House Money Research Articles

The Effects of Prior Outcomes on Risky Choice: Evidence from the Stock Market

How do prior outcomes affect the risk choice? Research on this can help people to understand investors’ dynamic decisions in financial market. This paper puts forward a new value function. By analyzing the new value function, we find that the prior gains and losses have an impact on the form of value function and the current investors’ risk attitude. Then the paper takes the behavior of the whole stock market as the research object, adopts aggregative index number of 14 representative stocks around the world as samples, and establishes a TVRA-GARCH-M model to investigate the influences of prior gains and losses on the current risk attitude. The empirical study indicates that, at the whole market level, prior gains increase people’s current willingness to take risk assert; that is to say, the house money effect exists in the market, while people are more risk aversion following prior losses.

Risk as a Threat, Risk as a Missing Opportunity, the Owner Finance and Entrepreneurship

The purpose of this paper is to investigate the extent to which the attitude toward the risk predicts a new venture creation. Using a sample of 1,214 novice entrepreneur and a multidimensional scale of the entrepreneurial risk perception, we study if the perception of the personal and the financial risk of failure and the global risk as a missing opportunity may predict decision making. More precisely, we expect that the entrepreneurs playing with other people’s money or their external debts (vs. their own or personal saving) will be high-risk taking (low-risk taking). Thus, they are more likely to choose new venture opportunity and they downplay potential loss financially and personally (focus more on potential loss financially and personally). Our empirical investigation reveals three dimensions of risk attitude regarding the multidimensional risk perception and the source of funding. We also found that the source of new venture funding ‘the entrepreneur’s own money’ versus that of the investors influenced our subjects attitude toward risk. Perhaps, the “house money effect” was not convenient for some entrepreneur in spite of the risk as an opportunity and the external funds, the entrepreneur didn’t create a new venture. We explain this result by the similarity in the manager and the entrepreneur’s decisions, as they would sometimes choose to be pioneering risk takers; even though the funds they would risk are typically not their own.

Investors’ Risk Preference Characteristics Based on Different Reference Point

Taking the stock market as a whole object, we assume that prior losses and gains are two different factors that can influence risk preference separately. The two factors are introduced as separate explanatory variables into the time-varying GARCH-M (TVRA-GARCH-M) model. Then, we redefine prior losses and gains by selecting different reference point to study investors’ time-varying risk preference. The empirical evidence shows that investors’ risk preference is time varying and is influenced by previous outcomes; the stock market as a whole exhibits house money effect; that is, prior gains can decrease investors’ risk aversion while prior losses increase their risk aversion. Besides, different reference points selected by investors will cause different valuation of prior losses and gains, thus affecting investors’ risk preference.

The Effect of Stock Option Backdating on CEO Risk Taking

Existing compensation literature often assumes that stock options are granted at-the-money (when the option has no value). However, the popularity of stock option backdating implies this assumption is invalid in the real world. This study examines how stock option backdating affects executive risk taking by using the behavioral agency model and the house money effect view. While behavioral agency theory suggests a negative relationship between the gains of stock option backdating and subsequent risk taking, the house money effect advocates a positive relationship between these two factors. In addition, we propose that CEO vulnerability positively moderates the relationship between stock option backdating gains and executives’ risk taking behavior. Using a matched sample design, our empirical results support the house money effect predictions.

The house money and break-even effects for different types of traders: Evidence from Taiwan futures markets

Using a set of transaction records from the Taiwan Futures Exchange, we examine risk-taking behavior subject to prior outcomes and study the house money and break-even effects across various trader types. The empirical results show that the degree of morning gains/losses nonlinearly influences afternoon risk taking for all trader types, but the pattern is different for each type. Active individuals exhibit a house money effect after experiencing large gains and exhibit a break-even effect after large and small losses. Futures proprietary firms exhibit a break-even effect only after experiencing large morning losses. By contrast, foreign institutions exhibit only a house money effect after they experience small gains. The additional risk-seeking behaviors of futures proprietary firms and foreign institutions do not have a significant influence on market volatility or liquidity; only active individuals' risk-seeking behaviors when facing large morning losses impact both market volatility and liquidity.

“How I think you are investing”: Gendered, social metacognitive influences on consumers’ investing perspectives

Marketplace social metacognition concerns how consumers think about other consumers in the marketplace and how those others make decisions. We apply this perspective to the consideration of gender stereotypes in relation to investing decision scenarios involving potential gains and losses, as suggested by prospect and house money investing theories. In an experimental study of 84 business school students we find that target-investor order of gender presentation (i.e., the gender of an imagined investor with either a male or female presented first) was more predictive than one's own gender in terms of both amounts invested and investing processes engaged in by male as opposed to female target-investors across gain and loss scenarios. Our findings suggest possible revisions in relating gender stereotype theory to both social metacognition and behaviorally diagnostic investing information.

The effect of prior outcomes on gender risk-taking differences

This study proposed that men are more likely to take greater risk after a win (‘house money’ effect), while women are more likely to take greater risk after a loss (‘escalation of commitment’ effect). These effects are, however, moderated by prior experiences in risk-taking and role characteristics. Three distinct groups of 30 subjects (total = 90) each were solicited to play an experimental betting game. The subjects were categorized into risk providers (RP), risk customers (RC), and non-risk customers (NRC). RP are represented by casino executives, RC by leisure life-time casino gamblers, and NRC by non-casino gamblers. On average, RC group was found to take most betting risk. Male RCs were more likely to bet more after a win, while female RCs were more likely to bet more after a loss. NRCs, irrespective of gender, were more likely to bet more after a loss. There were no gender risk-taking differences in prior outcomes in the RP group.

The influence of relative values of outside director stock options on firm strategic risk from a multiagent perspective

Prior work has examined the effects of absolute levels of outside director stock option grants on risk behavior without recognizing that relative stock option values could differentially affect risk taking. Drawing from the house money effect perspective, we extend this literature by examining how positive deviation from prior outside director option grants values influences firm strategic risk. Additionally we draw from the behavioral agency model and the power literature to develop a multiagent contingency framework suggesting the effect of positive director pay deviation depends on the incentives and power of CEOs reflected in CEO stock ownership and CEO duality, respectively. Our empirical results indicate positive pay deviation has a positive effect on firm risk taking while high ownership and duality independently and jointly weaken this base relationship. Copyright © 2013 John Wiley & Sons, Ltd.

House money effects, risk preferences and the public goods game

This paper investigates whether risk preferences inform the decision of how much to put into the public account in the public goods game under the three different frames (the two house money effect frames: the standard and covered-loss frames, as well as the real-loss frame). The main contribution of this paper finds that the covered loss and real loss treatments are statistically equivalent. This assures researchers that just introducing the notion of loss into an experimental treatment without the need for participants to realize a real loss is still a valid experimental instrument. We also find that the house money effect is a better explanation for the difference in contributions between gain and loss framing than loss aversion.

Is it my money or not? An experiment on risk aversion and the house-money effect

The house-money effect, understood as people’s tendency to be more daring with easily-gotten money, is a behavioral pattern that poses questions about the external validity of experiments in economics: to what extent do people behave in experiments like they would have in a real-life situation, given that they play with easily-gotten house money? We ran an economic experiment with 122 students to measure the house-money effect on their risk preferences. They received an amount of money with which they made risky decisions involving losses and gains; a randomly selected treatment group received the money 21 days in advance and a control group got it the day of the experiment. From a simple calculation we found that participants in the treatment group only spent on average approximately 35 % of their cash in advance. The data confirms the well documented results that men are more tolerant to risk than women, and that individuals in general are more risk tolerant towards losses than towards gains. With our preferred specification, we find a mean CRRA risk aversion coefficient of 0.34, with a standard deviation of 0.09. Furthermore, if subjects in the treatment group spent 35 % of the endowment their CRRA risk aversion coefficient is higher than that of the control group by approximately 0.3 standard deviations. We interpret this result as evidence of a small and indirect house money effect operating though the amount of the cash in advance that was actually spent. We conclude that the house money effect may play a small role in decisions under uncertainty, especially when involving losses. Our novel design, however, could be used for other domains of decision making both in the lab and for calibration of economic models used in micro and macroeconomics.

Why are gainers more risk seeking

AbstractThe phenomenon that prior gains may increase people’s willingness to accept risky gambles is named as thehouse money effect(Thaler and Johnson, 1990). Many studies have shown that the “house money effect” is a robust phenomenon but few scholars explain the mechanism of it well. We suppose the reason for the house money effect is that the ante (starting amount) is from the prior gambling profits, and its potential loss has relatively low psychological value. To test this hypothesis, we designed a series of studies using two-stage gambles. A total of 915 university students participated. In Study 1, in addition to a standard condition (which replicated the basic effect), we test how people respond to “prospect theory, with memory” frame, a “concreteness” frame and “quasi-hedonic” editing. None of these types of frames result in a significant house money effect. In Study 2, we certify the reference point shift to 100 Yuan in the second-stage gamble, thus the house money effect can be regarded as the absence of loss aversion; Study 3, consisting of 3 sub-experiments, indicated that gambling profits and normal income will open different mental accounts which are spent quite differently. The pain of losing 100 Yuan allowance is more serious than that of losing 100 Yuan gambling wins. People will typically reject the gamble of 50/50 chance to gain or lose 100 Yuan if the ante is from the “normal income account”, but accept if the ante is from the “windfall account”. The results of the series of experiments prove the accuracy of our hypothesis mostly.

How prior realized outcomes affect portfolio decisions

Investors have been shown to have particular preferences when it comes to the characteristics of stock they hold in their portfolios, while prior gains and losses have been shown to impact on individuals’ economic decisions, both in an investment context and more widely. This paper is the first to investigate how prior gains and losses affect investors’ preferences for particular stock characteristics and so shape their portfolio compositions. Using a rich dataset combination from China, we conclude that prior realized outcomes play an important role in shaping portfolio composition through their impact on the characteristics of stocks that investors choose to hold. We find that positive prior realized outcomes encourage investors to select stocks with a variety of characteristics broadly consistent with higher risk taking (for example, higher betas and higher levels of idiosyncratic risk), though there are some differences across investor classes. While our empirical results are in line with what one would expect from the existing literature on the disposition and house money effects, we also consider other possible interpretations of the results.

Managerial Gambling Attitudes: Evidence from Bank Acquisitions

This study investigates the implications of the cumulative prospect theory in the context of U.S. bank acquisitions, with particular emphasis on its probability weighting component. Specifically, we examine whether gambling attitudes matter in U.S. bank takeover decisions. The evidence demonstrates that offer price premiums and target announcement returns are much higher in bank takeover transactions involving targets with gambling (lottery) features (high skewness, high volatility, and low price). In addition, we find that synergies and bidder announcement returns are lower in lottery-type acquisitions. The patterns we document are stronger when bidding banks are bigger, target banks are smaller, investor sentiment is above the median, and the Chicago Fed National Activity Index is negative. Consistent with the prediction of the house money effect of Thaler and Johnson (1990), we also find gambling to be pronounced when acquiring banks have performed well in the past. Overall, the results indicate that banking acquisitions are influenced by gambling attitudes.

The house money effect on investment risk taking: Evidence from Taiwan

This paper investigates the effect of house money on the risk taking behavior of individual investors. When gains are more substantial, individuals tend to take greater risk. The house money effect seems to decline over time because the propensity for risk taking following gains is diminished with time. This study shows that when evaluating investment gains, the reference points for investors are adapted over time, with the current salient reference point being the highest stock price attained at a given time in the past. The empirical evidence suggests that the house money effect is actually discernible in the real world financial markets and not just in artificial laboratory experiments.

Know When to Hold ‘Em, Know When to Fold ‘Em?

This study attempts to differentiate between the effects of loss aversion and the house money effect on CEO decision making by examining the effects of performance relative to aspirations on two ou...

Estimation of the House Money Effect Using Hurdle Models

Evidence from an experiment investigating the “house money effect” in the context of a public goods game is reconsidered. Analysis is performed within the framework of the panel hurdle model, in which subjects are assumed to be one of two types: free-riders, and potential contributors. The effect of house money is seen to be significant in the first hurdle: specifically, house money makes a subject more likely to be a potential contributor. Hence we find that the effect of house money is more than just an effect on behaviour; it has the effect of changing a subject from one type to another. This result is potentially important in the external validity debate.

How Prior Outcomes Affect Individual Investors' Subsequent Risk Taking

We present empirical evidence of how prior outcomes affect individual investors’ subsequent risk taking. Investors who experience big gains or big losses are likely to exit the stock market; however, investors remaining in the market increase their portfolio risk taking following losses. They replace stocks sold with new positions of a higher (lower) value following recent losses (gains), thereby leading to an increase (decrease) in overall stock portfolio risk taking. Our results are consistent with the predictions of consumption habit formation interacting with the disposition effect. Our results cannot be explained by information, simple rebalancing, the house money effect, or the break even effect.

Risk dishabituation: In repeated gambling, risk is reduced following low-probability “surprising” events (wins or losses).

In path-dependent risk taking, like playing a slot machine, the wager on one trial may be affected by the outcome of the preceding trial. Previous studies have shown that a person's risk-taking preferences may change as a result of the preceding trial (win or loss). For example, the "house money effect" suggests that risk taking may increase after a win, whereas the "break even effect" posits that risk taking increases after a loss. Independent of those findings, a person's emotional state has been found to influence risk taking. For example, the "mood maintenance hypothesis" supports the notion that positive affect decreases risk taking, and related research finds that increased negative affect increases risk taking. Because winning and losing may influence one's emotional state, we sought to investigate how both previous outcomes, as well as a person's emotional responses to those outcomes, independently influence subsequent risk taking. To do this, data were collected using three simplified slot machines where the chance of winning each trial was set to 13%, 50%, and 87%, respectively. Evidence for the break even and house money effects were found on the 13% and 87% games, respectively. Likewise, emotional valence was found to predict risk taking on these two tasks, with emotional valence fully explaining the break even effect observed on the 13% game. In addition to these results, the present research revealed that risk taking is reduced following low-probability ("surprising") events (i.e., a win in the 13% condition or loss in the 87% condition). Dubbed "risk dishabituation," this phenomenon is discussed, along with its likely corresponding emotional experience--surprise.

Asymmetry in market efficiency across economic states: explanation and implication

The empirical financial literature has recently suggested that the US stock market might be efficient in bad times and inefficient in good times. This article explains why some psychological phenomena such as wishful thinking, overconfidence and the house money effect might cause deviations from full rationality principally in good times and not in bad times. Furthermore, this article gives several reasons why the arbitrage process might be effective in bad times and limited in good times. These results are important both for policymakers and for portfolio management.

'How I Think You Are Investing': Gendered, Social Metacognitive Influences on Consumers’ Investing Perspectives

Marketplace social metacognition concerns how consumers think about other consumers in the marketplace and how those others make decisions. We apply this perspective to the consideration of gender stereotypes in relation to investing decision scenarios involving potential gains and losses, as suggested by prospect and house money investing theories. In an experimental study of 84 business school students we find that target-investor order of gender presentation (i.e., the gender of an imagined investor with either a male or female presented first) was more predictive than one’s own gender in terms of both amounts invested and investing processes engaged in by male as opposed to female target-investors across gain and loss scenarios. Our findings suggest possible revisions in relating gender stereotype theory to both social metacognition and behaviorally diagnostic investing information.