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

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  • Hauke Jelschen

    (University of Kiel)

  • Ulrich Schmidt

    (University of Kiel
    Kiel Institute for the World Economy
    University of Johannesburg)

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.

Suggested Citation

  • Hauke Jelschen & Ulrich Schmidt, 2023. "Windfall gains and house money: The effects of endowment history and prior outcomes on risky decision–making," Journal of Risk and Uncertainty, Springer, vol. 66(3), pages 215-232, June.
    • Handle: RePEc:kap:jrisku:v:66:y:2023:i:3:d:10.1007_s11166-023-09411-5
    DOI: 10.1007/s11166-023-09411-5
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