House money effect

What is the House Money Effect?

The house money effect is a greater willingness to take risks after a gain. Earlier winnings feel more expendable than money already counted as your own. The name comes from gambling: a player treats chips won from the casino as “house money.”

How the house money effect works

Thaler and Johnson (1990) reported real-money experiments in which prior gains increased risk-seeking. Their account concerns how people combine earlier outcomes with the possible gains and losses of a new choice. They also examined the appeal of chances to break even after a loss.

The mental-accounting idea is that a gain has not been fully incorporated into the same account as other resources. Losing it can then feel different from losing money that was already there.

A house money effect example

Imagine a gambler who wins $100 and then accepts a bet they would have refused before winning. The extra risk feels easier because it can be paid for from the winnings. The $100 still belongs to the gambler and can still be lost.

A bonus or investment gain might invite similar reasoning, but it will not make everyone take more risk. One speculative purchase cannot tell you whether the person's recent gain caused the choice.

Why it matters

How money was acquired can affect how people treat it. That is relevant when examining decisions after gains.

Myopic loss aversion concerns a different combination of loss sensitivity and how frequently outcomes are evaluated.