACT We use a sample of Chinese firms to examine the impact of local gambling preference on corporate financialization. Our findings suggest that when a firm is located in a region with stronger gambling preference, it commits more corporate financialization. Specifically, strong opportunism and high risk-taking ability are the main mechanisms. In addition, we provide evidence based on gambling psychology that ‘house money effect’ and ‘break-even effect’ strengthen the positive relationship between gambling preference and entity corporate financialization.

How do free-play offers affect gambling behavior?

PurposeThis study aims to understand how free-play credits affect risk-seeking behavior in slot players. Extant results suggest they encourage risk aversion, counter to the primary aim of increasing spend per visit. The results inform operators as to the effectiveness of what has become the primary play incentive for casino marketers within many of the world’s markets.Design/methodology/approachWithin a quasi-experimental grouped design, 365 days of player-level performance data from four different casinos were analyzed to determine whether player losses (casino revenues) and time played differed on visits that included free-play redemptions from those that did not. Hypotheses were tested via paired-samples t-tests and Mann–Whitney U tests.FindingsOn balance, neither player losses nor time played were significantly different on the free-play visits. Neither the house money effect nor the endowment effect was supported. The results were most consistent with the prospect-theory-with-memory editing rule. No findings indicated increased risk-seeking behavior associated with the free-play offers.Practical implicationsCasino operators are afforded insight related to how costly free-play campaigns affect gaming spend and playtime. Both are critical to understanding the impact of free-play on the gambler’s experience.Originality/valueThe 365-day samples extended existing research by analyzing the impact of free-play offers on risk-taking behaviors within the scope of a perpetual/ongoing campaign. Comparisons of observed daily behavior/outcomes were made between separate tiers of like-kind gamblers from each of four different casinos. Quasi-hedonic editing rules were applied to a multistage decision framework.

Correction to: Experimental (re-)analysis of the house-money effect in a public goods game

Correction to: Experimental (re-)analysis of the house-money effect in a public goods game

Experimental (re-)analysis of the house-money effect in a public goods game

Experiments in economics usually provide subjects with starting capital to be used in the experiment. This practice could affect decisions as there is no risk of loss. This phenomenon is known as the house-money effect. In a repeated public goods game, we test for house-money effects by paying subjects in advance an amount they could lose in the experiment. We do not find evidence of a house-money effect over time.

An Analysis of the Experimental Design of “My Money or Yours: House Money Payment Effects''

Considering the expanding usage of experiments in Economics, the present article chooses one published paper in the area, dealing with the house money effect and analyzes it in a didactic way as concepts relating to the experimental design of lab experiments are evoked and discussed. In order to do so, three sections are outlined. First of all, the house money effect is explained and the article under scrutiny is placed in the context of what had already been done before; secondly, some of the experimental design concepts are summarised and then applied to soundly describe the experimental design of their experiment. Finally, after briefly presenting their results, there is an analytical overview of what has been done after their work and a personal take on possible lines for further research.

Examining the Risk Behaviors of Individuals with Ultimatum Game within the Framework of House Money Effect

Examining the Risk Behaviors of Individuals with Ultimatum Game within the Framework of House Money Effect

The Impact of Free-Play: A Longitudinal Study of Trip-Level Visitation and Wagering Behavior

The aim of this study was to understand the impacts of changes in free-play (FP) award values on visitation frequency and gaming revenue. With costly and perpetual FP campaigns well established in many markets, a critical issue for operators centers on the potential consequences of walking back offer values, especially when nearby competitors do not. The results of experimentally manipulated FP offers suggested that widely held industry beliefs about their ability to influence visitation are equivocal. Additional outcomes related to the economic impact of FP awards across the experimental groups also questioned the sensitivity of loyalty club members to reductions in FP offers. Working from a common offer tier of 600 loyalty club members, subjects were randomly assigned to one of six groups, each comprised of 100 subjects. Daily group-level outcomes were produced by aggregating player performance data over a 191-day sample period, collected from the records of a tribal casino operating in a competitive repeater market. This longitudinal design allowed for the measurement of multiple levels of FP offers on visitation behavior and gaming value, over a meaningful duration. Our findings fill gaps in the literature related to the impacts of FP on visitation frequency and the ability to drive own-money wagering. Our results also add to literature within the domains of operant conditioning, goal gradient theory, and a growing stream of research on FP efficacy. There are also connections to the house money effect, reverse house money effect, and the endowment effect.

Risk management for individual traders in financial market

When participating in the financial market, few investors can sustainably succeed in the market, most of them often make psychological mistakes that lead to failure. The article applies theories and synthesizes empirical studies to analyze common mistakes of individual traders based on the theory of behavioral finance, including: prospect theory, herding effect, house money effect, sunk costs, and overconfidence. The article uses qualitative methods combined with descriptive statistics on a sample of 120 individual investors who are directly trading on the financial market, using a convenience sampling method. The results show that the disposition effect has the strongest impact on investors' decisions, specifically, 81.3% of investors often close their profit positions too soon while the trend is still continuing. Hesitating when making decisions or trading with weak signal, being influenced by others also have a strong impact on the trader, the rest of the factors have a moderate impact. From those results, the article analyzes that the main cause of psychological deviations is "fear" inside each person. Investors close their profit positions early because of the regret aversion if losing that profit, they hesitate to make decisions because of the fear of making mistakes, affected by the herd effect is due to the isolation aversion. On that basis, the article proposes solutions to help investors control psychological factors to survive and succeed in their trading activities, the solution emphasizes self-discipline, planning, and a constant learning process.

Irrational risk-taking of professionals? The relationship between risk exposures and previous profits

The risk attitude of investors is a key factor determining financial asset prices and market trends. Changes in risk attitude may be due to the interference of macro-level (business cycle) and micro-level (individual experience) effects. We investigate the impact of individual experience on the subsequent risk-taking attitude of professionals via the analysis of the trading activity of 351 non-financial firms and (non-bank) financial institutions (insurance companies, financial intermediaries, etc.) covering 57,039 FX forward transactions in a highly volatile period between January 2008 and November 2012. Panel regressions for all firms and institutions do not show significant behavioral patterns. When investigating each client separately, however, we find that 39.7% of the clients having enough transactions to analyze statistically tend to increase their risk exposure irrationally after large gains or losses which can be the manifestation of the break-even and house-money effects well-documented in the literature for non-professionals. This irrational behavior may destroy value, so both market players and regulators should pay attention to monitor and control it.

Does good luck make people overconfident? Evidence from a natural experiment in the stock market

This paper examines the changes in investors' trading behavior after winning an IPO allotment in China—a purely luck-driven event. We find that these investors subsequently become overconfident: They trade more frequently and lose more money relative to other investors. This effect is stronger when investors are inexperienced and when investors' pre-existing level of overconfidence is low. We also show that investors exhibit a stronger gambling propensity and hold more lottery-like stock after winning an IPO allotment. Our findings are not explained by wealth effects or house money effects. Overall, our evidence indicates that the experience of good luck makes people overconfident about their prospects.

Risky choices in a natural experiment from Turkey: Var Mısın Yok Musun?

In this paper, we study high-stakes risky choices of contestants in the Turkish edition of the popular TV game show Deal or No Deal. We conduct a large-scale replication of Post, Van den Assem, Baltussen, and Thaler (2008), and we investigate contestant behavior in Turkey in detail via the expected utility and cumulative prospect theory. We find strong empirical support on the role of path dependence in shaping risk attitudes: Turkish contestants who enjoy early gains or suffer early losses in the initial rounds of the game are more risk-lover than other contestants, which aligns well with the break-even and house-money effects à la Thaler and Johnson (1990). We also document that the cumulative prospect theory predicts contestant behavior better than the expected utility theory empirically. Finally, we demonstrate that risk aversion exhibits sizable heterogeneity over demographics, and female and university-graduate contestants are more risk-averse than their male and less-educated counterparts.

Impact of Casino Free Play on the Wagering Behavior of Light- and Medium-User Groups: The Importance of Winning at the Bottom of the Database

This study examined the extent to which free-play credits affected spend-per-trip levels in slots, with a focus on contributions from the loyalty program’s (LP) light- and medium-user tiers. These user groups represent the bulk of LP members, and also comprise the area of the database for which spending gains are most important and equivocal. Daily, tier-level performance data were collected from four different casinos, which were owned and operated by a common parent company. Analysis of player performance data failed to indicate group-level differences in the spend-per-trip results produced by free-play redeemers and non-redeemers, within each of two tiers. These findings were produced by both parametric and nonparametric measures. The free-play group (FP) recorded a mean daily T-win that was significantly greater than that generated by the no-free play group (NFP) on a maximum of 2 days (out of 365), across all four properties and both tiers. Given that the players in FP were staked with free credits, it would appear that these awards served as bankroll substitutes, rather than sources of incremental play. With respect to own-money wagering, the lack of significant increases in win on free-play trips may be most aligned with the prospect-theory-with-memory effect. While our work expanded the literature by examining decision-making under risk, beyond two stages, our results did not generally support the house-money effect. For management, our findings signaled the need for a program review, as these expensive annual campaigns comprised a substantial percentage of the casino marketing budget.

PRIOR TRADING OUTCOMES AND SUBSEQUENT PORTFOLIO RISKS: USING SECURITIES DEALER IN TAIWAN AS AN EXAMPLE

This study examines whether the investment behavior of securities dealers is consistent with the predictions of the house money and break-even effects. Using the stock portfolios, dealers hold in Taiwan from 1996 to 2013 as a sample, we test the relationship between trading gains/losses and subsequent changes in portfolio risk. The results show that only gains with low risks, not all gaining situations, cause subsequent risk preferences, and regardless of the size of the trading loss, there is not a significant change in subsequent risk. Controlling dealers’ characteristics, industry competition, and the stock market condition, the evidence shows that the house money effect on dealer behavior exists after earning low-risk profits and does not support the break-even effect. These results are qualitatively unchanged after robustness checks that primarily exclude dealer overconfidence effect and ensure that the risk-taking behavior under low risks results in a decrease in gains and thus not a rational behavior.

How Situation Affects Risk Taking Behavior

This paper examines how situation affects risk taking behavior. Two theories predict different outcomes on the effect of situation to risk taking. House Money Effect predicts that positive situation will result in increased risk taking due to availability of slack that can be risked. On the other hand, negative situation will decrease risk taking because of reduced slack. Thus House Money Effect describes positive relation between situation and risk taking behavior. On the contrary according to Reflection Effect from Prospect Theory, human beings are risk averse in gain situation but risk seeking in loss situation. Reflection Effect thus predicts that positive situation will result in decreased risk taking while negative situation will result in increased risk taking, in other word negative relation between situation and risk taking. To test which theory better describes the relation between situation and risk taking behavior, we examine how company performance affects risk taking behavior of the top management. Company performance is proxied using Return of Asset. Risk taking behavior is proxied using change of debt level. The result shows negative relation between situation and risk taking, and thus support Reflection Effect in Prospect Theory.

Behavioural biases and nonlinear adjustment: evidence from the housing market

ABSTRACT Using the threshold vector error correction model, this study finds substantial evidence for asymmetric mean-aversion in the Korean housing market, arising from behavioural biases. In order to effectively capture behavioural biases from the prospect theory, special attention is paid to the extreme tails of price deviations from long-run rationality. The major findings are highly consistent with the prospect theory predicting the risk-aversion effect after prior losses and the house money effect after prior gains. The overall speed of adjustment at losses is assessed about 7 times as high as at gains. The evidence that price changes are serially dependent, even after controlling the behavioural biases, suggests that house prices are also driven by investors’ extrapolative expectation.

Behavior when the chips are down: An experimental study of wealth effects and exchange media

In this experimental study, we implement a lottery-type game that is similar to the investment game of Imas (2016) and Gneezy and Potters (1997) to examine if the form of the exchange medium influences wealth effects and risk taking in general. We argue that reduced moneyness should lead to increased risk taking and decreased wealth effects (i.e., the break-even and house-money effects). We find that when the lottery task is conducted using tokens (with monetary value), there is a significant break-even effect but an insignificant house-money effect. However, when the lottery task is conducted using a digital media of exchange, what we label “e-coins,” there is a significant house-money effect and no break-even effect. Finally, with cash, there are both significant break-even and house-money effects. We find that subjects risk a bit more when using tokens compared to cash, but risk significantly more when using e-coins.

Testing hypothetical bias in a framed field experiment

AbstractHypothetical bias is tested based on inter‐ and intra‐respondent comparisons of choice behavior, applying a hypothetical and real choice experiment. The inter‐respondent comparison commonly applied in the environmental and agricultural economics literature consists of a control group of buyers who are asked to hypothetically choose between conventional and organic beans and an experimental group of buyers who are endowed to purchase the same beans using an identical experimental design. Hypothetical bias is tested by comparing inter‐ and intra‐respondents’ (i) hypothetical and real choices, (ii) preference parameters of the estimated choice models related to hypothetical and real choices, and (iii) hypothetical and real willingness to pay (WTP). Choices in the experimental group are highly consistent when switching from hypothetical to real choices for this study's homegrown goods. However, after being endowed, the price sensitivity of lower income households drops, suggesting a house money effect. WTP derived from actual purchases is higher than WTP based on hypothetical choices, indicating a negative hypothetical bias, but differences are only significant in the case of the inter‐respondent comparison. Actual prices paid by respondents in the field experiment appear to be considerably lower than the estimated WTP values and yield a mixed picture of hypothetical bias.