There is evidence that risk-taking behavior is influenced by prior monetary gains and losses. When endowed with house money, people become more risk taking. This paper is the first to report a house money effect in a dynamic, financial setting. Using an experimental method, the authors compare market outcomes across sessions that differ in the level of cash endowment (low and high). Their experimental results provide strong support for a house money effect. Traders' bids, price predictions, and market prices are influenced by the amount of money that is provided prior to trading. However, dynamic behavior is difficult to interpret due to conflicting influences.
JEL classification: C91, C92, D80
Keywords: house money, prospect theory
The authors gratefully acknowledge the financial support of the Federal Reserve Bank of Atlanta and the Social Sciences and Humanities Research Council of Canada. The authors thank Steve Karan for research assistance and Paula Tkac for helpful comments. The views expressed here are the authors' and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.
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